CONSULTANCY STUDY ON SOCIO-ECONOMIC-POLITICAL TRENDS IN PAN-PEARL RIVER DELTA REGION

SECOND MONTHLY REPORT PART II

COVERING GUANGXI, YUNNAN, GUIZHOU, AND

SICHUAN

DECEMBER 2004

CENTRAL POLICY UNIT HONG KONG SPECIAL ADMINISTRATIVE REGION Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

2 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Table of Contents

I. Executive Summary ------5

II. Topical Analysis ------9 “Pan-PRD Logistics Development: Opportunities and Challenges for Hong Kong” Part Two: South-western Region

South-western Cargoes Bypass Guangxi and Use Ports in Shanghai and Guangdong ------10

Guangxi Plans to Construct a Logistics Centre for the Greater South-western Region ------18

Yunnan Actively Develops River Port Logistics ------22

Enormous Room for Guizhou to Develop Retail Chains ------26

Chengdu to Develop into a Major Modern Logistics Centre in Western China ------29

Strengthening Hong Kong’s Position as a Logistics Hub as it Integrates into the Pan-PRD ------33

Opportunities for Hong Kong in the Mainland Logistics Market ------42

(Appendix) Specific Commitments Related to the Opening of Logistics Sector in the Mainland under CEPA ------52

III. Trends & Updates on the Four South-western Provinces/Region ------55

Economic Development Trends of Guangxi in the First Three Quarters of 2004 ------56

Guangxi Introduces Measures to Speed Up Development of Non-state 58 Economy ------

Guangxi Aims to Fill Up its Industrial Zones ------60

Economic Development Trends of Yunnan in the First Three Quarters of 2004 ------63

3 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Table of Contents (continued)

Yunnan Prioritises Development of Cultural Industries ------66

Closer Cooperation Between Yunnan and the ASEAN ------68

Economic Development Trends of Guizhou in the First Three Quarters of 2004 ------70

Guizhou Opens Up Public Utilities Sector, Uses BOT to Press on 72 Reforms ------

Guizhou Creates Favourable Environment for Insurance Development --- 74

Economic Development Trends of Guizhou in the First Three Quarters of 2004 ------76

Chengdu Set Up Three Tourism Centres in 2004 ------78

Sichuan Carries Out Pilot Test for Agricultural Insurance ------80

Memorabilia of Pan-PRD Regional Cooperation ------83

IV. Data and Trends ------87

Guangxi ------88

Yunnan ------89

Guizhou ------90

Sichuan ------91

Major Economic Indicators of Nine Pan-PRD Provinces/Region 92 (Jan-Sep 2004)------

Nine Pan-PRD Provinces/Region: Statistics at a Glance (2003) ------93

Nine Pan-PRD Provinces/Region: 10-Year Economic Trend 95 (1994-2003) )------

V. English-Chinese Glossary of Terms ------97

4 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

I. EXECUTIVE SUMMARY

1. With the exception of Guangxi, all the other south-western Pan-PRD provinces are inland provinces, merchandise exports of which need to be shipped to the coastal ports. Compared with Shanghai and Guangdong, it is shorter in distance to transport the cargo from southwest China to ports in Guangxi. However, as facilities at the Fangchenggang, Beihai and Qinzhou ports of Guangxi are relatively behind, it takes much longer to transit at these ports, reducing the attractiveness of these ports. Hence, a lot of the south-western export cargo would rather take the long route to ports in Shanghai and Guangdong. Recently, a new Guiyang-Zhanjiang-Shenzhen express port-railway link has commenced operation. Via this new express railway, cargo movement from Guizhou to Shenzhen will be reduced by 30 hours compared to the conventional railway transport to Guangzhou. In Sichuan, the Shenzhen-Chengdu “Five-Fixed Trains” also opened earlier this year, cutting the cargo transport time from Chengdu to Shenzhen by eight days. Yunnan also depends on ports in Guangdong for exports, with their cargo mainly transported through Guizhou and Guangxi, then transported to Guangdong for export. In water transport, the distance for shipping goods from the southwest through the Pearl River into the sea or for redirecting to the ocean is half that of shipping them through the Yangtze River. Even though the Pearl River does not traverse Sichuan, cargo transported to the ocean via the Pearl River can still bring substantial cost savings to the province. The use of the Pearl River instead of the Yangtze River by south-western Pan-PRD’s cargo is conducive to strengthening Hong Kong’s position as an international transport hub.

2. The establishment of China-ASEAN Free Trade Area provides the logistics industry in Guangxi and Yunnan with new and enormous development opportunities. Guangxi is the only region in China that enjoys both land and sea links with the ASEAN. The region’s capital, Nanning, is also the permanent host of the China-ASEAN Expo in the future. The city will become the centre of merchandise trade between China, ASEAN and the neighbouring regions. Guangxi hopes to make use of this opportunity to turn the autonomous region into a regional logistics centre for trade between China and ASEAN. It is currently formulating preferential policies on areas such as fiscal, land-use, funding, customs, and administrative control to support the development of logistics industry. To the west of Guangxi, the land frontier between Yunnan and the three ASEAN countries of Vietnam, Laos and Myanmar is more than 4,000 kilometres

5 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

long, while the golden water channel of Lancangjiang River–Mekong River passing through the province and linking up six countries provides the province with sound conditions to develop into a logistics centre. Yunnan has already decided to include modern logistics planning into its Eleventh Five-Year Plan, requesting ports in the border areas be constructed under the objective of “development of port logistics and construction of logistics ports”.

3. As cargo flow between the Mainland and Hong Kong is mainly handled by land transport, Hong Kong’s airport and ports still have to rely on the effective coordination of rail and road transport across the border to be able to fully integrate into the Pan-PRD region and play a pivotal role. Hong Kong has to link up with the PRD road network in Guangdong to facilitate movement of goods from the Pan-PRD region to Hong Kong, from where the goods are exported overseas either via ocean-going vessels at the container ports or international flights at the airport.

4. Threatened by the rapid development of Mainland ports and airports, the key to Hong Kong’s logistics industry development prospect lies in keeping an open mind and wider vision. Should Hong Kong’s logistics companies be able to leap northwards to develop the Mainland market, it could not only tap the Hong Kong logistics market, but also that of the whole Pan-PRD region, and even the entire Mainland. Compared with the Mainland Pan-PRD provinces/region, Hong Kong possesses comparative advantages unmatched by other cities in the region. With years of international market experience, the logistics industry of Hong Kong has established a comprehensive global network, accumulated extensive market experience and management expertise, and nurtured numerous logistics professionals. With these advantages, Hong Kong businesses can develop the Mainland logistics market under the CEPA framework. Apart from providing the much-needed funds for the Mainland logistics industry, the entry of Hong Kong investment will also be conducive to lifting the technological and management standards of the Mainland logistics companies, hence benefiting the development of a modern logistics industry in China. For Hong Kong businesses, by extending the hinterland to the Pan-PRD region, their room for development will expand and they will find additional business opportunities. This will bring forth a win-win situation.

5. Currently, although the SAR Government’s Commerce and Industry Branch, and institutions and organisations such as Hong Kong Trade Development Council, Hong Kong Federation of Industries and Hong Kong General Chamber of

6 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Commerce have already established mechanisms to answer enquiries related to CEPA provisions on the Mainland’s opening up of the services sector, there is no specialised assistance dedicated to developing the Mainland logistics market. According to a survey conducted by the Hong Kong Logistics Association, there are still many Hong Kong logistics companies, particularly the small- and medium-sized enterprises, unfamiliar with the market, licensing processes and logistics technology development of the Mainland. They know even less about investment opportunities in the Mainland, the existing major logistics companies and their business scopes – particularly information on the Pan-PRD region beyond Guangdong.

7 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

8 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

II. TOPICAL ANALYSIS

“Pan-PRD Logistics Development: Opportunities and Challenges for Hong Kong”

Part Two: South-western Region

South-western Cargoes Bypass Guangxi and Use Ports in Shanghai and Guangdong ------10

Guangxi Plans to Construct a Logistics Centre for the Greater South-western Region ------18

Yunnan Actively Develops River Port Logistics ------22

Enormous Room for Guizhou to Develop Retail Chains ------26

Chengdu to Develop into a Major Modern Logistics Centre in Western China ------29

Strengthening Hong Kong’s Position as a Logistics Hub as it Integrates into the Pan-PRD ------33

Opportunities for Hong Kong in the Mainland Logistics Market ------42

(Appendix) Specific Commitments Related to the Opening of Logistics Sector in the Mainland under CEPA ------52

9 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

South-western Cargoes Bypass Guangxi and Use Ports in Shanghai and Guangdong

With the exception of Guangxi, all the other south-western provinces in the Pan-Pearl River Delta (PRD) are inland areas without coastal ports for exporting goods. Goods have to be transported to ports in the coastal cities for export. In terms of distance from Guizhou, Yunnan and Sichuan, the ports of Beihai, Qinzhou and Fangchenggang in Guangxi are the best points for goods from the south-western Pan-PRD provinces to go overseas. Guangxi is now stepping up the construction of large composite coastal ports, coordinating the planning and construction of facilities at the three ports of Beihai, Qinzhou and Fangchenggang, primarily focusing on building deep-water navigation channels, big tonnage berths, and cargo container berths. At present, the total handling capacity of ports in Guangxi is 30.9 million tons. By 2010, the handling capacity of these ports will exceed 50 million tons, and reach 100 million tons by 2020.

Ports of Beihai, Qinzhou and Fangchenggang (1) Beihai Port is 425 sea miles away from Hong Kong. Along its long coastline, there are many natural deep-water ports, which can accommodate 200 berths with 10,000-50,000 tonnage capacity and 24 berths with 100,000-200,000 tonnage capacity. At present, 16 berths of 5,000-tonnage and above and four berths of 10,000-tonnage and above capacity have been constructed, generating annual handling capacity of more than 4 million tons. After the completion of the project’s third phase, handling capacity would reach 10 million tons. The port has already established freight links with 129 ports in 96 countries and regions. The construction of the Beihai International Port-Road Transportation Centre, which measures 40 mu (Chinese unit of area equivalent to 1/15 of a hectare) , will substantially improve the traffic conditions between ports and roads in Beihai, further perfecting its transportation system. (2) Qinzhou Port is 1,338 sea miles away from Singapore. Qinzhou has a broad, deep-water, and wind-sheltered port, with straight and smooth navigation channels, not blocked by silt. Its Phase I development plan segregates the western port into eight operational deep-water zones, to hold 100 berths of 1,000-tonnage capacity and 30 berths of 10,000- to 100,000-tonnage capacity, comprising a total handling capacity of 60 million tons per year. The eastern port area can accommodate tens of deep-water berths with 100,000-300,000-tonnage capacity, with a total handling capacity of 100 million tons per year when completed. At present, four 10,000- to 30,000-tonnage berths and three 20,000- to 50,000-tonnage berths have been built. The existing annual handling capacity of Qinzhou port is 3.1 million tons. Via rail connections to the port, goods coming by the Nanning-Kunming, Xiangtan-Guizhou, Guizhou-Guangxi, and Litang-Qinzhou railways can reach Qinzhou Port directly. (3) Fangchenggang Port is 151 sea miles away from Vietnam’s Haiphong Port and 1,439 sea miles away from Thailand’s Bangkok port. It is the biggest port in Guangxi and one of the major gateways from which cargoes from the south-western region can sail to the go overseas. Fangchenggang Port has a very convenient transportation network, with established links to expressways and national highways, as well as sea routes linking with 220 ports in 71 countries and regions. By the end of the Tenth Five-Year Plan, the Fangchenggang Port’s handling capacity will exceed 20 million tons.

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Meanwhile, Wuzhou Port is the biggest inland river port of Guangxi. It is situated at the intersection of Guijiang River, Xunjiang River, and Xijiang River in Wuzhou City, and is the most important inland water transport channel in Guangxi, often touted as its “water gateway”. Sailing towards the southeast along the Xijiang River will reach Guangzhou, Hong Kong and Macao. Sailing northwest along the Xijiang River along the direction of Xun River will reach Nanning, Baise, Liuzhou, and sailing north along the Guijiang River will reach Guilin. Wuzhou is Guangxi’s biggest inland river port for merchandise export; it is a merchandise collection centre for Yunnan, Guizhou and Sichuan exports. At present, it has established trade ties with more than 110 countries and regions, and has in place its own set of regulatory institutions such as customs, commodity inspection bureau, quarantine inspection bureau, port supervision agency, Bank of China, ocean transportation monitoring agency, etc. The annual port handling capacity of Wuzhou is above 5 million tons and in the record year, annual exports totalled US$210 million. Major transport links within and outside the autonomous region include important highway connections to Beihai, Liuzhou, Guilin, Nanning, and Guangzhou.

Bottlenecks restraining the functions of ports in Guangxi

Compared with the traditional coastal ports in Shanghai and Guangdong, it is much shorter in distance for the south-western Pan-PRD provinces/region to export their merchandise through ports in Guangxi. In order to reduce transportation time and cost, many in the south-western region hope to export their goods through ports in Guangxi. In the early 1990s, Sichuan already threw in huge investment in Guangxi’s Beihai Port in an effort to establish its own corridor for sailing to the sea. At that time, Sichuan highlighted the slogan “borrowing ships to go overseas”. The “sea-going corridor for the south-western region” (“Corridor”) completed in 2001 was particularly constructed for the convenience of south-western merchandise to reach the ports in Guangxi for exporting overseas.

The “Corridor” connects Chengdu, Guiyang and Nanning, the capitals of the three south-western provinces/region of Pan-PRD -- Sichuan, Guizhou and Guangxi -- with the three Guangxi ports of Fangchenggang, Beihai, and Qinzhou, which are located at the Beibu Bay. It provides the greater south-western region with a fast and convenient channel for transporting cargo to the coastal ports. This channel is 1,709 kilometres long and consists of top-class roads and expressways involving a total investment of about Rmb25.5 billion. It includes 1,015 kilometres of expressways, 67 kilometres of Class I roads, and 627 kilometres of Class II roads. The construction of the “Corridor” was segregated into 19 sections; work commenced in 1987 and the “Corridor” came into full operation in December 2001.

The construction of the “Corridor” provides good infrastructure facilities for the three provinces/region, Sichuan, Guizhou and Guangxi, to cooperate and develop their logistics industries. Travelling from Chengdu to Beihai used to take one week’s drive, but with this “Corridor” in place, it now takes only 20 hours. From Guiyang, it now takes only one day’s

11 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

drive to get to Chengdu and Chongqing in the north, and Guilin, Beihai of Guangxi in the south. A lot of local government officials and enterprises in the three south-western provinces/region of Pan-PRD want to make use this corridor. However, a number of bottlenecks exist, forcing many merchandise exports to bypass this shorter-distance alternative and go the long way to the ports in Shanghai and Guangdong. There are three main reasons for this:

1. The transportation costs involved are too expensive. Transportation costs herewith include toll charges for roads and bridges, various fines and compensation fees, as well as gasoline surcharges. The Chengdu Transportation Bureau had once gathered a group of local logistics companies to drive from Chengdu to Beihai along the “Corridor”. According to its Bureau Chief Mr. Huang Ping, there are 19 toll stations on the road between Chengdu and Beihai, which means there is about one in less than each 100-kilometre. Travelling with a twenty-foot equivalent unit (TEU) container along this “Corridor”, for example, the driver would have to pay total toll charges of Rmb4,628. Given there are so many toll charges along the “Corridor”, transportation costs increased substantially, greatly reducing the attractiveness of using this channel.

2. Although most sections of the “Corridor” are good quality expressways comparable to international standards, there are still some sections that are of poorer quality Class I and II roads. The latter not only slow down cars, but also pose serious safety concerns. For example, the Class II road of Dafang-Naxi at the border between Sichuan and Guizhou is the worst section of the whole “Corridor”. This 250-kilometre-long national highway is situated in the area between Sichuan Basin and Yunnan-Guizhou Plateau. The area is mountainous and the road is dangerous; there are many cracks and pits along this section; and in some places, the cemented roads are full of faults and indents.

3. Another main reason why merchandises from the south-western region bypass Guangxi and take the longer route to Shanghai and Guangdong ports is the time taken to ship the goods out from the ports, which also offsets the benefits gained from the shorter transport distance. According to the Chairman of Sichuan Hongsheng International Logistics Company Limited Mr. Wen Lantian, Sichuan’s merchandise exports are mainly transported to Shanghai, followed by Guangdong. The reason they do not use the ports in Guangxi is because ports such as Fangchenggang still lag behind the other ports in their facilities; goods are usually held at these ports for a longer period of time, resulting in a long cargo movement cycle. Furthermore, a lot of goods cannot be shipped directly out of Guangxi ports to destinations in Europe and the USA, and would require transhipment to ports such as Hong Kong.

12 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

New express port-rail link connects Guizhou and Shenzhen

There are two main ways to ship out the merchandise exports of Guizhou. The first way is to take them to the Shanghai Port by rail and then transfer them onto the international liners. This option involves a longer transportation distance and higher cost. The second way is to take them to the Huangpu Port in Guangzhou by rail, then ship them to Shenzhen or Hong Kong by barge, and then transfer them onto the international liners. This option involves more modes of transport. Apart from these, a small portion of Guizhou merchandise is transported via rail to Guangxi’s ports in Fangchenggang or Beihai for export. However, owing to the recent tight capacity of railway transportation, and insufficient number of berths available for international liners, it had become difficult to get the exports shipped out on time. With the completion and operation of the new express port-rail link between Guiyang, Zhanjiang, and Shenzhen in November this year, products made in Guizhou have found a new transport channel for exports.

The new express channel was based on the opening of the Zhanjiang-Shenzhen public barge express route in July last year. Guizhou’s goods are transported to Zhanjiang by railway and loaded into containers, which will then be transported by the Zhanjiang-Shenzhen barge to Shekou or Chiwan Container Terminals for overseas shipment by international liners. Similarly, goods imported into Guizhou can be unloaded first in Shekou or Chiwan Container Terminals and transported to Zhanjiang by the Zhanjiang-Shenzhen barge, before being transported to Guizhou via rail.

Compared with other routes to the seas available to Guizhou, the new express port-rail link enjoys the advantages of being more economical and fast. Take Guizhou’s major export of Zhonggang jade as an example, transporting a twenty-feet equivalent unit container of Zhonggang jade via the new express port-rail link will save on average more than Rmb1,200 compared with transporting the jade to Huangpu Port by rail. It also saves transport time by more than 30 hours. At present, the three container terminal companies in Zhanjiang, Shekou, and Chiwan in Guangdong as well as 13 well-known international liners have started to seek new business opportunities in Guiyang. Hong Kong businesses should likewise seize opportunities for new business along the lines of expanding merchandise procurement sources to the south-western region and investing in logistics development.

Guizhou’s water transport system links up with the ports in Shanghai and Guangdong by rivers

In water transport, Guizhou’s inland rivers belong to the upper reaches of two major river systems – the Yangtze and Pearl Rivers. 26 of Guizhou’s rivers can be used for navigation. Ships can sail to the seas via the eastern ports through going north along the Wujiang River and Chishui River and going further down the Yangtze River. From Dawujiang in Yuqing County to Yanhe and Gongtan, there are 264 kilometres of Class V

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navigation channels which can accommodate the sailing of 300-ton ships. Along the river, four terminals have been constructed, including Dawujiang, Sinan, Yanhe, and Beilingsiwang Temple. At present, Chishui River is home to the province’s biggest cargo terminal, Lianyuxi Cargo Terminal, the biggest state-owned shipping company, Guizhou Chishui Shipping Company, and the biggest collectively-owned shipping company, Chishui City Shipping Company. Cargo transport on Chishui River accounts for 65% of the total water freight transport in the province.

On the south, the “two-plus-one rivers” system of Nanpanjiang, Beipanjiang and Hongshui Rivers is an important channel for the transportation of Guizhou’s merchandise to the seas via Hong Kong and Macao by going through the Pearl River traversing Guangxi and Guangdong. Along this river system, there are 324 kilometres of Class VI navigation channels that can accommodate the sailing of 100-ton ships, with more than 10 wharfs. About a thousand cargo ships of different types navigate on the “two-plus-one rivers”. Rich coal resources along the riverbank are being steadily shipped to Guangxi and Guangdong. Currently, the Ministry of Communications has included the “two-plus-one rivers” system among the major channels of the country’s waterways – designating it as the “central sea-going channel for the south-western provinces/region”. Class IV navigation channels capable of accommodating 500-ton ships are being planned.

Guizhou plans to spend the next 20 years to construct five “express waterways” on its north, east and south that would lead to the seas. These five water transport channels include Wujiang River and Chishui River which connect to Yangtze River in the north; the Qingshui River that reaches the Yangtze River through Yuan River via Poyang Lake and Dongting Lake in the east; and the Duliujiang River and Nanpanjiang River which link up with the Guangdong and Hong Kong ports via the Xijiang River and down to the Pearl River in the south. Simultaneously, Guizhou will develop shipping services covering different regions and various warehouse locations. Port supporting facilities and supporting navigational protection systems will be established. This will bring forth coordinated development of its ports, navigation channels and shipping, as well as the development of an inland river transport system that links up with other modes of transportation.

14 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Main Sea-going Channels for the South-western Provinces/Region

Yunnan goods are exported through Guizhou, Sichuan and Guangxi

Yunnan also relies on ports in Guangdong for their exports, with their cargo mainly transported through channels in Guizhou and Guangxi, then transported to Guangdong coastal ports, or to the Hong Kong container terminal to make use of its frequent international shipping routes for export. Currently, the construction of a highway linking Guizhou with Yunnan, and a Class II road linking Baise of Guangxi with Yunnan have been completed. Expressways and top-class roads extending to Chengdu and Yibin in Sichuan are under construction. In water transport, Yunnan’s goods are mainly transported to Guangxi via the section of the Pearl River in Guizhou, and then via the navigation channel on the Xijiang River, goods are shipped out to the seas or to Hong Kong for re-export by ocean-going vessels.

The Xijiang River navigation route is a major channel of the Pearl River water system. It connects with Nanning and Guangzhou via the Hongshui River in the west, and links up with the major PRD cities in Guangdong, as well as Hong Kong and Macao in the east. On June 1, 2004, Phase II construction of Guangxi’s Xijiang River navigation channel, involving a total investment of Rmb2.01 billion, was completed and passed the examination of China’s Ministry of Communications. From then on, 1,000-ton ships can freely sail on the 847-kilometre Xijiang River channel from Nanning to Guangzhou. It has also become a convenient channel for the south-western Pan-PRD provinces of Yunnan, Guizhou, and Guangxi to ship their cargoes overseas. The distance involved in moving goods from the south-western region to the seas through the Pearl River, or to redirect them from there to the 15 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

ocean, is only half of that involved in moving goods through the Yangtse River. Even though the Pearl River does not traverse Sichuan, shipment to the ocean via the Pearl River can still bring substantial cost savings to the province. Use the Pearl River instead of the Yangtze River to ship goods from the southwest helps to strengthen Hong Kong’s position as an international transport hub.

A port-rail link connects Shenzhen and Chengdu

Guangdong is also its main channel for Sichuan to reach the seas. Most of its goods are exported through ports in Zhanjiang and Shenzhen. On January 31, 2004, the governments of Shenzhen and Chengdu signed a “Shenzhen-Chengdu Port-Rail Link Cooperation Agreement”. Both sides agreed to seek the support of the Ministry of Railway and speed up the launching of a “five-fixed trains” service (meaning fixed destination, fixed route, fixed frequency, fixed schedule and fixed transport price), making it a swift channel of transportation for merchandise import and export.

The new Shenzhen-Chengdu “five-fixed trains” service was first launched on April 20, 2004. It starts from Chengdu, passes through Neijiang, Liupanshui, Guiyang, Zhuzhou, Guangzhou, and finally reaches Yantian Port in Shenzhen. It spans a distance of 2,683 kilometres, shorter than the previous distance of normal cargo train service by about 200 kilometres. The total travel time is only 91 hours, saving the cargo transport time from Chengdu to Shenzhen by eight days. According to people e7 seluMiniency565.3()-1the cargo transp of

16 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) the time that goods are held at the ports. The practice also lowers the cost of customs clearance for companies, allowing them to fully enjoy “door-to-door” transportation service.

Another measure is the adoption of the “train as a unit” concept, which made possible the “processing of customs clearance, verification and cancellation procedures for the entire train”. By this way, cargoes transported on the Chengdu-Shenzhen Port-Rail Link would be verified and cleared at arrival, extremely shortening the customs clearance time. Whether the cargoes are for import or export transfer, as long as they meet all requirements for information support and have adequate and valid supporting documents, the railway station office of the Chengdu Customs will proceed with verification and clearance procedures for the entire train of imported goods for transfer upon their arrival in Chengdu, while the Sungang Customs at the Shenzhen Station will process customs verification and clearance procedures for the entire train of goods for re-export. Under normal circumstances, the Customs at the ports will no longer check the goods previously cleared for transfer.

Thirdly, the Customs on both sides have committed to provide highly efficient “process-at-arrival” service for goods transported on the Shenzhen-Chengdu Port-Rail Link. According to the plan, the Ministry of Railway will set up a cargo container centre in Chengdu and arrange for container train services to promote containerisation in the Pan-PRD and encourage the development of logistics industries.

Chengdu cargo to enjoy express transfer clearance in and out of Lianyungang Port

Apart from ports in Guangdong, Sichuan also takes Lianyungang in eastern Jiangsu Province as an important channel for reaching the seas. On April 7, 2004, Lianyungang and Chengdu Customs signed an agreement allowing import and export cargo containers from Sichuan to enjoy express customs clearance for transferring at Lianyunagang Port and Chengdu. At the same time, the “five-fixed trains” service of the Chengdu-Lianyungang cargo container transport commenced operation. From then on, import and export goods from five cities in four central-western provinces, including Zhengzhou of Henan Province, Xi’an of Shaanxi Province, Mianyang and Chengdu of Sichuan Province, and Lanzhou of Gansu Province enjoyed express customs clearance when they are shipped in and out of Liangyuangang Port. For many years, provinces in the central and western regions have regarded Lianyungang Port as an important sea-going channel. In 2002, cargo containers from the three provinces of Sichuan, Shaanxi and Henan accounted for more than 20% of the containers at Liangyuangang Port. Sichuan alone had 22,380 TEUs (twenty-foot equivalent units) exported and imported through Lianyuangang Port, while about 80% of Chengdu city’s short-distance ocean cargo containers were transported via the Lianyuangang Port. However, because of its relatively low handling capacity, Lianyuangang Port is not yet exerting a lot of competitive pressure on the ports in Guangdong and Hong Kong.

17 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Guangxi Plans to Construct a Logistics Centre for the Greater South-western Region

The unique regional advantages and fast growing economy provide favourable conditions for Guangxi to develop its logistics industry. Given its geographical location, Guangxi is an ideal channel for the greater south-western region to reach the seas. It is within short distance from Hong Kong and Macao as well as from ports in southeast Asia. In addition, the Xijiang River is a golden water channel linking the inland rivers of Yunnan and Guizhou with Guangdong, Hong Kong and Macao. In recent years, Guangxi’s macro economic performance has maintained a good momentum with gross domestic product (GDP) on a fast growth pace, and social and business developments showing improvement in all aspects. In real terms, Guangxi’s GDP grew by an annual average of 9.05% in 2000-2003. In 2003, its GDP was Rmb273.3 billion, up by 10.2% over the previous year, and was the highest throughout Guangxi’s “Ninth Five-Year Plan” period. At present, the road and railway systems in Guangxi form a comprehensive transportation network that reaches the seas and crosses borders into neighbouring countries and provinces, laying a solid foundation for the development of a modern logistics centre in Guangxi. Construction of port transportation facilities around the Beibu Bay has achieved rapid development. As the construction of a major corridor for the greater south-western region to reach the seas progressed, Guangxi gradually established for the entire region a logistics centre that provides access to the seas.

Guangxi’s logistics industry not yet up to modern standards

Following the history of logistics development, Guangxi’s logistics sector has a solid foundation to develop. The traditional logistics industry, which is scattered across different industries and business departments, has laid a foundation for the development of modern logistics. In recent years, state-owned networks for commercial logistics services underwent reform and were exposed to market competition. Logistics companies handling products that are highly related to the national economy and people’s daily living, such as agricultural products, pharmaceutical products, and non-ferrous metals, achieved greater development. These companies are currently the major components of Guangxi’s logistics industry. Internal logistics operations of many collectively-owned enterprises have reached sizeable scale, while non-state logistics companies are also developing prosperously. Moreover, foreign investors are starting to enter the logistics sector in Guangxi, ushering in new ideas and advanced management experience.

In view of the priority given to the modern logistics industry on the national level, Guangxi has begun to plan its own modern logistics development model. It plans to take up a position that aptly matches its geographic advantage. For instance, a 1,000 mu agricultural logistics centre involving a total investment of above Rmb300 million is being planned for construction in Nanning city with the support of the governments of Guangxi

18 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Autonomous Region and Nanning city. As the project would be the biggest agricultural logistics centre in the south-western region, it has received Rmb100 million of special fund injection from the State Planning Commission. Meanwhile in Liuzhou city, a key wholesale market of raw materials is being upgraded. More than ten national medium- and large-sized steel manufacturers such as Liuzhou Steel Company, Wuhan Steel Company, and Panzhihua Steel Company have established their presence in the wholesale market. Upon completion of upgrading works, trade volume in the wholesale market is expected to reach Rmb2 billion, making it a professional production materials trading centre, capable of radiating its influence throughout the entire south-western region.

However, current logistics development in Guangxi remains confined to the traditional way of transportation and storage, still lagging behind the true sense of modern logistics. These are reflected as follows: many important infrastructure facilities are still being monopolised and fail to fully perform their functions; the logistics links of purchasing, manufacturing, transportation, storage, processing, distribution, and sales in industrial and commercial sectors are still separated from each other, seriously handicapping the development of external logistics services, and making it difficult for third-party logistics to emerge; with a low level of informatisation and backward management and technological level, the foundation is insufficient for the development of modern logistics; and there is a serious shortage of logistics professionals. In view of the awkward situation that other provinces regard Guangxi as a mere route of transfer rather than a centre providing logistics services, both the Guangxi Government and the logistics industry are faced with the challenge of expanding and strengthening the province’s logistics market, to turn it into a regional logistics centre for the southern China region and hence spearhead Guangxi’s overall economic development.

China-ASEAN Expo promotes Guangxi’s logistics industry development

The establishment of China-ASEAN Free Trade Area, and the decision to designate Nanning as the permanent host of the China-ASEAN Expo, provide the logistics industry in Guangxi with new and enormous development opportunities. Guangxi will gradually become the centre of merchandise trade between China, ASEAN and other neighbouring regions. Statistics show that at the first China-ASEAN Expo held on November 3-6 this year, the event was participated by 1,505 enterprises from 10 ASEAN nations, China, and other countries. Of these, 19 are ranked among the world’s top 500. More than 200 products from 11 industries were exhibited at the expo, including machinery, household appliances, electronic and information technology, automotive and car parts, hardware and construction materials, agriculture, pharmaceutical, chemical, and light industries. Guangxi hopes to seize this scarce opportunity to turn the autonomous region into a regional logistics centre for China-ASEAN trade.

The Guangxi Government is currently formulating preferential policies on areas such as

19 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) fiscal, land-use, funding, customs, and administrative control to support the development of logistics industry. Chain operations and logistics groups will be nurtured to develop some large groups, forming some “united fleets” of logistics companies in the region. Attention will be given to the development of medium- and top-class wholesale markets. The government will also strive to set up large distribution centres for bulk merchandise, logistics processing centres, price-setting centres, and information dissemination centres that penetrate into and outside the province and connect to overseas markets. Support will be given to the establishment of logistics distribution centres by large chain operators, wholesale agents, third-party logistics companies, as well as large industrial enterprises. The establishment of a multi-level logistics distribution system which provides both professional and general services will be sped up. A centralised logistics system with major cities, transportation hubs, merchandise collection centres and ports as the backbone will be set up. Modern logistics parks will be constructed in Nanning, Liuzhou and Fangchenggang Port, and the development of logistics processing centres with an annual capacity of above Rmb1 billion will be fostered.

To create better conditions for modern logistics development, Guangxi will strive for further transportation infrastructure development to ease transport bottlenecks. A major project is to build a fast and convenient international transport corridor that links China with ASEAN. This would become a composite transportation network that spans out all directions. Focus would be given to speed up the construction of highways extending to the neighbouring provinces and countries, and expand investment in construction of highways that link up its counties, towns and villages in an effort to upgrade the general standard of its road network. Major construction projects involving its railways and airports will also be sped up. The government will continue the construction of major navigation channels on inland rivers, and deep-water berths and navigation channels at its coastal ports. Emphasis will be given to the construction of the Guangxi section of Luoyang-Zhanjiang railway, the upgrading of Guizhou-Guangxi railway, the expansion of Nanning airport, the construction of 1,000-tonnage berths in Guigang and Nanning ports, the construction of three sections of Guangxi-Wuzhou expressway -- which include Tanluo-Baise, Hezhou-Lingfeng, and Guilin- Quanzhou expressways, and the dredging of Naji navigational channel in Tianyang. In addition, the government will accelerate the road construction project between Nanning and Friendship Pass, Baise and Luocunkou, Cenxi and Wuzhou (Xindi) as well as the cross-border highways of Liuzhou and Guilin. The construction of a top class road between Nanning and Shuiren, and an expressway between Huangshahe and Quanzhou, have been completed as scheduled. The government is now actively pursuing the preparatory work for the construction of the Hepu to Hechun railway and the Cenxi to Xingye highway. Besides, a series of projects have commenced work, which include the construction of 200,000-tonnage berths and 150,000-tonnage navigation channels at Fangchenggang port, the expansion of the navigation channel to 100,000-tonnage capacity at Qinzhou Port and works on the third phase of the port’s development, and the building of infrastructure facilities necessary for supporting large coastal industrial projects. Moreover, the preliminary stage

20 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

of the Nanning-Fangchenggang railway upgrading project will be accelerated to encourage a series of key industrial projects to set up in the coastal area.

Prospects for logistics companies are fast improving

With the rapid development of Guangxi’s logistics industry, its logistics companies are facing improving business prospects. As shown in an industrial survey on Guangxi enterprises in the third quarter of 2004, the index used to gauge the business prospects for Guangxi’s transportation, storage, and postal services industries rose by 10.65 points over the previous period to 117.42. The same index for road transportation rose by 9.76 points to 108.58; the index for city public transportation industry was 107.14, unchanged from the previous period; the index for water transportation was 147.06, up by 44.71 points; the index for air transportation was 150, up by 50 points; the index for storage industry was 110, up by 20 points; and the index for postal industry was 134.62, up by 12.88 points. In the second half of this year, the operating performance of Guangxi’s logistics companies also showed upward momentum, mainly evidenced by the following: (1) rise in estimated business volume; (2) obvious improvement in enterprise profitability; (3) improvement in delays of loan repayment; (4) increase in demand for labour; (5) increase in enterprises’ investment in fixed assets; (6) increased confidence of logistics entrepreneurs.

21 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Yunnan Actively Develops Port Logistics

The land frontier between Yunnan and the three ASEAN countries of Vietnam, Laos and Myanmar is more than 4,000 kilometres long. The Lancangjiang River–Mekong River golden water channel that links up six countries traverses the whole province. Yunnan has 11 national Class I ports and 10 provincial-level ports that are operational all year round, giving the province the geographical advantage of developing into a logistics centre to conduct business with southeast Asia. Since the late 1990s, Yunnan’s Party Central Committee and the provincial government have proposed the strategic goal of establishing a major international transport corridor linking with south and southeast Asia. At the same time, the province will seize the opportunity arising from the national strategy of expanding domestic demand through developing China’s western region and to steer the province’s transportation infrastructure construction into a period of rapid development. With the establishment of the China-ASEAN Free Trade Area, the regional advantage of Yunnan will be further highlighted. Yunnan has thus decided to include modern logistics planning into its Eleventh Five-Year Plan.

Constructing international channels to link the inner provinces with the ASEAN

Transportation is a key component of logistics. In recent years, Yunnan has been stepping up the construction of transportation infrastructure such as roads, railways, aviation, and water transportation channels, in an effort to make Yunnan a fast and convenient international transport corridor linking the inland provinces with ASEAN countries. At present, the electrification of the railways: Chengdu-Kunming, Neijiang-Kunming, Guiyang-Kunming, and Nanning-Kunming have been completed. The expressways linking Guizhou and the Class II road linking Baise of Guangxi have also been finished, while the expressway and top-class road linking Chengdu and Yibin are undergoing construction. By 2003, the province will have close to 4,000 kilometres of top-class roads, with all roads within 200 square kilometres from Kunming basically achieved top-class highway standards.

At present, Yunnan is planning to build a major international transport corridor. By 2010, the corridor will form a transport network with “five inlet and three outlet routes” for Yunnan, including the five railways of Nanning-Kunming, Guiyang-Kunming, Chengdu-Kunming, Neijiang-Kunming, Yunnan-Tibet (Yunnan Section) and their related highways, waterways and aviation routes. These will provide inlets into Yunnan from five directions spanning from the four provinces/region of Guangxi, Guizhou, Sichuan, and Tibet. The network will also include the three railways of Kunming-Hanoi, China-Thailand and Pan-Asia (western section) and their related highways, waterways and aviation routes that go through the border in three directions, passing through the three countries of Vietnam, Laos and Myanmar, and further linking up with the southeast Asian region. Upon completion of the transport network, goods from inland countries of southeast Asia such as Myanmar can be transported to Kunming via the railway running between Kunming and Guangzhou, and then

22 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

shipped to ports in Guangdong and Hong Kong for export. This will help the Pan-PRD region extend its source of merchandise procurement across the border into southeast Asia, hence beneficial to the development of Hong Kong’s airport and ports.

In road transport, an expressway and a Class II highway dedicated to passenger vehicles will be constructed for the Yunnan section of Kunming-Bangkok highway by 2005. The entire Kunming-Bangkok highway will be completed in 2010. The Association of Yunnan’s Modern Logistics Industry will organise a field study on this major corridor for its members in the coming year. They will go along Kunming-Loas-Cambodia-Thailand, paying attention to the logistics conditions and trade and economic environment of key cities along the Kunming-Bangkok highway. During the study, logistics professionals will explore opportunities for cooperation with local logistics companies in a bid to establish an efficient, safe and low-cost logistics channel for ASEAN countries to export their goods.

Upgrading transportation information facilities

Apart from the construction of transportation infrastructure, Yunnan is also planning to implement 15 transportation information projects in five years; planning to fully transform and upgrade highway and waterway information infrastructure with information technology applications. Upon the completion of the 15 information projects, Yunnan’s transport-sector information system will be greatly improved.

On highways, Global Positioning System (GPS) and Geographical Information System (GIS) will be widely used by freight forwarders to set up control systems for logistics processing and transportation. Pilot tests on modern logistics will also be conducted to provide fast and convenient service for the society. Mechanical and electrical engineering works on the expressways of Kunming-Qujing, Qujing-Luliang, Chuxiong-Dali, Kunming-Yuxi, Yuxi-Yuanjiang, and Yuanjiang-Mohei have been completed successively. Main toll, supervision and communications systems supported by high-speed fibre-optic information transmission networks have been constructed. A project on the system of information exchange for highway freight forwarding promoted by the Ministry of Communications is being tested by subsidiaries of the three transport groups of Kunming, Dejuji, and Chuxiong. An efficient system of cargo transport and logistics as well as a logistics centre are being implemented by Kunming’s transport groups. In water transport, the Lancangjiang River-Mekong River international navigation channel is being developed jointly by China, Laos, Myanmar and Thailand. The construction of management information systems for navigation channels, ports, ships and cargo transportation is expected to complete next year. Moreover, e-commerce (electronic commerce) can be launched with the establishment of databases and local area networks.

23 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Yunnan is suitable for developing port logistics

In August this year, experts from Beijing wrapped up its first round of inspection on Yunnan and held a meeting with leaders of the Yunnan Development and Reform Commission. Constructive ideas were proposed for the planning of the province’s modern logistics structure and a comprehensive analysis on how modern logistics can be integrated with the unique features of Yunnan was carried out.

Given the geographical advantages of Yunnan, and with the ongoing construction of a major international transport corridor, experts pointed out that Yunnan has an edge in developing port logistics (i.e. international logistics), which can also be used as a strategy to support the development of Yunnan’s logistics industry. According to the experts’ proposals, Yunnan should regard “development of port logistics and construction of logistics ports” as its objective and direct port construction to follow accordingly. In developing port logistics, the counties or states where the ports are located should be designated as merchandise distribution centres, distributing products with distinctive local characteristics and imported and exported goods of other inland provinces. Meanwhile, the states along the international corridor between Kunming and the ports should develop logistics for their own area, and on this basis, contribute actively to the development of port logistics, evolving into important nodes along the major port logistics channel.

For the industries, experts believe the direction of Yunnan’s modern logistics development should correspond with the logistics needs of the province’s major industries such as tobacco, fruits and vegetables, flowers and plants, and pharmaceuticals. Take flowers and plants for example, although the establishment of Chenggong Flower Auction Centre in Kunming has led to the establishment of a company specialised in flowers transportation and distribution -- Yunnan Yunhua Flower Company Ltd. -- the overall flower logistics system is still immature. There remain a lot of constraints on airfreight of flowers, and the related development of an information platform still lags behind. This makes the flowers industry especially in need of modern logistics support. This is also the case for other major industries in Yunnan. Experts pointed out that while cultivating logistics markets for specific industries, the government should also encourage cooperation between logistics companies, and support the cooperation and forging of alliances between industrial and commercial enterprises and logistics companies, and between logistics companies and transportation, storage, freight forwarding, and cargo container companies. The closer relationships that result would help to improve the competitiveness of the province’s logistics companies.

Encouraging foreign participation in Yunnan’s logistics development

To attract investment and more sophisticated management expertise, Yunnan encourages foreign investors to actively participate in its construction of infrastructure facilities and the

24 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

international transport corridor, as well as storage and logistics infrastructure at cross-border port areas. These include: transportation, postal telecommunication, construction and operation of public wharf facilities (for example, the Kunming Container Freight Transhipment Centre, Lancangjiang River’s Menghan Container Terminal, and the newly built Nongdao Development Zone Freight Yard are all inviting foreign investment); exploration of general service zones along top-class highways; water transport; cross-border vehicular transport; construction and operation of flyovers and car parks. Also included are design and manufacturing of automatic parking and toll systems, training in applications of technologies, and construction of education facilities.

Experts suggest the Hong Kong logistics professionals to organise a field study to Yunnan to better understand the environment and the infrastructure facilities related to local logistics development, to search for business partners, and to explore opportunities in expanding the sources of merchandise procurement into the ASEAN region.

25 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Enormous Room for Guizhou to Develop Retail Chains

As an inland province, logistics infrastructure development in Guizhou is relatively behind, stalling the development of the logistics sector. At present, there are only seven companies operating international freight forwarding services and most of them are branches of large domestic state-owned enterprises in Guizhou. The development of local logistics industry still lags behind the national standard. In addition, the lack of any large-scale specialised wholesale market impedes the development of sizeable merchandise trading transactions. Such conditions have directly led to lacklustre performance in the total value of retail sales. In the development of logistics industry in Guizhou during the recent years, retail chains experienced more rapid development; however, it remains far from reaching the standards of modern logistics, leaving plenty of room for future development.

Domestic and international retail giants intensifying competition in the Guizhou Market

By the end of 2003, Guizhou had 12 retail chain companies of designated size and above，with 182 outlets of various kinds with a total operating area of 131,400 square meters and a staff size of 4,852. In 2003, the province’s retail chain sector achieved total sales revenue of Rmb1.256 billion, an increase of 25.6% yoy and accounting for 2.7% of the province’s total retail sales of consumer goods. The development of retail chain sector has shown strong momentum in Guizhou. In recent years, developing from the foundations of traditional retail chain supermarkets and department stores, specialised retail chains of household appliance and pharmaceuticals products have emerged and beginning to stand out in their respective industries.

With Guizhou’s rapid economic growth, the residents’ incomes and purchasing powers have steadily increased, attracting more and more international and domestic retail giants to enter or prepare to enter the Guizhou market. Since 2002, Beijing Hualian, PriceSmart, and Wal-Mart have opened their chain stores in big- and medium-sized cities such as Guiyang. With excellent business credibility and advanced management modes, these stores pose big challenges for Guizhou businesses which are still operating under the traditional modes. As the day China fully opens up its retail market to foreign investors is fast approaching, there will certainly be more foreign retailers entering the province to take a share in Guizhou’s retail chain market. Although retail chain operation does not have a long history in Guizhou, they are quite popular with Guizhou consumers because they mainly sell daily consumption products, are equipped with comfortable shopping environment and a wide variety of product selection, offer lower prices, and provide good after-sales service.

Room for retail chain industry development is enormous

Although the development of Guizhou’s retail chain industry has shown good progress, its scale remains relatively small. In 2003, the total retail sales of consumer goods by retail chains of designated size and above was Rmb1.256 billion, accounting for only 2.7% of the

26 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

total retail sales of consumer goods, which was less than half of the national level of 6.3%. Compared with the more developed provinces and municipalities of Jiangsu (9.6%), Beijing (22.1%) and Shanghai (36.3%), Guizhou’s retail chain sector lagged far behind, and was far from being comparable to the developed western countries. It was reported that in 2002, the retail chain of Wal-Mart stores recorded US$246.5 billion in sales revenue, accounting for 7.6% of total retail sales in the United States that year. In terms of individual enterprises, not a single Guizhou enterprise ranks among the top 200 retail chain companies in China in terms of the number of outlets established in the country. Also, none of the Guizhou companies was enlisted among the country’s top 150 retail chain companies in terms of the sales revenue. From such a basis of comparison, Guizhou’s retail chain sector is obviously still at its infant stage of development. There remains huge room for future development, which is worth the attention of retail chains in other provinces, Hong Kong and even overseas. Development opportunities include：

1. County-level markets have yet to be developed

At end-2003, among the 182 outlets operated by retail chains of designated size and above, 159 or 87.4% are located in Guiyang. Outlets in other cities account for only 12.6% and in most counties these outlets could hardly be found. The major area of competition for most retailers is confined to the provincial capital. Looking at the breakdown in retail sales, such a distribution is evidently unreasonable, resulting in the concentration of fierce competition in certain areas, while a large piece of the market actually receives little of the attention it deserves. Since currently most of the outlets of these retail chains are located in the provincial capital of Guiyang, where large department stores, supermarkets, and all sorts of household appliances and pharmaceutical chain stores are already densely established in its commercial areas, the Guiyang market is quite saturated, leaving markets in the county-level with much bigger room for development.

2. New commercial product varieties await discovery

An examination of commercial products offered at the specialised retail chains shows that the current market is dominated by household appliances and pharmaceuticals. Few other product types are available, reflecting the market’s lack of development and maturity. In the developed eastern provinces, specialised chain stores for other commodities (such as information technology, office stationery, books, tea, and eyeglasses) have long bloomed. However, such development in Guizhou remains lagging. For instance, the number, distribution, and product variety of convenience store retail chains in the residential areas of Guiyang are not sensible enough. As such, there remain some opportunities in this market that can be tapped by retail chains in other provinces and even overseas.

3. Commercial properties usher in new development opportunities

The commercial property sector of Guizhou has a short development history, but many

27 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

real estate developers have become aware of the importance of retail chains to property development. Currently, many national and foreign large retail chains (such as Gomi, Wangfujing Department Store, Yichu Lotus Supermarket, and McDonald’s) planning to enter the Guizhou market have become major targets of the commercial property developers in Guizhou who are eagerly seeking business partners. The interactive development of retail and commercial property sectors is not only a win-win solution for both sides, but also exerts material influence on the expansion of traditional commercial centres in Guizhou and construction of new ones.

Raising the standard of facilities in distribution centres

Although during the recent years local retail chains in Guizhou have made much progress in terms of improving corporate structure, management style and business models, there is still a big lag compared with the advanced modes of operation in large international retail chains already operating in the country. This is mainly reflected in the lack of standardisation in their logistics distribution facilities, which have restrained Guizhou companies from fully performing the distribution functions of retail chains in a low-cost and highly efficient manner. From the successful experiences of retail chains all over the world, high efficiency and profitability of retail chain operations are attributable to unified modes of operation in terms of purchasing, distribution and pricing. With a merchandise distribution centre, one can effectively practise bulk purchase, centralised storage, and unified distribution and sales at different retail outlets. It is certain that a modern logistics distribution system will be important to promote and coordinate the development of retail chains in Guizhou.

Given the current situation in Guizhou’s retail chains development, people from the industry believe priority should be given to apply modern logistics in sea, land and air multimodal transportation, and in the development of large-scale modern distribution centres. Leveraging on Guiyang’s position as the province’s transportation hub, a high-standard and large-scale storage and warehousing industry should be developed. On this basis, traffic environment should be improved, a modern mode of transportation industry should be created, the commercial network with the other parts of the country should be enhanced, a supporting information network should be set up, a market for goods recycling and prescription should be established, a team of workforce to meet the modern logistics demand of loading and unloading tasks should be developed, and the standards of companies in packaging should be improved. Full development of Guizhou’s retail chains can only be accomplished through these means. Guizhou hopes to attract foreign funds, management expertise and industry talents to help develop its modern logistics distribution centre. As an international transportation hub, Hong Kong has extensive experience in the logistics industry. It can cooperate with Guizhou and introduce Hong Kong’s logistics companies into the province to explore new business opportunities.

28 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Chengdu to Develop into a Major Modern Logistics Centre in Western China

Since the implementation of the development of China’s western region strategy, the country’s western region has experienced rapid economic development. This provides Chengdu in Sichuan with new opportunities in developing its logistics industry. The Tenth Chinese Communist Party Congress in Chengdu has clearly put forward the strategic policy of “accelerating the development of modern logistics in Chengdu, establishing a key modern logistics centre in the western region”. Currently, Chengdu has about 300 traditional storage enterprises and more than 1,000 transportation companies. In 2003, the value-added contributed by the transportation, storage and postal industries reached Rmb12.5 billion, accounting for 6.7% of the city’s GDP, which approximates the national level. The 2004 International Modern Logistics Expo held in Chengdu in September attracted the participation of nearly one thousand national and overseas logistics companies. Multinational logistics giants have begun to take notice of this western Mainland city of Chengdu and regard it to have good potential for modern logistics development.

Chengdu’s socio-economic foundation apt for modern logistics development

Chengdu has been designated by the State Council as the south-western region’s “three centres and two hubs” (that is, financial centre, trade centre, technology centre, transportation hub and communication hub). The city plays a radiant and leading role in accelerating the economic development in the south-western and even the western regions, as well as in providing a solid social and economic foundation to modern logistics development. At present, Chengdu’s social and economic strength ranks fourth among 15 sub-provincial cities, following Guangzhou, Shenzhen and Hangzhou.

Chengdu’s GDP in 2003 was Rmb187.1 billion, with per capita GDP of US$2,100. In recent years, the modern manufacturing industry has enjoyed rapid development in Chengdu, which has 21 industrial development zones; three of which are state-level and eleven are provincial-level. A comprehensive yet distinctive industrial system comprising mechanical, electronics, pharmaceutical, food, metallurgy and construction industries has been established. The value-added of industry in Chengdu in 2003 was Rmb67 billion, and the ratio of value-added of the primary, secondary and tertiary industries was 8.0:45.9:46.1 – with the tertiary industries taking the lead.

With China further opening up to the outside world, a large number of world famous companies such as Toyota, Shinoka, Intel, SMIC, Motorola, Corning, Lafarge, and Uni-President have set up their operations in Chengdu. The city has become one of the important links in the global economic cycle. It is the largest merchandise distribution centre in the south-western region as well as the most prosperous commercial and trading services city in the region. In recent years, its commercial network improved and expanded

29 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) continuously. In 2003, total retail sales of consumer goods reached Rmb77.2 billion, and there were 894 merchandise trading centres with an annual turnover of Rmb55.7 billion. Among these, the turnover of 32 centres exceeded Rmb100 million and 7 exceeded Rmb1 billion. Domestic and overseas retail chain giants such as Carrefour, Metro, Auchan, Renrenle, and Bejing Hualian all view Chengdu’s commercial development prospects positively, and are establishing and expanding new branches in the Chengdu market.

Supporting modern logistics development with improved transportation infrastructure facilities

Chengdu’s logistics infrastructure such as railways, roads and aviation continues to improve. The four railway trunks Chengdu-Chongqing, Baoji-Chengdu, Chengdu-Kunming, and Dazhou-Chengdu which connect north China, north-western China, south China, and the south-western region converge at Chengdu as the largest railway hub in the south-western region. In 2003 the freight volume transported on Chengdu railways reached 49.77 million tons and cargo traffic totalled 39.9 billion ton-kilometres. The major railways that connect to the ports run from Chengdu to Tianjin, Qingdao, Lianyungang, Shanghai or Shenzhen. The Ministry of Railway has already initiated a Rmb1.7 billion project of the Chengdu North Railway Station, and is about to invest Rmb700 million into the East Railway Station to turn it into Asia’s largest railway container terminal station, with a container cargo throughput of 8.54 million tons by 2005.

Chengdu is the focal point for Sichuan’s highway network, which has a total of 7 provincial routes totalling 347 kilometres long within the province. Many expressways like Chengdu-Chongqing, Chengdu-Mianyang, Chengdu-Leshan, and Chengdu-Ya'an have been completed. The roads in Chengdu downtown form a check-lattice pattern, basically extending outwards with a radiant ring-shaped network. There are eight main national highways and roads either passing through, starting from or ending in Chengdu. Among these, two are main national highways and six are national main roads with a total length of 542 kilometres. In 2003, freight transported on roads in Chengdu reached 237.24 million tons and freight traffic reached 9,768.49 million ton-kilometres. Chengdu has two roads leading to coastal ports: the Chengdu-Beihai corridor and the Chengdu-Shanghai corridor.

In air transport, lying amid the busy Asian-European flight route, Chengdu is an ideal stopover point for planes from eastern China, Hong Kong, Macao, Taiwan and southeast Asian countries on their way to Europe. The Chengdu Shuangliu International Airport is one of the six regional aviation hubs designated by the Civil Aviation Administration of China (CAAC), and there are about 25 international flights going through Sichuan every day. In 2003, 83,000 flights took off from and landed at the Shuangliu International Airport, cargo and postal throughput reached 220,000 tons, making it the sixth largest airport in the country and the first among airports in the western region. By 2010, Shuangliu International Airport’s cargo and postal handling capacity is estimated to reach 400,000 tons. The airport

30 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) plans to construct its second runway as well as international and domestic cargo stations. By 2020, the airport is expected to become the largest air transport hub and cargo and postal throughput is expected to reach about 1.2 million tons.

Step-by-step establishing a modern logistics centre for the western region

Overall, Chengdu has a reasonable basis for developing modern logistics, but it is still in the preliminary stage of transforming its traditional storage and transportation industry into a modern logistics industry. Logistics functions of industrial and commercial enterprises continue to be performed internally by companies themselves or their suppliers. Third-party logistics account for only a small proportion of the total logistics volume. Not one single logistics company is able to provide full logistics services for an individual industrial or commercial enterprise. Furthermore, the allocation of logistics resources is inefficient and a unified public logistics information platform has yet to be established. Logistics information and resources of different kinds are not being consolidated and this leads to a waste of logistics resources, high logistics costs, and extremely inefficient customs clearing of cargo. Owing to companies’ failure to use the Internet to obtain timely cargo movement information, industries and enterprises do not fully trust logistics companies, and would therefore opt to take charge of their logistics functions by themselves. This in turn makes it difficult to initiate segregation of logistics activities from overall enterprise operation.

In transportation, express logistics channels that would connect Chengdu with developed economic zones of PRD, Yangtze River Delta and Beijing-Tianjin-Tangshan area has not yet actually taken shape. Chengdu has not yet established any direct international air links with developed economies such as Europe and the USA. There are also no flights to major airports such as Paris in France, Frankfurt in Germany or Chicago in the US. Hence, at the current stage, Chengdu has not yet established its position as an important logistics centre of the western region.

In order to speed up logistics development in Chengdu and ensure its smooth transition from its traditional form to a modern one, the municipal government has committed that it would promote the development of modern logistics, aiming to turn Chengdu into an important modern logistics centre of the western region in five years’ time. By 2007, the logistics industry will create a value-added of Rmb30 billion. More than 10 large logistics companies with businesses spanning the western region and generating an operating revenue of more than Rmb1 billion will be nurtured. Total logistics cost as a percentage of GDP will decline to below 15%. Concrete works to be undertaken include:

1. Strengthening the organisation and leadership of modern logistics industry development. In November 2003, Chengdu’s Party Committee and municipal government set up a core group to take charge of the work in developing the city’s modern logistics industry.

31 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

2. Establishing the city’s logistics planning and giving strategic guidance to the establishment of the modern logistics system. The main task is to consolidate the planning resources for the logistics sector from various departments. Under the guidance of the city’s overall development plan, the layout plan for commercial network distribution, the layout plan for industrial parks and zones, the construction plan for roads and transportation facilities, and the construction plan for a digitalised Chengdu will be integrated; while a framework for Chengdu’s logistics system, a platform for infrastructure facilities and a platform for logistics information will be scientifically designed. These would help shape Chengdu city’s modern logistics development plan, and provide concrete guidance for the development of modern logistics industry in the city.

3. Accelerate the development and construction of centralised logistics zones to promote centralised development of modern logistics. Emphasis will be given to the construction of a logistics base in Chengdu which caters mainly to highway-railway linked transport (Chenghua), a logistics centre which caters mainly to logistics distribution in the southwest (Wuhou), an aviation logistics centre which caters mainly to express air cargo (Shuangliu Airport), and the Qingbai Logistics Park which caters mainly to bulk-cargo. They will form a centralised multi-functional modern logistics zone. New modes of developing logistics industry in inland cities will also be explored; express international and domestic logistics channels connecting to developed economies inside and outside China will be constructed.

4. Proactively introduce well-known international and domestic third-party logistics companies to help the transformation of the traditional logistics companies into modern logistics companies. A platform for public logistics information for the whole city to improve the efficiency of logistics will be set up.

5. Formulate policies to accelerate the development of the modern logistics industry, and create a sound environment for investment that is conducive for the industry to develop. The “Opinions on the Use of Land for Modern Logistics Projects in Chengdu” that has been promulgated will largely solve land-used related problems encountered in the course of developing logistics projects and logistics companies, laying a solid foundation for the development of logistics industry in Chengdu.

32 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Strengthening Hong Kong's Position as a Logistics Hub as it Integrates into the Pan-PRD

Of the 8 Pan-PRD provinces/region, all except Guangxi, Fujian and Hainan are inland provinces without ports for exporting merchandise. Goods need to be transported via ports in coastal cities1, and this is where Hong Kong obviously can complement with them. As Asia’s most important commercial, trade and transportation hub, Hong Kong can fulfil the need for logistics arrangement in these provinces. In the first half of this year, exports of the nine Pan-PRD provinces/region via Hong Kong amounted to US$23.85 billion, increasing by 12% and accounting for 23.1% of the total exports by the nine provinces and regions. Imports into the nine Pan-PRD provinces/region via Hong Kong were US$60.52 billion, up by 28.4% and accounting for 65.9% of the total imports into the nine provinces/region. The transport links between Hong Kong and the eight Pan-PRD provinces/region are mainly coursed through PRD road networks in Guangdong. According to the national plan, railway and highway links between Hong Kong and the main Pan-PRD cities will become closer and improve further in the future2. With closer connection, cargo from Jiangxi, Hunan, Guizhou, Yunnan and Sichuan can be transported to Hong Kong more rapidly for export overseas via international liners at Hong Kong’s container terminals or international flights at the Hong Kong International Airport. This is not only conducive to the strengthening of Hong Kong’s position as international transport hub, but also exerts far-reaching influence on the development of ports and airports in Hong Kong, and indirectly creates more employment opportunities for Hong Kong.

As a logistics hub, Hong Kong possesses unique advantages

Hong Kong, situated at the centre of Asia-Pacific, is China’s gateway on the south. Over the years, it has maintained its central position as the world’s busiest container port and international air cargo centre.

1. Port

Hong Kong ranks among the world’s most developed modern deep-water ports and is at the centre of sea-trade activities in south China. At present, there are more than 80 regular international liners providing Hong Kong ports with over 400 regular container calls a week, connecting Hong Kong with more than 500 destinations all over the world. Those operating in ports include not only large vessels sailing in from the Pacific Ocean but also the relatively small river cargo vessels coming from the Pearl River. Every day, more than 300 barges run between Hong Kong the PRD ports. In 2003, cargo handling capacity at Hong Kong ports reached 207.6 million tons, with ocean freight making up 71.6% and river freight accounting for 28.4%. Hong Kong, as an intersection point of ocean and river cargo transport, together with its extensive experience and good reputation in warehouse and storage management,

1 Please refer to the analysis in the sections entitled “South-western Cargoes Bypass Guangxi and Use Ports in Shanghai and Guangdong” in this consultancy study and the section entitled “Gradually Perfecting the Transportation Network for Exit of Goods from the South-eastern Region” in the consultancy study for the South-eastern Pan-PRD region. 2 Please refer to the section entitled “Hong Kong's Link with the Pan-PRD Transport Network Plan” in the first issue of the consultancy study for the South-eastern Pan-PRD region. 33 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) cargo receipt and handling capacity, freight safety, marketing, related legal and financial services, excel in developing into a Pan-PRD international logistics centre.

Hong Kong’s Port Cargo Throughput

34 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

2. Air transport

Since 1996, Hong Kong has been the busiest international air cargo centre. At present, about 70 international airlines offer about 4,300 regular passenger flights and full cargo flights between Hong Kong and about 130 destinations in the world weekly. In March 2001, the marine cargo terminal northeast of the Hong Kong International Airport came formally into operation, providing two-way low cost, highly efficient cargo services linking the Hong Kong International Airport with 17 ports1 in the PRD. This symbolises that the distinguished international airport of Hong Kong has included marine-air service into its logistics system. The marine terminal spans an area of 14,000 square metres, with a handling capacity of 300,000 tons of cargo initially, and plays a significant role in instilling closer marine and air links between Hong Kong and the PRD cities as well as eases the heavy road traffic at the Mainland-Hong Kong border and congestion at cargo customs declaration points.

The World’s Busiest International Airports Ranked by Cargo Throughput in 2003

10,000 tons 300

250

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ta is t re i ge ami ar Par N Seoul nkfur Mi nchora Fra ingapo New York A S Hong Kong Los Angeles

Another important support facility for cargo transport at the Hong Kong International Airport is the commercial trade logistics centre which was completed in 2003. Situated on the southern side of the airport, this centre possesses advanced logistics facilities and management technology, provides one-stop supply and distribution service, offers high-value and high-technology products with added-value processing for shipping overseas. According to people in the industry, the marine-land terminals and the large logistics centre complement with each other, promoting the growth of Hong Kong’s aviation and sea-transport business, and providing new impetus for the development of Hong Kong’s logistics industry. To keep up with the rapid economic growth in south China, the Hong Kong International Airport is planning a series of construction to meet market needs. These

1 Includes the 17 ports of Taiping, Zhongshan, Doumen, Huangpu, Lianhuashan, Rongqi, Jiangmen, Pingzhou, Beijiao, Heshan, Huadu, Beicun, Foshan, Gaoming, Sanshui, Qingyuan, Zhaoqing. 35 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

include setting up 4 additional parking spaces for cargo aircraft, bringing the total number to 25. The SAR Government will also invest more than HK$1 billion in the next ten years to introduce a new generation of satellite communication, navigation, and aviation transportation management systems to fully-improve safety and efficiency of aviation transport.

Breaking the spatial gap

Air cargo and ocean cargo transport are the two main pillars of Hong Kong’s logistics industry. However, cargo freight between the Mainland and Hong Kong is still mainly channelled via land transport. For its airport and ports to integrate into the Pan-PRD and exert its pivotal function, Hong Kong still has to rely on the effective coordination of rail and road transport. At present, there are only three transport channels between the Mainland and Hong Kong — Huanggang in Shenzhen, Man Kam To and Sha Tau Kok -- which are getting narrow. All the three channels pass through the downtown area of Shenzhen, where long queues of cargo trucks caught in traffic remain basically unchanged all these years. Furthermore, the two major railways which traverse from the north to the south — Beijing-Kowloon and Beijing-Guangzhou railways -- plus the numerous north-to-south running highways constructed in the recent years still fail to effect connections with Hong Kong ports and airport.

According to experts in the industry, conditions like this weaken Hong Kong’s position when competing with logistics industries in the Pan-PRD. To turn around this unfavourable situation, Hong Kong can only hope that the plan for a PRD circular road network1 announced by the country early this year will be constructed soon, allowing more rapid transportation of Pan-PRD goods to Hong Kong for exporting overseas via ships at Hong Kong’s container ports or international flights at its airport. Within this road network, the Shenzhen-Hong Kong Western Corridor under construction and the Hong Kong-Zhuhai-Macao Bridge under discussion will play a significant role2.

Overcoming institutional barriers to lower cost

Apart from breaking the spatial gaps, Hong Kong also needs to develop into a key logistics centre that links to the Pan-PRD, and overcome barriers posed by the existing institutions. On this aspect, the SAR Government needs to discuss with the relevant departments in the Central Government to find appropriate solutions. For example, because Guangdong and Hong Kong belong to two custom territories, their systems of customs clearance, inspection and quarantine are different and cannot be linked up effectively. Such differences have led to delays and less efficient logistics processing, and increased the cost of transportation for the shippers. At the same time, due to the customs’ over-detailed

1 Please refer to the section entitled “Hong Kong's Link with the Pan-PRD Transport Network Plan” in the first issue of the consultancy study for the South-eastern Pan-PRD region. 2 Same as above. 36 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

administrative rules on industrial trade processing companies, the customs verification and cancellation period is excessively long; this also contributes to higher transportation cost. At present, the cost of cargo handling to and from Hong Kong which entails cross-border transportation charges are substantially higher than cargo moving to and from other south China ports. According to a recent survey conducted by the Centre of Cyber Logistics of the Chinese University of Hong Kong on the logistics sector in the PRD, the total transportation cost1 accumulated from the time the goods are released by the factory to its arrival at the target market will increase by 10-18% if it is transported via Kwai Chung terminals of Hong Kong instead of Yantian ports in the Shenzhen city. The difference arises mainly from the more expensive truck transport charges, which costs HK$3,200 coming to Hong Kong but only HK$1,200 if transported to Yantian.

However, the barrier posed by administrative rules on cross-border transportation has long been in existence, and means to resolve the situation is beyond the control of local governments. Under the current system, customs clearing efficiency has already been maximised, what remains to be improved are administrative regulations. This calls for effective communication between the SAR Government and the Central Government. The upcoming construction of the Shenzhen-Hong Kong Western Corridor which will employ “one-stop unified inspection for the Mainland and Hong Kong Customs and Immigration” must be an important pilot test. Institutional barriers exist not only between Guangdong and Hong Kong; similar barriers also exist among the Pan-PRD provinces/region. Even between Guangdong and the other eight inland provinces/region, there exist differences in customs declaration procedures and regulations. Experts pointed out there are 450 million people in the Pan-PRD region, with a GDP of US$634.4 million. So, if the region plans to develop itself into a unified market, the first step should be to overcome the institutional barriers. Hence, it seems most urgent to build a common electronic customs declaration platform within the “9+2” region. Besides, great efforts should be exerted to resolve the differences in logistics standards and the lack of transparency and uniformity in information systems.

Alleviating competitive pressures within the region

As a logistics hub of Mainland China, Hong Kong has long played a vital role. However, during the recent years, as the Mainland continues to open up and become more internationalised, its cargo export channels have diversified. Among them, the development of ports and airports in the Pan-PRD region has particularly accelerated, mounting competitive pressures on Hong Kong’s position as a transportation hub.

1. Lowering cargo transportation cost

For the inland Pan-PRD provinces/region, the time costs and transportation costs of using

1 Transportation cost includes cost of shipping, cargo truck transport, port handling charges and other miscellaneous fees (cargo release charges at destination port, fuel surcharges, customs declaration fees, etc.) 37 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

the ports of Shenzhen and Zhanjiang of Guangdong are relatively lower; and the Shanghai port in eastern China is getting more competitive. The rapid development of these coastal ports has added to competitive pressures that should not to be ignored by Hong Kong. For example, in Shenzhen ports, the container throughput back in 1998 was less than 2 million TEUs, but 5 years later in 2003, this has risen to 10 million TEUs. This development pace has way exceeded the original design plans.

At present, the service quality gap between the ports of Shenzhen and Hong Kong is gradually narrowing down; Hong Kong ports’ comparative advantages are being threatened. Worse still, the handling charges of Hong Kong ports remain much higher – double on average – compared with those charged in Shenzhen. The lower cargo handling costs at Shenzhen ports resulted in high cargo throughput growth every year (annual average growth reached 30% from 1999-2003). Meanwhile, growth in Hong Kong has been declining (from 11.2% in 1999 to 6.8% in 2003). Taking the example of Kerry Logistics, three-quarters of its marine cargo processed in the PRD are shipped out directly from the Shenzhen ports. Whether Hong Kong will be able to lower port costs is key to maintaining its position as a cargo transport hub, and experts in the Hong Kong industry should give deeper thoughts about this and seek counter-measures.

Container Throughput at Major Container Ports in China in 2003

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n en ian anji zhou al ngdao i D uzhou hanghai T Ningbo Xiam F S Shenzhen Qi uang G Zhongshan

On aviation, Hong Kong faces a new threat posed by the new Baiyun airport in Guangzhou, particularly in the area of cargo transport. The air cargo handling area at the New Baiyun Airport is over 76,000 square metres, 20 times that available at the old airport and could handle 1.2 million tons of cargo annually, fast catching up with Hong Kong’s 2.65 million tons throughput last year. In terms of charges, it is much cheaper to ship at the Guangzhou Airport than in Hong Kong. According to a related survey, air cargo handling charge of Hong Kong is HK$1.75 per kilogram, but is only HK$0.55 per kilogram at the Guangzhou Baiyun Airport. It is anticipated that in a few years’ time the Guangzhou Baiyun Airport will handle as much cargo as the Hong Kong International Airport. It is necessary for Hong Kong to adopt measures to lower the cost at Hong Kong International Airport to enhance its competitiveness.

38 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Cargo Handling Capacity, and the Number of Domestic and International Routes of Airports in the PRD Region Hong Guangzhou Shenzhen Zhuhai Macao Kong Cargo handling capacity a (tons) 800,000 750,000 600,000 3,000,000 165,000 Domestic routesb 72 88 46 40 14 International routesb 27 11 0 90 8 a Current cargo handling capacity, information obtained from respective airport websites b Routes operated by Zhuhai and Macao airports as of 2002, information obtained from Statistics of China Civil Aviation 2003.

2. Perfecting the international network

The shipping business competes not only by low cost and charges, but also by the number of international routes and frequency of flights and ships. In this aspect, Hong Kong possesses absolute advantage, especially in terms of cargo transport via the container terminals, because the international networks of ports in Shanghai and Guangdong are still behind that of Hong Kong. However, in terms of air traffic, Hong Kong’s advantage is gradually narrowing since the opening of the new Guangzhou Baiyun airport. At present, there are 90 international airlines operating at the Hong Kong International Airport, 3 times more than that offered by the Baiyun airport. However, since the new airport in Guangzhou opened in August, many international airlines such as the US Northwest Airline have sought access. A series of international air routes will soon be launched and many world-renowned airlines will soon enter. The target of having at least 40 international airlines with direct flights to Guangzhou by 2005 is more likely to be achieved ahead of schedule rather than delayed. The Sino-US Air Service Agreements recently signed also brings in new challenges. According to the agreement, the number of flights between the US and China will be increased from only 54 to 249 a week. Previously, owing to the limited number of flights between the US and China, a lot of cargo transit through Hong Kong into China. Facing these new challenges, Hong Kong has to further improve its international network by increasing the number of international air routes and flight frequency.

2004 Sino-US Air Service Agreement

In the Sino-US Air Service Agreement signed on July 24, 2004 and implemented on August 1, both sides agreed to implement the following in stages over the next six years：

(1) The number of passenger/cargo traffic airline companies operating flights between the two countries will be increased from the existing 4 companies to 9 companies. In the next 6 years, 5 carriers will be chosen to enter the Sino-US air transport market. In particular, the US side will be adding a new cargo airline company this year; and a new passenger airline company will be added in 2005; China will enjoy more freedom in the appointment of carriers.

39 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

(2) In the coming 6 years, the current 54 weekly flights will be increased to 294 weekly flights in three phases, among which 118 will be cargo fights and 84 will be passenger flights. (3) Cargo transportation companies in the US will be allowed to set up a cargo transport centre in China. By 2007, this cargo transport centre can independently deal business in China and the entire Asia-Pacific area, without having to refer the transactions back to the US. (4) The previous limit of 12 American destinations for China’s flights and 5 China destinations for American flights was cancelled.

Meanwhile, another comparative advantage of the international cargo transport at the Hong Kong International Airport is also being challenged. As a free port, Hong Kong has always meant to be special to the Mainland. Every year, a great volume of China-made products is re-exported through Hong Kong to the US by air. However, as China reaches bilateral agreements with more and more countries to open fifth freedom rights for air cargo traffic, an increasing number of Mainland airports has gained direct access for exporting to the US and Europe. This has led to a decline in dependence on the Hong Kong International Airport, affecting Hong Kong’s transit cargo transportation businesses. Under such circumstances, Hong Kong’s ability to perfect its international aviation network will become the key to determining whether Hong Kong will be able to sustain its position as international aviation hub.

Opening of Fifth Freedom Rights by China

The so-called five air freedoms are as follows: First freedom grants rights to fly over a country; second freedom grants rights to stop in a country for aircraft maintenance; third freedom grants rights to offload passengers or cargo at destination; fourth freedom grants right to carry passengers or cargo at destination; fifth freedom grants rights to take on as well as offload passengers or cargo in a third country. In 2003, China granted fifth freedom rights to foreign airlines for the first time. Nanjing and Xiamen were made pilot test grounds for opening fifth freedom rights. Singapore Airline’s cargo was allowed to open routes that fly by Xiamen and Nanjing, and proceed to Chicago as its final destination. Singapore Airlines was thus granted the right to take on or offload international cargo at Xiamen and Nanjing. Other Mainland airports actively seeking permission to open fifth freedom rights include: Shanghai, Tianjin, and Wuhan.

3. Adding more domestic air routes

While strengthening the international network of the Hong Kong International Airport, it is also necessary to realise that the weakest link of the Hong Kong International Airport is the limited number of routes and flights into the Mainland. At present, Hong Kong operates only 42 Mainland routes, the least number of domestic air routes in the PRD other than Macao, and is only half of that offered by Guangzhou. If services to the Mainland could be

40 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) increased, export cargo from the Pan-PRD region, and even from the YRD region and north China could be brought to Hong Kong to make use of its international flight services, boosting the development of Hong Kong’s air transportation industry. In this respect, the newly reached Mainland and Hong Kong Air Service Arrangement has wide implications. Under the new Arrangement, the total number of the air cargo flights will be more than doubled from the currently 40 a week to a total of 84 a week. It is anticipated that cargo flights between Hong Kong and the Mainland, particularly the Pan-PRD, will become more frequent. The most unique aspect of the new Arrangement is that Hong Kong airlines have, for the first time, been granted the right to make two stops on its route, which allows them to develop some minor destinations.

Mainland and Hong Kong Air Service Arrangement

The Economic Development and Labour Bureau and the Civil Aviation Administration of China have completed the annual discussion of Mainland and Hong Kong Air Service Arrangement. According to the new Arrangement, both parties will gradually open up to the operation of more individual routes, striving to allow two airlines from each side to serve each route, and immediately lift the limit on the total number of airlines allowed to participate in the market.

According to the Arrangement, beginning October of 2004, the total number of passenger flights operated by Hong Kong airlines and the Mainland will be increased to close to 1,600 weekly from current 1,200, with passenger traffic increasing by 30%. Taking Beijing for example, Hong Kong airlines will add 4 passenger flights per week starting from October 2004 and another 7 passenger flights per week starting from March next year, bringing the total number of weekly frequencies that may be operated by Hong Kong airlines on the route to 70. In Shanghai, passenger capacity will be increased by about 10% (around 7 flights per week), and another 10% starting from March next year, bringing the total number of weekly frequencies that may be operated by the Hong Kong designated airline to 98. In addition, from October, 2006, a second Hong Kong airline will be allowed to operate passenger services on the Shanghai route.

Capacity for all-cargo services will increase from the current 21 frequencies per week for each side to 42 frequencies per week, bringing the total number of freighter services that may be operated by airlines of both sides to 84 frequencies per week. Taking Shanghai for example, Hong Kong may designate a new airline to operate all-cargo services starting from October 2004, and the maximum number of cargo flights that Hong Kong airlines may operate on this route will be increased from 21 to 28 frequencies per week. In terms of new routes, a new one to Lijiang will be added to the existing 44 routes, and Services on the route may commence once facilities to support Customs, Immigration and Quarantine are in place and the required technical conditions are fulfilled.

41 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Opportunities for Hong Kong in the Mainland Logistics Market

Under the pressure posed by the fast development of ports and airports in the Mainland, whether Hong Kong will be able to sustain its position as a cargo transport hub would depend on whether Hong Kong will be able to lower its transportation costs and perfect its transport network. However, it should be noted that Hong Kong’s logistics industry continues to boast of highly efficient management and professional know-how, which give it much comparative advantage when competing in the Pan-PRD and even in the global logistics market. The development prospects of Hong Kong’s logistics industry lie in keeping an open mind and wider vision. Should Hong Kong’s logistics industry be able to leap northwards to develop the Mainland market, it could not only tap the Hong Kong logistics market, but also that of the whole Pan-PRD region, and even the entire Mainland. Hong Kong’s logistics industry should learn from Hong Kong manufacturers. More than 20 years ago, Hong Kong manufacturers moved northwards, turning PRD into a factory of the world, and enabling Hong Kong’s services industries to reach today’s accomplishments.

Demonstrating the strengths of Hong Kong’s logistics services

Compared with the developed countries, China’s logistics industry is still in its infant stage, dominated by activities such as warehousing and storage, transportation, loading and unloading. Problems being faced by the industry’s development include an unstable foundation, local protectionism, underdeveloped information platform and transportation system. In the Mainland, even in the relatively developed PRD cities of Guangdong, most logistics companies operate at low standards, with little modern management content. They know little about advanced international operation concepts and how to tap international market resources. A survey conducted by the Dongguan Bureau of Foreign Trade and Economic Cooperation indicated that existing Mainland logistics companies are mostly of small-scale, lag in competitiveness, lack sustainability, and offer single-mode services. At the same time, operating entities have little awareness of modern logistics services and there is a grave shortage of modern logistics professionals.

As for the other eight Pan-PRD provinces/region, logistics development started since the 1990s. Most companies just changed their names from a cargo transporting company into a logistics company. Strictly speaking, not a single one truly lives up to the concept of a modern logistics company. The so-called professional logistics companies remain at a low-standard of operation, unable to provide integrated and multi-functional services ranging from transportation, warehouse and storage, loading and unloading, to packaging, distribution processing and relevant information consultancy to unified import and export freight forwarding agency services.

Compared with the Pan-PRD provinces/region in the Mainland, Hong Kong has unrivalled advantages. At present, not a single enterprise or logistics centre in the Mainland

42 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

has a fully-integrated sea, land and air transport capability; even the number of multimodal transport companies remains limited. On the other hand, Hong Kong possesses more mature conditions. With years of international market experience, Hong Kong’s logistics industry has established a comprehensive global network, accumulated extensive market experience and management expertise, and nurtured numerous logistics professionals. Lately, Hong Kong’s logistics industry has become one of the most developed in the world, with 38,000 professional logistics companies employing some 200,000 staff which accounts for 6.3% of the total labour force, making it one of the pillar industries of Hong Kong.

Mainland experts pointed out that their local companies already have in place an existing network and experience in operating single-mode logistics functions, but lack experience in globalised and integrated services. As for Hong Kong’s logistics companies entering the Mainland market, it would be too costly to establish their own networks. For both sides, this creates room for complementarities and provides opportunities to strengthen cooperation. Given the comparative advantages enjoyed by the logistics industry in Hong Kong, it is commonly recognised by experts and academics that “attracting Hong Kong logistics companies and keeping them would help raise the standard of logistics industry in the Mainland.”

Channels for Hong Kong to tap into the Mainland logistics industry

According to the commitments made when China entered the World Trade Organisation (WTO) in December 2001, China will open up its service industries, including the logistics sector, by 2005. During the transition period, foreign investors are not allowed to operate wholly-owned logistics companies in the Mainland, and can only enter the market under Sino-foreign joint venture arrangements; they are also restricted from holding majority shares. Not only are these set-ups subject to the approval of authorities, the number of these companies is also restricted.

The implementation of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), however, opened up the Mainland logistics sector to Hong Kong players ahead of the others. Under the CEPA framework, Hong Kong investors are allowed to set up wholly-owned logistics companies in the Mainland beginning January 1, 2004, to provide cargo transport and distribution related logistics services, including road transport, storage and warehousing, loading and unloading, value-added processing, packaging, delivery and related information and consultancy services for ordinary road freight, freight forwarding agency services within the Mainland, and the management and operation of logistics services through computer network. With the implementation of the second phase of the CEPA in January 2005, Hong Kong companies will be allowed to provide management services in small- and medium-sized airports 1 . These promises provide Hong Kong companies with faster access to the Mainland logistics market, so that they can tap into the

1 Please refer to appendix for details. 43 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Mainland market ahead of their foreign competitors and establish a firm footing in the Pan-PRD region. Should foreign logistics service providers wish to take advantage of the preferential policies under CEPA to enter the China market, it may do so through merger and acquisition of Hong Kong companies, which can also be beneficial to Hong Kong companies. In addition, the provisions in CEPA are applicable to all Hong Kong logistics service providers regardless of their asset size, particularly lowering the entry requirements for small- and medium-enterprises, providing more room for expansion and development.

Logistics-related Liberalisation Commitments Made by China when Entering the WTO (1) Marine cargo service o Allow foreign investors to operate minority-held joint ventures and according to China vessel sailing time. o Allow foreign investors in the form of Sino-foreign joint ventures to operate cargo handling, container yards and shipping related auxiliary services upon China’s accession to WTO. (2) Road transport service o Allow foreign investors to operate majority-held joint ventures one year after China’s accession to the WTO and to operate wholly-owned subsidiaries three years after China’s accession to WTO. (3) Warehousing and storage service o Allow foreign investors to operate majority-held joint ventures one year after China’s accession to WTO and set up wholly-funded subsidiaries four years after China’s accession to the WTO. (4) Freight forwarding agency service o Foreign freight forwarding agencies with at least three years’ experience are allowed to set up joint ventures upon China’s accession to WTO. o Allow foreign investors to own majority stakes in joint ventures one year after China’s accession to WTO and set up wholly-owned subsidiaries four years after China’s accession to the WTO. o A joint venture may set up branches one year after its establishment. o Allow joint ventures with five years’ experience in the Mainland to set up a second freight forwarding joint venture company. (The five year requirement was reduced to two upon China’s accession to WTO).

Meanwhile, the National Development and Reform Commission proposed eight measures to promote modern logistics development, which include further opening up of the logistics sector, encouraging large-scale logistics companies overseas to set up logistics companies in the Mainland, and encouraging use of foreign funds, equipment and technology for the construction of domestic facilities or business operation.

With the gradual revoking of market access restrictions in the Mainland, Hong Kong companies can take advantage of its strengths in the management of supply chains, transportation of international air cargo, operation of logistics facilities, management and

44 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

raising of funds, and cooperate with the Pan-PRD region or overseas companies to expand the Mainland logistics market, and leverage on the fast development achievements. Apart from providing the much-needed funds for the Mainland logistics industry, the entry of Hong Kong investment will also help uplift the technological and management standards of Mainland logistics companies, and benefit the development of modern logistics industry in China.

To Hong Kong, extending the hinterland to the Pan-PRD region will also expand the room for its development and bring about additional business opportunities, resulting in a win-win situation. After moving the service industries northwards, Hong Kong people should adopt a wider vision on employment, considering the whole Pan-PRD region as a place for them to make a living. It is worth mentioning that CEPA has applied zero-tariff preferential policy to 1,0871 Hong Kong products, which will enhance chances for Hong Kong products to enter the Mainland market. Since logistics rely on product flow, the increase in flow of Hong Kong products to the Mainland will bring about stronger demand for logistics services, and thus benefit the overall development of Hong Kong logistics industry. Under the CEPA framework, there are a lot of ways for Hong Kong to tap the logistics industry in the Mainland. They include the following:

1. With the help of favourable policies, directly set up join-ventures, wholly-owned companies to provide tailor-made logistics services for Mainland companies, especially Hong Kong manufacturing companies in the Mainland. A survey conducted by Hong Kong Trade Development Council shows that approximately 50% of PRD companies would pick Hong Kong as its joint-venture partner to provide logistics services.

2. Further segment the service chain of Hong Kong logistics industry and transfer part of logistics functions into the Pan-PRD. This is to fully utilise the less costly land and human resources available in Pan-PRD, and at the same time upgrade and facilitate transformation of Hong Kong logistics.

3. Some bigger Hong Kong logistics companies may take up shares in large-scale logistics projects in the Mainland, and create partnership between Hong Kong and logistics companies in the Mainland. This way, not only will fruits of rapid development in the Mainland logistics industry be shared, but the emergence of unhealthy competition will also be prevented. Hutchison Whampoa Limited (HWL) has set a good example in this respect by taking up shares in Shenzhen’s Yantian Port, which has been beneficial to the development of both Shenzhen and Hong Kong economies.

1 Including the 273 products which have been enjoying zero tariff since January 1, 2004 (later expanded to 374 products based on the by Mainland 2004 tariff codes.), and the 713 products which will begin to enjoy zero tariff upon implementation of CEPA II in Janauary 2005. 45 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Logistics Projects Available for Hong Kong Companies

Currently, although the SAR Government’s Commerce and Industry Branch, Hong Kong Trade Development Council, Hong Kong Federation of Industries and Hong Kong General Chamber of Commerce have already established mechanisms to answer enquiries related to CEPA provisions on the Mainland’s opening up of the services sector, there is no specialised assistance dedicated to developing the Mainland logistics market. According to a survey conducted by the Hong Kong Logistics Association, there are still numerous Hong Kong logistics companies, particularly the small- and medium-sized enterprises, which are not familiar with the licensing processes and logistics technology development in the Mainland market. They know even less about the investment opportunities in the Mainland, existing major logistics companies and their business scope – particularly information on the Pan-PRD region beyond Guangdong.

Within the eight Pan-PRD provinces/region, some investment promotion projects and existing logistics companies worth the attention of Hong Kong logistics companies are briefly introduced below:

1. Fujian

As the most important comprehensive logistics service centre in Fujian, Xiamen has authorised the development of twelve key logistics projects: Xiamen Logistics Information Platform, Logistics Park of Xiamen International Airport, Xiamen (Zhongpu) Wholesale Market for Vegetables and Agricultural Products (Phase II and III Project), Xiamen Xingrong International Logistics Centre, Xiamen Livestock and Poultry Wholesale and Trade Market (Phase III Improvement and Extension Project), District Online “Modern Logistics”, Xiamen International Trade Logistics (Haicang) Container Warehouse and Storage, Facility Improvement and Informatisation Project of Xiamen International Trade Taiwan-oriented Logistics Centre, Xiamen Haitou Logistics Park, Yongquan Logistics Centre, Improvement and Extension Project of Datong Xiamen Xiangyu Logistics Centre and the Expansion of the Renewable Resources and Dimension Stone Logistics Centre.

Xiamen has fourteen duly recognised logistics companies: Xiamen Jinlian Logistics Co., Ltd, Xiamen Ocean Shipping Agency Co., Ltd, Xiamen Huashang Zongheng Logistics Investment Co., Ltd, Xiamen Port Logistics Co., Ltd, Xiamen Taida International Freight Forwarding Agency Co., Ltd, Xiamen Superchain Logistics Development Co., Ltd, Xiamen Haitou Logistics Co., Ltd, Xiamen Post Office, Xiamen Jiafa Logistics Co., Ltd, Xiamen Hongxin Stock Co., Ltd, Datong Logistics (Xiamen) Co., Ltd, Xiamen Medicine Purchase and Supply Centre, Xiamen Huamao Logistics Co., Ltd, and BAX Logistics (Xiamen) Co., Ltd.

2. Jiangxi

46 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Jingdezhen City of Jiangxi will invest Rmb730 million in five years’ time to build a comprehensive 1 million square metre regional logistics park to serve Jingdezhen City and neighbouring regions, focusing on Jiangxi, Zhejiang and Jiangsu and radiating the entire country. Statistics show that in 2003, Jingdezhen manufactured and sold 353.04 million pieces of daily-used ceramic wares for the domestic and international market, over 100,000 thousand Changhe mini-cars were sold all over China, several million compressors, printers, refrigerators and nearly ten million tons of coke, carbon black, high frequency electric porcelain, agricultural and by-products were transported by road to different parts China, hence the volume of goods distributed is huge, and there are plenty sources of goods. As modern urban construction speeds up, Jingdezhen urgently needs the construction of a brand new composite logistics park.

Currently, the larger-scale, more competitive modern logistics company groups in Jiangxi include: (1) Jiangxi Changyun Stockholding Co., Ltd: a polar enterprise in Jiangxi transportation industry with the longest inter-province and inter-region road passenger transportation line, the largest fleet of transportation vehicles, the largest-scale of assets, and the highest profit. (2) Jiangxi Yuanyang Transportation Co., Ltd, whose business focuses on bulk ocean vessel mainly taking sea routes toward south-eastern Asian countries and regions like Hong Kong, Taiwan, Japan and South Korea and Papua New Guinea and Solomon, and covering south-eastern Asia. It has also established Nanchang-Shanghai container liner route, serving container transport service for Nanchang, its surrounding area and other parts of the world. (3) Xingfa Logistics (Nanchang) Company Limited, specialise in providing goods warehousing and storage, loading and unloading, sorting, distribution, common goods sub-packaging and packaging services, and related logistics services. (4) Jiangxi Material Storage & Transport Corporation is the largest material circulating base in Jiangxi. A second-class national enterprise with 80,000 square metres of professional warehouse facilities, 50,000 square metres of open yard, and a specialised 1,614-metre dual-track rail, equipped with cranes.

3. Hunan

Hunan Province has restructured the system of merchandise circulation, taking the initiative to integrate and economically reorganise distribution of raw materials, commercial goods, grains, and supply and marketing, manufacturing enterprise raw material purchasing and the product sales resources of marketing departments. Using existing channels and facilities, the province aims to set up specialised wholesaling firms or logistics companies which are managed and operated according to the specifications of modern wholesaling or logistics firms. It will also seek to establish a stable product purchasing, storage, transportation and sales relationship with local and foreign companies according to terms contracted. Special attention will be paid to establishing such relationships with Taiwan, Hong Kong and Macao companies to form a socially coordinated production relationship and

47 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

improve production capacity. At present, some of the companies in Hunan have set up logistics information websites with their counterparts in Guangdong and Jiangxi etc.

The provincial capital, Changsha, has drafted a four-year plan to set up four major logistics distribution centres: Xiayi New Port, Changzhutan, Xingsha and Wangchengpo Logistics Centres. Red-star Logistics Company Limited has invested Rmb1.8 billion to build a modern agriculture expo and trade centre which occupies an area of 3,000 mu. Within the next three to five years, it will also complete the construction of Hunan Red-star International Logistics Centre. Located at Dongdamen, Gaoqiao Logistics Company is actively setting up big market blocks for commercial trade, processing and storage, and a residential area block, which will span radiating influence on surrounding areas.

4. Hainan

Hainan is constructing the Hainan First Logistics Centre, with an area of 500 mu and an annual throughput of 1.42 million tons. This centre is located in Haikou, a city in the passage of Guangdong-Hainan railway. Its order processing, storage management, circulation processing, sorting and distribution, information services, and e-commerce facilities are all constructed with reference to the essential requirements of modern logistics. Part of the centre has already been put to use.

The major and more influential logistics companies in Hainan are: (1) Hainan Postal Logistics Co. Ltd., which owns 100 postal special-purpose vehicles, a 3,000-square metre logistics storage area and a huge 10,000 square metre parking lot. Relying on the postal network, it mainly engages in logistics transportation, distribution, storage, sorting, freight forwarding agency and e-commerce activities. (2) China Shipping Hainan Logistics Co Ltd.: one of the eight regional companies established by China Shipping Group Logistics Corporation (affiliated to Marine Cargo Group Corporation of China). It is equipped with modern logistics facilities and has more than 130 service centres throughout the country with its service network covering coastal regions and the Yangtze. (3) Other logistics companies are: Marine Cargo Golden Bay Logistics Company Limited, Seaport Group Company of Hainan, Hainan Asian Bridge Yeda Logistics Centre, Hainan Branch of Zhongtong Logistics, Haikou Nanhai Youth Industrial Corporation, Hainan Yaoxing Group, and Haikou Yuanshun Logistics Company Limited.

5. Guangxi

Guangxi hopes foreign investors including those from Hong Kong could actively engage in the construction of Guangxi modern logistics industry. Right now, its capital city, Nanning, is planning to promote 182 major investment projects involving a total investment of Rmb55.4 billion. Among them are 25 commercial trade logistics projects worth Rmb9.6 billion. The logistics-related investment projects currently being promoted by Guangxi

48 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) include: Liuzhou Guolian Logistics Centre, Qinzhou Logistics Zone, Lihe River Modern Logistics Zone and First Phase of Shuidong New Area of Rongshui Miao Autonomous County in Liuzhou city.

A major logistics company is Liuzhou Multimodal Transport Corporation which is dedicated to developing road passenger-cargo transportation and linked transportation by rail, road, sea and air. It is the only certified international freight forwarding agency and the only multimodal transportation companies in Liuzhou, with partnerships established with hundreds of multimodal transportation companies and freight forwarding agencies in other cities, with comparative advantages hardly matched by other logistics companies in Liuzhou.

6. Yunnan

Yunnan actively encourages foreign investors to engage in the construction of its major international transportation corridor. Efforts have been made to attract investors to participate in the construction of its border port area, to develop facilities for warehousing and storage, and other logistics functions. In the areas of transportation, post and telecommunication industries, Yunnan encourages foreign investors to construct and operate its public port utilities (for example, Kunming Container Cargo Transportation Centre, Lancang River Menghan Container Terminal, and the newly-built Nongdao Economic Development Zone Freight Yard are all open to investors). Foreign investors are encouraged to develop comprehensive service areas along its top-class highways, marine water freight transport, cross-border vehicle transportation, construction and operation of overpass and car parks. In addition, it also includes design and manufacturing of auto parking system and toll system, practical technology training and construction of educational facilities.

At present, the blueprint of Kunming International Logistics Centre has been drafted, and it has formally entered the construction phase. Located in Chenggong County near Kunming suburb, the centre will within five to ten years become a national flower trading centre, an important political, administrative, educational, cultural, and a new industrial centre, a comprehensive logistics centre with rail cargo container station and focusing on land-transport logistics. The International Logistics Centre is will have a core company playing the leading role, and attract construction funds for to develop subsequent constructions. Hong Kong should and can encourage suitable business groups to actively participate in this.

The major logistics companies are: (1) Kunming COSCO Logistics Company Limited, the first company in Yunnan to take on logistics as its name. (2) Kunming Daqian Transportation Company Limited, engaged in container cargo transportation, cold chain transportation, dump car transportation, general transportation, warehousing and storage services. (3), Kunming ASEAN International Logistics Centre (temporary name). It is

49 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

jointly set up by Yunnan Haohong Logistics Group Corporation and Ouyun Tuozhan Company Limited and British-owned Shengrong Holdings. An item under this is the Yunnan Haohong Metal Material Distribution Centre, which has started construction. This largest and most comprehensive metal logistics centre of Yunnan is expected to complete in the Lunar New Year.

7. Guizhou

The Guizhou Provincial Government has approved the following key logistics-related projects for investment: a modern logistics centre, Golden Phoenix (Group) Company Commercial and Trade project, Agricultural Produce Trading Market in Qingyan Town, Huaxi District of Guiyang, and comprehensive parking lot, etc. In addition, Guizhou Materials Storage & Transportation Corp. is actively attracting foreign funds from both home and abroad to participate in the following projects: setting up plants, enterprises and economic entities in Niulangguan Base in the form of joint ventures, partnerships, wholly-owned entities; operations inviting outside participation include goods storage and consignment by customers, and train freight forwarding agency.

Guizhou Materials Storage & Transportation Corp. (GMSTC), one of the largest material warehousing and storage companies, is a state-owned composite materials enterprise, providing integrated service of material warehousing and storage, transportation managing, tourism development, circulating and processing services. The Corporation has the following subsidiaries: Niulangguan Branch mainly engaged in material warehousing and storage, transportation, and train freight forwarding, Construction Material Operation Company of GMSTC engaged in transferring and sales of bulk cement, and Operation Company of GMSTC engaged in operation and sales of steel.

8. Sichuan

At present, Chengdu, the capital city of Sichuan, is speeding up its infrastructure construction in the integrated logistics development zone to promote the specialised development of modern logistics. The key is to construct Chengdu Logistics Base (Chenghua District) featuring the highway-railway linked transportation, a logistics centre which caters mainly to logistics distribution in the southwest (Wuhou), an aviation logistics centre which caters mainly to express air cargo (Shuangliu Airport), and Qingbai Logistics Park which caters mainly on bulk-cargo. These would form a centralised multi-functional and characteristic modern logistics zone. Hong Kong companies may cooperate with Chengdu in the following aspects: logistics infrastructure construction including highway and bridge, logistics professionals training; and exchange of ideas related to logistics planning and regulations.

The Sichuan Government gives priority to developing third-party logistics in order to

50 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) promote the transformation of its traditional logistics companies into modern ones. According to some statistics, at present, there are more than 100 third-party logistics companies in the province. Among them, Chengdu Ants Logistics, Container Shipping Company, Tobacco, Post & Telecom Logistics are enjoying positive development.

51 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

(Appendix) Specific Commitments Related to the Opening Up of Logistics Sector in the Mainland under CEPA Phase I

Phase I was implemented on January 1, 2004, main contents include:

(1) Maritime transport and auxiliary services o To allow Hong Kong service suppliers to set up wholly-owned enterprises in the Mainland to operate international ship management services, storage and warehousing for international maritime freight, container station and depot services, and non-vessel operating common carrying services. o To allow Hong Kong service suppliers to set up wholly-owned shipping companies in the Mainland to provide regular business services for vessels that they own or operate, such as shipping undertaking, issuance of bills of lading, settlement of freight rates, signing of service contracts, etc. o To allow Hong Kong service suppliers to use liner vessels serving main routes to move, without any restrictions, empty containers that they own or rent, as long as customs procedures are observed. (2) Road transport services o To allow Hong Kong service suppliers to set up wholly-owned enterprises in the Mainland to provide road freight transport services. o To allow Hong Kong service suppliers to provide direct non-stop road freight transport services between Hong Kong and individual provinces, cities and autonomous regions in the Mainland. o To allow Hong Kong service suppliers to set up wholly-owned enterprises in the Western Region of the Mainland to provide road passenger transport services. (3) Storage and warehouse services o To allow Hong Kong service suppliers to provide, in the form of wholly-owned operations, storage and warehousing services in the Mainland. o The minimum registered capital requirement for storage and warehousing enterprises in the Mainland set up and invested by Hong Kong service suppliers will be the same as that for Mainland enterprises. (4) Freight forwarding agency services o To allow Hong Kong service suppliers to provide, in the form of wholly-owned operations, freight forwarding agency services in the Mainland. o The minimum registered capital requirement for international freight forwarding agency enterprises in the Mainland set up and invested by Hong Kong service suppliers will be the same as that for Mainland enterprises. (5) Logistics services o To allow Hong Kong service suppliers to provide, in the form of wholly-owned operations, logistics services in the Mainland, which include road transport, storage and warehousing, loading and unloading, value adding processing, packaging, delivery and related information and consultancy services for ordinary road freight; freight transport agency services within the Mainland; and the management and operation of logistics services through computer network.

52 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Specific Commitments Related to the Opening Up of Logistics Sector in the Mainland under CEPA Phase II

Phase II will be implemented on January 1, 2005, main contents include:

(1) Maritime transport and auxiliary services o To allow Hong Kong service suppliers to set up wholly-owned enterprises in the Mainland to provide shipping agency services for vessels owned or operated by the Hong Kong service suppliers themselves, including customs declaration and inspection; using commercial bills of lading or multimodal transport documents to conduct multimodal transport services. o To allow Hong Kong service suppliers to set up wholly-owned shipping companies in the Mainland to provide regular business services for feeders that they operate between Hong Kong and the ports opened to foreign vessels in the Mainland, such as shipping undertaking, issuance of bills of lading, settlement of freight rates, signing of service contracts, etc. o To allow Hong Kong service suppliers to provide supplies services other than fuel and water (e.g. components and parts or food) for vessels owned or managed by the Hong Kong service suppliers themselves. o To allow Hong Kong service suppliers to provide cargo loading and unloading services. (2) Airport services o To allow Hong Kong service suppliers to provide, in the form of cross-border supply, contractual joint venture, equity joint venture or wholly-owned operations, contract management services for small and medium airports. The period of validity of the contract should not exceed 20 years. o To allow Hong Kong service suppliers to provide, in the form of cross-border supply, consumption abroad, contractual joint venture, equity joint venture or wholly-owned operations, airport management training and consultation services. o To allow Hong Kong service suppliers to provide, in the form of equity joint venture or wholly-owned operations, the following seven types of air transport ground services in the Mainland: agency services; loading and unloading control, communication, and departure control system; unit load devices management; passenger and baggage services; cargo and mail services; ramp services; and aircraft services. (3) Road transport services o To allow passenger transport companies operating franchised bus services and companies operating non-franchised bus services (Guangdong–Hong Kong cross-boundary coach services) in Hong Kong to set up joint venture enterprises in Guangdong, Guangxi, Hunan, Hainan, Fujian, Jiangxi, Yunnan, Guizhou and Sichuan to provide “direct passenger bus services” between Hong Kong and the above nine provinces/region. o To allow passenger transport companies operating franchised bus services in Hong Kong to set up wholly-owned enterprises in Mainland cities at the municipal level to provide passenger public transport and hire car services at those cities. (4) Freight forwarding agency services o To allow freight forwarding agency enterprises in the Mainland established by Hong Kong services suppliers to set up branch offices upon full payment of registered capital.

53 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

54 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

III. TRENDS & UPDATES ON THE FOUR SOUTH-WESTERN PROVINCES/REGION

Economic Development Trends of Guangxi in the First Three Quarters of 2004 ------56

Guangxi Introduces Measures to Speed Up Development of Non-state 58 Economy ------

Guangxi Aims to Fill Up its Industrial Zones ------60

Economic Development Trends of Yunnan in the First Three Quarters of 2004 ------63

Yunnan Prioritises Development of Cultural Industries ------66

Closer Cooperation between Yunnan and the ASEAN ------68

Economic Development Trends of Guizhou in the First Three Quarters of 2004 ------70

Guizhou Opens Up Public Utilities Sector, Uses BOT to Press on 72 Reforms ------

Guizhou Creates Favourable Environment for Insurance Development --- 74

Economic Development Trends of Sichuan in the First Three Quarters of 2004 ------76

Chengdu Set Up Three Tourism Centres in 2004 ------78

Sichuan Carries Out Pilot Test for Agricultural Insurance ------80

Memorabilia of Pan-PRD Regional Cooperation ------83

55 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Economic Development Trends of Guangxi in the First Three Quarters of 2004

In the first three quarters, Guangxi economy continued to grow, expanding 12.3% year-on-year (yoy) in real terms to Rmb215.8 billion. The growth rate, though slowing (13.2% in the first quarter, 12.5% in the second quarter and 11.2% in the third quarter), was still remarkable.

Agriculture improved fast, while heavy industries led manufacturing output growth

Agricultural production rose relatively fast to Rmb71.11 billion, 7.4% higher in real terms than a year ago. Planting and animal husbandry accounted for a larger proportion of the sector and enjoyed faster growth. Output reached Rmb28.57 billion and Rmb31.85 billion respectively, rising by 8.2% and 8% respectively. Value-added of industry by enterprises above designated size was Rmb41.25 billion, 21.2% higher than the same period of last year, and growth was 6.5 percentage points higher than that recorded last year. Heavy industries achieved value-added of Rmb27.3 billion, a 25.3% increase which was driven by metallurgy, automobile and electricity industries. Light industries experienced steady growth and completed value-added of Rmb13.95 billion, 13.8% higher than the same period of last year, driven mainly by foodstuff and cigarettes.

In line with the nation’s administrative control policies, investment into fixed assets grew at slower pace

In line with China’s efforts to prevent overheating in investment, Guangxi’s investment in fixed assets by city, county and above levels grew at a slower pace compared to the peaks at the start of the year. In January-September, fixed asset investment was Rmb74.24 billion, 32.1% higher yoy in real terms. Real estate, steel and aluminium, where strict regulations were implemented, saw drastic fall in growth rate. In the real estate development, investment was Rmb12.11 billion, 29.8% higher than a year ago, but 9.3 percentage points lower than that January-June growth. Iron and steel sector completed Rmb2.8 billion of investment, down 2.9% yoy, reversing the rapid growth in the January-June period. Meanwhile, infrastructure investment kept strengthening to keep up with the demands arising from the overall development of the economy. Electricity, gas and water supply investments reached Rmb11.45 billion, up 47.3% yoy. Following years of rapid rise, transportation, storage and postal services maintained certain growth pace, with investment reaching Rmb9.27 billion, 17.5% higher yoy. Water conservation, environment and public facilities administration completed Rmb8.39 billion investment, increasing by 33.5%; investment in education was 36.3% higher reaching Rmb1.7 billion.

56 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Rising wages boosted retail sales

In January-September, the average wage in the province was Rmb9, 426, 13.5% higher yoy in nominal terms, driving total retail sales of consumer goods to increase by 13.1%. Pushed up by rising commodity prices, the consumer price index (CPI) rose by 4.5% yoy in the first three quarters, which was the highest since 1997. The surge in food prices was the main cause to the rising price. In January-September, food price rose by 12.6% yoy, the biggest rise since 1996. As for consumer goods, prices of household appliances, apparel, communication, automobile and tourism still experienced declines.

Utilised foreign direct investment decreased

In January-September, exports classified according to product source and destination increased by 25.7%. Major export products included smelted, rolled and processed ferrous metals as well ass non-ferrous metals, meters and instruments, cultural and office machinery and equipment, transportation facilities equipment, chemical raw material and products, as well as wood processing, wood, bamboo and grass processed products. In January-September, Guangxi’s actually utilised foreign direct investment (FDI) declined by 41.5% yoy to US$181 million, mainly due to the smaller-scale contracts signed earlier. This year, governments at different levels and departments concerned exerted greater efforts in inviting investment, and newly-signed contracts kept soaring. By September, contracted FDI rose by 68% to US$785 million. Among the new contracts, 17 were projects involved above-US$100 million investment, 1.1 times more than that recorded in the same period last year.

Guangxi’s Utilised Foreign Direct Investment

US$100 mn 6

5

4

3

2

1

0 2000 2001 2002 2003 2004 Jan-Sep

57 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Guangxi Introduces Measures to Speed Up Development of Non-state Economy

In order to support and give guidance to the development of non-state economy, the government promulgated the “Decision to Speed Up the Development of Non-State Economy”. The arrangement listed the two main measures to be adopted by the government: first is to broadened investment fields, and second is to render support to encouraged industries and sectors.

Capital from non-state sector allowed to participate in public projects

On broadening investment fields, all sectors open to investment under the national laws and regulations and all those sectors opened to foreign investment will be opened to non-state sector participation. When investing in unrestricted projects, non-state capital need not undergo government appraisal. With regards to participation in infrastructure projects, such as electricity, gas, public transportation and roads, non-state capital can gain rights to construct or operate through participating in tenders and auction. The government of the autonomous region will encourage and lead non-state capital to invest in high-tech, as well as traditionally unique industries, processed agricultural products, modern services and export processing. Non-state investment is also encouraged to participate in the reform of state-owed enterprises and to take shares in local railways and transportation facilities, as well as to bid for rights to operate urban facilities.

Registration requirements are also relaxed. The initial registered capital requirement for enterprises can be paid in instalments, beneficial to the development of small- and medium-sized enterprises. When setting up limited liability companies, investors unable to meet the required minimum registered capital can opt to inject capital by instalment over three years’ time; the first instalment can be as low as 10% of the required minimum. Moreover, the minimum registered capital for business groups formed by privately-invested holding companies is lowered to Rmb5 million; for joint registration of a parent company and its subsidiary, the minimum registered capital required is lowered to Rmb10 million.

Measures to support the development of non-state enterprises

Meanwhile, the government of the autonomous region would give support to industries and sectors being encouraged. Industries encouraged by the government include technology, characteristic traditional manufacturing, processed agricultural products, storage and transportation, marketing and construction of large-scale facilities base for raw agricultural product materials. The government is also stepping up support to export-oriented non-state companies, implementing brand strategy (refers to products that have met international standards and achieved certain level of market share in the domestic market), and encouraging non-state enterprises to take the initiative to create their own business. The government will offer financial and tax policy support, credit assistance; establish and perfect

58 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) multi-layer, diversified and various forms of credit guarantee systems to give credit support to non-state enterprises; broaden channels for non-state enterprises to seek direct financing and adopt supportive policies in the areas such as use of land (sea) for construction.

In line with China’s concrete measures to develop the western area, Guangxi has in recent years promulgated various important documents concerning the development of non-state economy and spurring regional economic growth. It also implemented the “campaign to invite hundreds of enterprises into Guangxi” to attract entry of non-state enterprises from outside of the region. At that time, Guangxi not only encouraged development of local non-state enterprises, but also invited the more mature enterprises in other provinces to participate in developing the market.

“Campaign to invite hundreds of enterprises into Guangxi”

The campaign to invite hundreds of enterprises into Guangxi started in August 2001 in the hope of boosting the development of non-state enterprises, aiming to invite a group of powerful non-state enterprises from other provinces to support a group of small-scale, sub-standard non-state enterprises in the province, helping to promote their development, ultimately leading to the comprehensive development of its non-state economy. Statistics show that between the start of the campaign and 2003, the province had invited investment from non-state enterprises all over the country into 147 projects, each with a size of more than Rmb10 million; the total investment involved reached Rmb24.046 billion.

More opportunities for Guangxi - Hong Kong cooperation

Driven by all kinds of preferential policies offered by the government, non-state enterprises are encouraged to participate in investment fields that are open to foreign investors, expanding the room for Hong Kong investors to independently seek non-state partners for cooperation. In recent years, Guangxi attached great importance to its role as a bridge in forging the China-ASEAN Free Trade Area. In this course, Guangxi launched different kinds of investment promotion and invitation activities, through which Hong Kong investors could gain better understanding of Guangxi and promote cooperation between the two sides. Hong Kong could also take advantage of these opportunities to get in touch with ASEAN member countries interested in investing in the western area and seeking new business opportunities. As non-state enterprises are encouraged to adopt an export-oriented direction of development, Hong Kong investors can find opportunities to cooperate with non-state enterprises wanting to tap the ASEAN market. When investing in Guangxi, Hong Kong investors should not only focus on finding means to lower manufacturing costs, but should also consider providing commercial services such as consultancy and financing for the rapidly growing non-state enterprises in the region.

59 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Guangxi Aims to Fill Up its Industrial Estates

After years of development and construction, the industrial estates of Guangxi, have contributed to the economy’s opening up, export expansion and foreign investment attraction. In recent years, these industrial estates have been gradually transformed into a pool for developing and emerging industries ranging from information to biological, new material, marine and environmental protection technologies. In 2003, these estates (excluding tourist vacationing and university estates) achieved Rmb43.55 billion in GDP, accounting for 16% of the province’s total. In the long run, they are expected to contribute more to the development of high-value-added industries and become new drivers of economic growth.

Investment in industrial estates boosts economic growth

Although it is recognised that industrial estates would become the new driving force of economic development for the autonomous region and its cities, Guangxi Government continues to take a proactive stance. On October 9, 2004, it announced that improvements on the 41 reserved industrial estates will be sped up, as there remains a large gap between these industrial estates and their counterparts in more advanced provinces and cities. Mr. Wu Heng, the Vice Chairman of Guangxi, asked governments of all levels to properly deal with the industrial estates’ administrative committees and establish working relationships with the different governing departments; properly utilising strategies of market economies, give guidance to the development of different economic development and industrial estates. Resources should be consolidated to maximise attraction of capital for investment into these estates. Development should address the existing weaknesses of these industrial estates, which include absence of a unified industrial development plan and related guidelines, to enable the different industrial estates to gain a clearer position in the course of Guangxi’s economic development. These measures would help accelerate adjustment of their industrial structure, raise economic output, effectively increasing the attractiveness of industrial estates, lead to higher land use ratio and expansion of operation scales. The Party Committee of the autonomous region as well as its government proposed to use 2-3 years’ time to realise the target of maximizing use of land in the 41 industrial estates.

Industrial estate facilities improved to raise their attractiveness

Besides complementary policies in terms of the internal administration and management of industrial estates, infrastructure facilities construction should also be accelerated to improve investment environment and efficiency in management. This would enable Guangxi industrial estates to realise above-norm, high-speed, and mounting pace of development; allow them to catch up with their counterparts in the eastern coastal areas; promote reform of state-owned enterprises, integrated development of high-tech and non-state economy; and allow the region to participate more directly in international competition. In particular, opportunities arising from the relocation and transfer of

60 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) industries worldwide should be seized; strengthen the cooperation with multinational companies on the global top 500 list and other distinguished companies, and give emphasis to attracting world-class corporate research and development centres.

Development of Guangxi Industrial Estates

The construction of Guangxi industrial estates started in 1991 and consisted of 92 zones of different types. After consolidation, 41 development estates have been reserved. These are classified according industries. There are 27 general economic development estates, 4 high-tech industrial estates, 9 tourist vacationing estates and one university estate. Among these, the scale of operation of the following has taken shape: (1) Nanning New and High Technology Zone: comprising of five major industries: biological engineering and pharmaceutical, electronic information, electrical equipments, vehicle parts, modern agriculture, characteristic agricultural by-products processing. (2) Guilin New and High Technology Industry Development Zone: made prominent with its electronic information and medical-pharmaceutical industries. The structure of “one zone, multiple parks” has been formed herewith: first is the information industry park with Rmb6 billion of output capacity upon full completion; second is a medical-pharmaceutical city with Rmb3 billion of manufacturing capacity upon full completion; the third is Chuanshan Technology Park with Rmb7 billion of production capacity upon full completion. (3) Beihai New and High Technology Industry Zone: led by the establishment of Yinhe Company along with electronic information enterprises consisting of fifteen companies including Yinwan, Xinweilai and Shenlan; led by the establishment of Beisheng Pharmaceutical Company along with eighteen other bio-pharmaceutical companies including Jiqi Fangzhou and Kaiyun Pharmaceutical; led by the establishment of Guofa Company along with ten other marine-biological-pharmaceutical companies including Dongfang Chuangmei, Black Pearl and Wenke.

By the end of 2003, the industrial estates of Guangxi accumulated 2,156 projects (of which 304 were foreign funded) and Rmb69.63 billion of contracted investment. Foreign investment accounted for 14% of the total number of projects and 18.2% of total value. In January-June this year, the different industrial zones had introduced 484 new projects (of which 41 were foreign funded) and involved contract value of Rmb19.84 billion contract. Foreign investment was US$210 million, accounting for merely 9% of total, reflecting that under the ASEAN Free Trade Area concept, results are more evident in terms of attracting investment from outside of the autonomous region. However, attracting foreign investment still requires more aggressive promotion. Furthermore, Hong Kong investors could also serve as a middleman for promoting Guangxi’s industrial estates overseas. Hong Kong investors interested in cooperating with foreign partners to establish manufacturing or new and high technology ventures, particularly those for exporting to the ASEAN market or for export processing in ASEAN countries; they should also leverage on the opportunities that arise from Guangxi’s construction of the China-ASEAN Free Trade Area and the Pan-PRD regional cooperation, and consider making these industrial estates as their investment bases to

61 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) explore the ASEAN as well as domestic market.

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Economic Development Trends of Yunan in the First Three Quarters of 2004

Since this year, driven by rapid growth in industry, investment and consumption, Yunnan maintained the stable growth trend that had started since last year. In the first three quarters, overall growth remained fast. Although macroeconomic controls effectively drove investment growth to a gradually slowing pace, all major indicators still remained on normal track, pushing the province’s economic development to its best level in more than ten years.

Government’s support to the rural sector benefited rural residents

In January-September, Yunnan GDP soared to Rmb191.5 billion, 11.3% higher than the same period last year. Growth pace was 0.7 percentage point lower than the first half, but 3.4 percentage points higher than the same period of last year, which made growth in this year’s first three quarters the fastest recorded since 1992, when quarterly GDP was first measured. The primary industries improved at faster pace, thanks to the priority given by the government to solving the three dimensional rural problems. Great efforts have been taken to strengthen agriculture and increase rural income to overcome the mishaps brought about by different natural disasters, enabling agriculture and the rural economy to grow at the fastest pace seen in years. In January-September, the province’s farming, forestry, fishery and animal husbandry created value-added of Rmb30.5 billion, up 5.1% yoy and enjoying 0.6 percentage point higher growth rate than the first half of this year. In this course, average rural income increased rapidly to Rmb1,272, Rmb152.5 more than the same period of last year.

Yunnan’s Gross Domestic Product

Yoy Growth (%) GDP (Rmb100 mn) 14 3,000 Nominal GDP (Rmb100 mn) Real Growth (%)

12 2,500 10 2,000 8 1,500 6 1,000 4

2 500

0 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Jan-Sep

Energy production drove industrial growth

Value-added of industry by enterprises above designated size was Rmb65.79 billion,

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14.6% higher than a year ago, up 6 percentage points from the same period of last year. Among these, energy production (such as coal, clean coal, charcoal) was a main driver. Heavy industries thus exerted stronger pull on industrial value-added with its 23.8% yoy growth, while that of light industries increased by only 9.4%.

Investment in fixed assets followed national trend

In January-September, fixed asset investment in Yunnan tracked the national trend. Rmb84.3 billion investment was completed in the entire province, up 30.6% yoy and the pace of growth was 5.6 percentage points lower than during the first half of this year.

64 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

US$76.98 million or 1.5 times higher. Export of yellow phosphor, a traditional export item of Yunnan, totalled US$78.63 million, up 6.1%, as export of electrical power resumed normal growth.

“Three-dimensional” Rural Problems The three-dimensional rural problems refer to agriculture, rural villages and rural residents. The problem in agriculture refers mainly to the industrialisation of agriculture. As the agricultural industry is still unable to adapt to the market economy’s system of operation, products are often left unsold or forced to be sold at excessively low prices. Governments at all levels are promoting the creation and establishment of “production, supply, and sales chains” activities to realise marketisation of its agricultural economy. Another setback in agricultural industrialisation is that agriculture is still a small, self-sufficient agricultural economy, having yet to take the shape of a scaled economy. This would turn out to be a serious problem after China’s entry into the WTO. The government is now taking great efforts to reduce surplus labour and boost agricultural productivity through encouraging automation in the agricultural sector. Small-scale, self-sufficient agricultural economy must be abandoned in preparation to meet the challenges posed by the WTO accession. Among all the problems related to the villages, the most outstanding is the reform of the household registration system. This system distinctly distinguished urban from rural areas and caused large economic and cultural disparity to arise between rural and urban areas. A reform of the household registration is currently underway across the country, in the hope to further release the surplus labour in rural areas. More importantly, after reforming the system, surplus labourers will be able to enjoy reasonable settlement and freer movementduct2a

65 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Yunnan Prioritises Development of Cultural Industries

One of Yunnan’s three key goals in the new century is to become a major cultural ethnic province; nurture its cultural enterprises to develop into a new pillar industry and become a new growth engine for its economy. Yunnan Government aims to establish a group of major cultural industries, a series of leading cultural enterprises, nurture a group of competitive bodies, and form an industry system of famous brands by 2006. Rural and urban residents are encouraged to expand their proportion of consumption on cultural products, make the value-added from cultural industries account for 6-10% of Yunnan’s GDP. Currently, Yunnan has already set up a specialised fund to support the development of cultural industries with Rmb10 million to be injected annually. The fund will be available to culturally rich, popular and sustainable projects. To qualify for use of the specialised fund, projects should pass the assessment of relevant departments.

Starting external promotion, Yunnan’s cultural industries took the first step to “go out”

Led by calls of the Yunnan Party Committee and Provincial Government, the entire Yunnan participated in the development of its cultural industries. Preliminary statistics show that at present the number of entities declaring to be of cultural nature reached a total of 515. In October, the 2004 Cultural Industries of Yunnan Shanghai Promotion Week was held. A total of 156 projects, which have passed the planning, research and analysis of experts from within and outside the province, were launched in Shanghai to invite investment. Through a series of promotion events, including cultural industry shows, seminars, performances, open forums and exhibitions, Yunnan’s cultural industries caught the wide attention of various sectors in Shanghai, media bodies in and outside the province, as well as attracted the participation of national and overseas events participants from the United Kingdom and Spain. This helped realise the province’s objectives of expanding influence and inviting investment. At that time, 24 projects were signed in Shanghai, totalling Rmb6.946 billion in investment. The promotion week marked the start of exploration for new means and agenda for Yunnan-Shanghai cooperation, pushing their cooperation on to a new stage. Promoting the development of ethnic cultural resources in Yunnan through the international metropolis of Shanghai would provide a platform for Yunnan cultural industries to stand in the limelight and prepare for entry into the global market, enabling Yunnan to take up an advantageous position in the overall development of China’s cultural industries.

The Yunnan Government designated 2005 as the year for developing cultural industries, hoping to mould the cultural industries to become new pillars for the economy in two years’ time. The promotion week in Shanghai formed part of the government’s efforts to prepare its ideas, environment and financial resources for expansion in development of the cultural industries. The promotion gave Yunnan the opportunity to accumulate experience for next year’s cultural exchange and cooperation activities to take place in Europe and the US next year.

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Cultural Industries

In a narrow sense, cultural industries refer to culture in the concept of “science, education, culture and sanitation”; includes culture and arts industries (arts, publishing, relic protection, libraries, archive libraries, social culture, news, cultural arts agency and other cultural art forms) as well as broadcasting, television and filming. The term could be shortened to culture, broadcasting and television industries.

In a broader sense, if education is taken to be a part of the broadcasting cultural department and included into the scope of cultural industries, the broad sense of cultural industries is applicable. It includes cultural art, broadcasting, television, filming as well as education. The term could be shorted to culture, education, broadcasting and television.

Complementarities between cultural industries and Hong Kong

CEPA created an environment for Hong Kong and the Mainland cultural industries to cooperate and interact on different levels allowing the two sides to gradually integrate. Among the segments of the cultural industries, films, broadcasting and television are areas where Hong Kong can readily take part in. As the market for these products is mainly driven by consumers’ views and likings, to be able to occupy a significant position in this market of 1.3 billion population, it is essential to have a thorough understanding of the Mainland public’s culture. As for films, although CEPA did lead to an increase in Hong Kong film production, Mainland reports show that incomes generated by Hong Kong films in the Mainland decreased compared with 1-2 years ago. Hong Kong producers still need to work hard to win the support of Mainland consumers. Cooperating with Mainland companies gives Hong Kong industries the golden opportunity to learn and integrate into the Mainland market. At present, the publishing, art and media sectors of the Mainland and Hong Kong each has its own comparative advantages. Their strengths could mutually complement each other through cooperation in technology, talents and resources. Meanwhile, leveraging on the development of Yunnan’s cultural industries, Hong Kong’s tourism sector could consider introducing unique attractions and programs into the Hong Kong market. Yunnan’s unique and mystique cultural features as well as its reputation in the Mainland would certainly make these items attractive to western tourists and enterprises.

67 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Closer Cooperation Between Yunnan and the ASEAN

According to Yunnan Vice Governor Shao Qiwei, the ASEAN countries have invested in a total of 381 projects in Yunnan by the end of 2003. Contracted investment amounted to US$470 million, while the actually utilised investment was US$230 million. The investment of ASEAN countries in Yunnan mainly concentrated on agriculture, tourism, machinery, medical care, and electricity. In the first three quarters, 24 more new ASEAN projects entered Yunnan. Contracted foreign investment reached US$30.63 million and actually utilised foreign investment amounted to US$11.77 million. Meanwhile, Yunnan has embarked on an outward investment strategy focusing on investing in neighbouring countries. In 2003, Yunnan’s investment in the ASEAN countries reached US$8.55 million. In the first three quarters this year, investment was US$6.38 million, 5% higher than the same period of last year.

Expand promotion of Yunnan via the ASEAN platform

Although the annual China-ASEAN Expo will permanently be hosted in Guangxi, Yunnan’s tightening economic and trade cooperation with the ASEAN members has not been adversely affected. On November 3-6, the First China-ASEAN Expo was held in Nanning, Guangxi. The Yunnan Government gave it much priority and sent a large 120-member delegation led by Vice Governor Mr. Shao Qiwei to attend the event. It was reported that the First China-ASEAN Expo in Nanning jointly hosted by the Department of Commerce and ASEAN countries attracted the participation of 2,500 companies from the ASEAN countries and all over China. It was an event of historical significance that drove and promoted the establishment of the China-ASEAN Free Trade Area.

In the course of the four-day Expo, Yunnan maximised the use of the platform provided by the Expo to introduce itself. With in-depth research and preparation, Yunnan attracted more companies from the ASEAN and all over China to fully utilise the advantages and favourable investment environment in Yunnan; prompted cooperation and efforts to complement each other, participate and cooperate in the co-development of Yunnan and the ASEAN. During the Expo, Yunnan selected and promoted a batch of promising, high-quality enterprises of all scales and natures ranging from tourism, ethnic culture and arts, tobacco, chemicals, mechanical and electronics, and modern transportation.

Yunnan strengthens construction of cooperation channels with neighbouring countries

In recent years, Yunnan has established diversified means of cooperation with neighbouring countries, engaging in discussions and coordination on economic and trade development issues of mutual interest. Established cooperation mechanisms including those between Yunnan and Northern Thailand, and Yunnan and Northern Laos. Platforms for discussions with the different Departments of Commerce and Trade in Vietnam, Myanmar

68 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) and Laos are also in place. Friendly relations and cooperation mechanisms with the ASEAN Industry and Commerce Council, ASEAN Commercial Chamber, as well as the Kunming-Hanoi Economic Corridor have also been established. These would allow Yunnan to provide better services to the ASEAN and the rest of the country, as well as facilitate faster development of the province.

It was disclosed during the ASEAN Expo that Yunnan has been granted permission by the Central Government to process immigration visas at the borders of Kunming Airport, Jinghong Airport, Hekou Airport and Mohan Airport, in order to provide convenience to tourists and businessmen from ASEAN visiting Yunnan. Tourists from ASEAN and third-party countries would be able to enter Yunnan conveniently and proceed to tour the other parts of China by entering through Yunnan. The province would create the best immigration and customs services to promote its cooperation with ASEAN.

Kunming commercial district development reserved for Hong Kong investors

As CEPA and cooperation with ASEAN begin to take shape, Huidu International Shopping Complex, which is located at the south end of Baita Road, is Kunming’s key project in Panlong District. The complex would become the first International business and trade platform in Kunming. Apart from a zero-tariff zone for Hong Kong goods, the complex integrates commercial services, shopping, office, leisure and entertainment into one place. Kunming particularly took an effort to promote this project in Hong Kong.

Huidu International Shopping Complex

Huidu International Shopping Complex is a huge business complex, with 5 major features to help make it become a leading commercial area in Kunming 1) Hyper-mall: a shopping mall with a scale unmatched by any other mall in Kunming; it is currently in negotiation with a number of big business groups, most of which have shown strong desire to enter. 2) Large-scale supermarket chain: it plans to usher in an internationally renowned supermarket chain to complement its other retail facilities in the shopping complex to make Huidu a top brand name in Kunming’s traditional commercial district. 3) Zero-tariff Hong Kong commercial city: this is the most characteristic flagship of the Huidu project and is the first large-scale zero-tariff store in Kunming. 4) Jewellery and specialty products trading city: Yunnan is a famous source of jade products in the Mainland. Tourists often stop to buy jewellery items in Yunnan. With such a characteristic store, Huidu will become an indispensable tourist spot. 5) Largest commercial pedestrian zone: spanning a distance of more than one thousand metres, it consists of more fashionable and branded stores and types, making it a top destination for residents. 6) Futures Exchange Market: is the key item in the project. It will cooperate with a US exchange group, US Summit Securities, and Hong Kong Fengwu Dongfang Development Fund to create a central trading platform for the ASEAN and the Pan-PRD.

69 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Economic Development Trends of Guizhou in the First Three Quarters of 2004

Despite the macroeconomic controls implemented by the Central Government, Guizhou’s economy experienced rapid growth this year. The province has completed Rmb107 billion of GDP, 11.3% higher in real terms compared to the same period of last year.

Faster growth in animal husbandry

Agriculture and rural economy have undergone favourable improvement, which had been rare in recent years; grains production, agricultural productivity and incomes of rural residents increased steadily. According to preliminary estimates, the total output of grains across the province increased by 4% yoy. Output of animal husbandry also increased at a robust pace. The total output of meat in the first three quarters was 1.1205 million tons, up 8.2% yoy. This growth pace was 1.7 percentage points above that recorded in same period of last year. Output of eggs and milk soared by 6.1% and 7.7% respectively compared to last year.

Major industries boost growth of industry

Given the favourable economic conditions and robust demand in both domestic and foreign markets, industrial manufacturing maintained a fast pace of growth. In January-September, value-added of industry by enterprises above designated size across the province reached Rmb30.35 billion, 19% higher than the same period of last year. The five industries, including tobacco, electricity, coal, beverages and chemicals were the leading drivers of industrial growth. Growth of light industries stood out, too. In the first three quarters, its value-added increased by 23%, 6.1percentage points higher than that of heavy industries. In particular, growth in production by emerging industries accelerated, with an accumulated output of Rmb5.95 billion, 30% higher than the same period of last year.

Slow-down in fixed assets investment while real estate investment continued to grow

After four years of high-speed growth, fixed asset investment in Guizhou stabilised this year. In January-September, overall fixed assets investment was Rmb53.39 billion, of which Rmb47.19 billion were made on city, county and above levels, up 13.4% and 15.5% respectively yoy. The pace of investment growth, though lower than the same period last year, remained consistent with the recent trends. Infrastructure construction and real estate were the main drivers of investment growth, soaring by 30.3% and 17.1% yoy respectively in the first nine months. Investment in the iron and steel sector experienced slower growth rate, while investment in cement and electrolysed aluminium sectors continued to decline.

70 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

City, County and Above Level Fixed Asset Investment in Guizhou

US$100 mn 700 600 500 400 300 200 100 0 2000 2001 2002 2003 2004 Jan-Sep

Continuous rise in residents’ incomes

In the first three quarters, urban residents’ average per capita disposable income was Rmb5,488, 7.3% higher than the same period of last year. Owing to recovering prices and expanding sales of agricultural products, rural incomes grew at double-digit pace the first time in years. In the first three quarters, rural residents’ per capital cash income was Rmb1,137, Rmb163.06 more than the same period of last year, 10.7% higher in real terms.

Generally speaking, consumer prices continued to soar. In January-September, resident consumer price soared by 3.8% than the same period of last year. This is the first time since 1998 that inflation gathered more substantial pace after the subdued trend in the past five years. Analysed according to the eight categories of resident consumption and price of services, the biggest rise was in food which was the main factor behind inflation.

Fast increase in tobacco export

On foreign trade, Guizhou completed US$860 million of exports in the first three quarters, 61.5% higher than the same period of last year. As disclosed by Guizhou’s Border Control and Inspection Bureau, the export of Guizhou tobacco totalled 15,000 tons so far, worth US$23.2 million, becoming one of the main export commodities of the province and ranking the second largest in China, only next to Yunnan. Majority of the tobacco are exported to 29 countries and regions including Indonesia, Britain, Russia, Germany, South Africa and Japan. Foreign investment promotion rose steadily, attracting US$59.16 million in utilised foreign investment during the first three quarters, 23.7% higher than the same period last year.

71 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Guizhou Opens Up Public Utilities Sector, Uses BOT to Press on Reforms

Owing to woeful lack of funds for infrastructure facilities construction and excessive deficiencies in the administration of public utilities, the Guizhou Government decided to fully open up the urban public utilities market in March 2004, encouraging foreign and non-state capital into the urban public utilities industries. Through opening up, the government hopes to differentiate between public administration and business, segregate the funding and administrative functions in public utilities within two years’ time. Overall, it aims to transform its public utilities companies into enterprise systems that meet the requirements of a modern corporate system in a market economy. Under the premises of protecting state assets, honouring debt and credit responsibilities, and suitably arranging and settling its staff, Guizhou has stepped up efforts to initiate corporate reform in urban public utilities.

Opening up large-scale public utilities via BOT

The government decided to open up public utilities including urban water supply, gas supply, heat supply, public transportation, wastewater treatment and waste disposal. Under the premise of unified planning and management, Guizhou will follow the principle of “whoever invests would decide, make profit, and undertake risk”; adopt sole proprietorship, joint venture, partnership, shareholding and BOT (build-operate-transfer) modes of operation to push the reform of public utilities. Through bidding and auction, investors and operators will be selected openly. Furthermore, the design, construction, materials and facilities supply, protection of urban facilities, and environmental protection and sanitation will be fully publicised. Other potential resources for the urban public utilities to tap include repayable arrangements such as those applicable to the sale and lease of taxi operating rights, public transport route franchise; naming rights for roads, public squares, road lights, bridges, car parks and related public facilities; advertising and other fee-charging rights. Foreign investors and all forms of domestic-funded enterprises are allowed to set up agencies to compete for the operating rights of these projects. Furthermore, urban public utilities companies are encouraged to reform into limited companies, and even prepare for public listing. Establishment of urban construction investment companies or public utilities companies are encouraged to create a platform for inviting foreign investment and allowing state-owned assets to spontaneously generate funds by themselves.

Regulate special operating rights to safeguard foreign investors’ interest

To safeguard the interest of those investing into the public utilities sector, the government issued a clear set of regulations to define the range of special operating rights for this sector. On October 1, the “Regulations on Special Operating Rights for Guizhou’s Public utilities” took effect. Its implementation is meant to further accelerate industrialisation and commercialisation of public utilities in Guizhou, improve market order, enhance investment environment, and safeguard investors’ legitimate rights. The

72 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) government’s regulatory function should be further clarified, gradually transferring the public utilities’ investment function onto the market. Since the sector’s opening up at the start of the year, the special operating rights of Guizhou Xiaohe Polluted Water Disposal Factory and Guiyang Gas Company have been transferred successfully. Meanwhile, the Guiyang Gas Pipe operating right is under negotiation and is currently undergoing appraisal.

Scope and Forms of Special Operating Rights in Guizhou’s Public Utilities Sector

Special operating rights of public utilities cited in the “Regulation” refers to special operating rights awarded to nationals, legal persons or other organisations to operate public utilities business within a designated period of time. The scope of special operating rights include: (1) Urban water and gas supply, centralised heating supply (2) Urban waste water disposal and daily waste disposal (3) Urban public passenger transportations (4) Maintenance of public facilities including roads, bridges, road lights; protection of urban greenery and gardening (5) Daily cleaning and disposal of wastes

Within the set period of time, the special operating rights could take the following forms: (1) Award project investment, construction and right to operate to legal persons or other organisations. This right will be transferred back to the government for free upon the expiration of the agreement; (2) Award special operating right of a completed public facility to legal persons or other organisations. This right will be transferred back to the government for free upon the expiration of the agreement; (3) Consign nationals, legal persons or other organisations to provide public utilities products and services

The maximum period of time awarded to special operating rights under the first two forms do not exceed 30 years; the third one not more than 8 years.

In the areas of public utilities management and operation, Hong Kong has gained extensive experience and has developed world-renowned companies in areas ranging from water supply, public transport, roads and tunnels to waste treatment and environmental protection and sanitation facilities. As Guizhou formally allows participation of foreign-invested companies in its public utilities sector through the likes of BOT financing schemes, Hong Kong would certainly find opportunity to showcase its strengths.

73 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Guizhou Creates Favourable Environment for Insurance Development

This year, insurance companies in Guizhou underwent reform and restructuring, and improved their operating principles and management standard. In the first three quarters, a cumulative insurance premium of Rmb2.57 billion was realised, up 3.74% yoy. In particular, premiums from asset insurance totalled Rmb988 million, 24.4% higher than a year ago. That of personal insurance totalled Rmb158 million, up 7.96% yoy. Various claims and disbursements totalled Rmb692 million, up 13.06% yoy. As development sped up, Guizhou Government re-issued the Central Government’s “Arrangement to Accelerate Insurance Development in Guizhou” in October 2004, asking governments of all levels to create favourable environment for insurance development, provide guidance to insurance companies to optimise networking, attract more domestic insurance agents to do business in Guizhou, and invite foreign-capital insurance agents to set up representative offices in Guizhou.

Support insurance companies’ development, regulate and perfect different insurance systems

Guizhou Government asked governments of all levels to seriously analyse the problems faced by insurance companies in the course of development, and find out solutions to support and promote legal operation of insurance businesses. The local Development and Reform Department plans to include the insurance sector into its overall economic development plan. The plan would also incorporate labour protection into its social security system reform. Companies and citizens would be guided to actively purchase insurances of supplementary nature such as old-age and medical schemes, so that commercial insurance practice can help perfect the province’s social security system. The departments of construction, transportation and gas pipelines were precisely asked to implement the related regulations so that the role of insurance in risk prevention and transfer can be maximised. In order to provide judiciary guarantees to the rapidly developing insurance sector and safeguard the legitimate rights of policy holders and insured companies, departments related to social security, judiciary, transportation, audit, taxation, statistics, commerce and price inspection were required to strengthen communication and collaboration with Guizhou Insurance Regulatory Commission, to deter criminal activities like deception, invasion, and embezzlement of insurance funds. As part of the financial sector, regulatory departments of the securities and banking sectors should strengthen their communication and collaboration with China Insurance Regulatory Commission (CIRC), set up a mechanism for sharing regulatory information and resources, cooperate in regulating and protecting financial order in Guizhou.

It is known that Guizhou would take great efforts to cultivate professional insurance companies and agencies, support and encourage various ownership types including non-state economies to take part in the insurance industry, gradually shaping a new insurance products system that is guided by market demands. Meanwhile, great efforts would be taken to

74 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report) launch new insurance products to provide services to reforming state-owned enterprises, agriculture, tertiary industries, high-technology companies, non-state economy, import and export trade, etc; develop annual insurance premium for the corporate sector, supplement old-age insurance, health insurance, provide services on risk consultancy, risk administration, on-line insurance, reduce insurance, claim processing, and other related high-quality and convenient insurances.

Insurance development encouraged, and Hong Kong can show its strengths

As Guizhou’s insurance sector develops to span a wider market and accommodate a greater variety of products, insurers from both Hong Kong and overseas will find greater opportunities. To prepare to enter the market, Hong Kong insurance companies could obtain the Mainland’s approval to form alliances, to allow qualified insurance companies and professionals to enter the Mainland market under the CEPA framework,. Relevant examination posts can be set up for Hong Kong residents to partake in exams for Mainland professional insurance intermediaries, after which they could find employment with insurance companies in the Mainland. Latest statistics show that there are about 15,000 insurance agents in Guizhou as of June 2004, most of them specialise in personal insurance products. Commercial insurance, in which Hong Kong has a longer track record of experience, is still in its initial stage of development. If Hong Kong insurance agents could take the lead in cooperating with partners in the Mainland to explore potentials in this market, exert its expertise and high-efficiency in providing insurance products along the lines of finance, import-export credit, industrial insurance, risk decentralisation and administration, they could lead the Mainland enterprises to gain more knowledge of the different insurance products, win the Mainland market’s confidence, and take a solid position in the Mainland insurance market.

75 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Economic Development Trends of Sichuan in the First Three Quarters of 2004

Sichuan’s GDP was among the top ten largest in the country. It is also a major economic zone in western China, with major economic indices ranking first among the western regions. In the first three quarters of 2004, Sichuan achieved real GDP growth of 13.1% yoy in real terms to Rmb467.9 billion, the growth was 1.9 percentage points higher than the same period last year but 0.4 percentage points lower than the first half this year. In particular, third quarter GDP reached Rmb191.1 billion, up 12.8% yoy in real terms.

Heavy industrial output grew rapidly

In the first three quarters, value-added of industry across the province totalled Rmb158.2 billion, up 19.3% yoy, and the growth rate was 3.6 percentage points higher than the same period of last year. In particular, production of enterprises above-designated size maintained rapid growth, reaching Rmb108.1 billion in the first three quarters, up 25.8% in real terms. The growth rate was 4.8 percentage points higher than the same period of last year and 0.2 percentage points lower than the first half this year. Major products saw increasing sales. Among them, crude oil processing rose by 59.7%, gasoline by 62.01%, thick steel board by 1.1 times, nickel by 56.9%, aluminium by 78.3%, offset publishing paper by 2.7 times and electricity generating equipment by 1.2 times.

Investment in real estate cooling

Under the influence of macroeconomic adjustment and control measures, investment in real estate development in Sichuan slowed down drastically. Investment in the key controlled industries, such as steel and aluminium refinery, has been effectively controlled. However, driven by steady growth in the energy, agricultural product processing, and culture, education, sanitation and social welfare sectors, overall investment in fixed assets continued to enjoy steady growth. In the first three quarters, fixed assets investment totalled Rmb179.9 billion, 24.9% higher, matching the growth pace in the same period last year. In particular, urban investment rose by 27.1% to Rmb158.5 billion. As China strengthened the control against the construction of urban public squares and landscapes, part of the renovation of old towns are drawing to a close, investment in urban infrastructure facilities thus gradually reduced, and the pace of decline was rather fast. In the first three quarters, overall investment in Sichuan’s urban infrastructure construction totalled Rmb19.93 billion, Rmb3.93 billion more than a year ago, up 24.5%.

Consumer prices soared at a rate higher than national level

In the first three quarters, Sichuan’s CPI increased by 4.6% yoy; in September alone, prices rose by 8% yoy, which was the second highest among the Mainland provinces and the

76 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

highest recorded since February 1997. In particular, prices of food rose more rapidly. Driven by long holidays, prices of grains, pork and vegetables kept rising. Furthermore, prices of agricultural resources also surged 15.5% from a year ago, mainly due to local conditions such as tight demand for railway transport which led to the rise in rail and road transport costs; and reduced output by manufacturers due to temporary shut downs for maintenance. To relieve inflationary pressures, Sichuan’s Price Inspection Bureau issued a notice asking all cities (states), counties (towns and areas) in the province to stop any price hike agenda that involved water, electricity and gas with immediate effect until December.

Consumer Price Indices of Sichuan vs. National

Yoy Increase (%) 10 Sichuan National 8

6

4

2

0

-2 Jul Jul Jul Ap Ap Ap Jan Jan Jan Oct Oct Sep 2002 2003 2004

Foreign direct investment declined

Classified according to product source and destination, Sichuan exports totalled US$2.43 billion in the first three quarters, up 14.6% yoy, lagging behind other Pan-PRD constituents. In the first three quarters, exports of machinery and electrical products totalled US$980 million, an increase of only 0.5%, far below the national growth rate of 44%. Export of television, one of its key products, totalled US$240 million, 41.5% lower. Export of laser video machines totalled US$65.99 million, down 8%; semiconductor exports amounted to US$100 million, up 9.8%. Actually utilised foreign direct investment totalled US$278 million dollars, down by 10.2%. Manufacturing remained the main sector attracting foreign investment; foreign investment in real estate increased rapidly, rising by 46% to US$97.56 million.

77 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Chengdu Set Up Three Tourism Centres in 2004

Early in 2004, Chengdu set out a clear goal to become a world famous tourist destination. By 2007, the number of tourists would reach 700,000 with tourism income to reach Rmb38 billion. It has been reported that tourist income totalled Rmb11.796 billion in the first half this year

Tourist Committee has been set up to boost tourism

In October 2004, Chengdu convened the city’s Tourism Work Conference to study how to further speed up the development of Chengdu’s tourism industry. During the conference the document ”Arrangements to Solve the Major Problems in Tourism Development by Chengdu Government (draft)” was publicised. The document revealed that Chengdu would set up a Chengdu City Tourism Committee on the basis of the existing Tourism Bureau. The committee, initially designated as a tourism-related administrative government department, would be in charge of strengthening tourism policies, drafting tourism plans, consolidating tourism resources, coordinating organisation, verifying objectives, etc. It will also be in charge of appraising major tourist projects, landscapes and scenic spots, providing guidance to the research and development of Chengdu’s tourism products; supervising tourism environment and services quality, leading the assessment and classification of tourist zones and scenic spots; coordinating and arranging specialised tourism development funds.

To further improve Chengdu’s functions in tourism services, all financial organisations and units should render support to the tourism industry, and give priority to the development of tourism in Chengdu. Chengdu plans to establish three tourism services centres within this year, including a tourist transportation service centre, a collection and distribution service centre, and a Chengdu tourist information service centre. In addition, Chengdu would accelerate regional cooperation to spur the industry’s development; cooperation with Chongqing will also start this year. Next year, it will begin cooperation with Guangzhou, Shenzhen, Beijing, Shanghai, Xi’an, Kunming, Aba in Sichuan, Ganzi, and Leshan, linking tourism routes and integrating promotion activities so that resources are efficiently shared. In promoting overseas, Chengdu would abandon its current marketing strategy and resort to a new system which commissions general travel agencies to handle the marketing tasks, hoping to boost the number of inbound tourists drastically. Eight foreign target markets, including Japan, South Korea, Europe, US and Canada, Australia and New Zealand, would be explored; a system of competition will be introduced; the appointment of the eight Chengdu-based general travel agents will be coursed through tender exercises. These agents will sign annual agreements with relevant departments of tourism administration to ensure fulfilment of its target to raise the number of inbound tourists.

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Hong Kong can declare intention to participate in Chengdu’s tourism development

Hong Kong investors possess rich experience in tourism services and thorough knowledge about foreign tourists’ demand for tourism products and services. Apart from direct operation of travel agencies in the Mainland, Hong Kong investors could cooperate with the Mainland to undertake proxy tourism services such as tourism promotion and planning tailor-made travel services. Meanwhile, although people from the industry mostly feel that Chengdu has a lot of unique tourism features, development in terms of tourism products and souvenir items remain insufficient to attract tourist, missing the business opportunity to earn more foreign exchange. In this respect, Hong Kong manufacturers could use their strengths in exploring, designing and manufacturing of tourist souvenir products. Knowing that the Chengdu Tourism Commission has been established to take charge of tourism development, the SAR Government could directly deal with this department to pave the way for Hong Kong to enter the Chengdu tourism market; also, take this opportunity to deepen understanding of tourism in the western area, put Hong Kong investors closer the Mainland market trend, and assist Hong Kong businessmen in exploring business opportunities, such as developing tourism routes that are deemed attractive by foreigners.

Three Tourism Services Centres of Chengdu

Firstly, the Chengdu tourist transportation services centre was already set up on August 28, 2004. Chengdu possesses 8,000-plus transportation vehicles, of which only 1,000 are dedicated for tourism purposes. These are now centralised under the control of the transportation services centre, which would officially begin setting pricing guidelines for tourist passenger vehicles next year, and ensuring the order and development of tourist transportation market. It was known that price disparities among transport service providers used to be large because tourism transportation companies used to deal directly with travel agencies, leading to a lot of non-standardised operating behaviour, the discrepancy between transport fees during peak and low seasons is particularly wide.

Secondly, the tourism collection centre, which would officially be launched at year-end. It would consolidate the functions and services of medium- or short-haul travel reception services that used to be scattered across different tourism company and tourist transportation units. This would then be turned into a tourism supermarket that offers services such as transportation arrangement. This centre will be of substantial scale and would serve tourists who are travelling independently. This centre will also provide recommendations for 1-2 day short-haul routes for tourists. According to initial estimates, Rmb60 million would be required to set up this centre. Funding would be obtained through one of the following three means: inviting investment and partial funding by the government, wholly-funded by the government, or awarding the operation of tourist routes through tender exercises.

The third is tourist information service centre, which will be guided by the government and operated as an enterprise, and is expected to be launched soon. This would be a pure information consultancy centre; primarily an on-line information dissemination centre, it would integrate and provide the latest information on Chengdu’s eating places, living accommodations, transportation, tourism, shopping and entertainment options, providing tourists from all over the world with detailed tourist information.

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Sichuan Carries Out Pilot Test for Agricultural Insurance

Agricultural insurance plays an important role in supporting and protecting the agricultural system. However, since commercialisation in 1996, agricultural insurance shrank due to low profitability. China Insurance Regulatory Commission (CIRC) has set up an exclusive task force, coordinating actively with local governments and departments concerned to pilot test various forms of agricultural insurance. After nearly one year’s preparation, pilot-testing grounds in Sichuan as well as eight other provinces/region, including Heilongjiang, Jilin, Shanghai, Xijiang, Inner Mongolia, Hunan, Anhui, Sichuan and Zhejiang were designated on October 21, 2004. So far, four professional agricultural insurance agents have begun business or received approval to prepare their launching.

Foreign investment in agricultural insurance for the first time

Shanghai Anxin Agricultural Insurance Agent was the first agricultural insurance company set up in Shanghai1, adopting an operation mode of “commercialised operation, supported by government promotion and subsidy”. To highlight its dedication to developing agricultural insurance, Anxin is required by the CIRC to maintain 60% of its business in crop planting and animal husbandry insurance. Jilin Anhua Agricultural Insurance Agent was the second to obtain permission to operate. Its business model is patterned after Groupama SA of France, with a joint-stock system providing rural residents in Jinlin with a basket of insurance products covering crop planting and animal husbandry, household finance, accidents and health. Unlike its Shanghai counterpart which focuses on agricultural technology, Jilin’s Anhua focuses on traditional agriculture. The third one was Heilongjiang Sunlight Agriculture Mutual Insurance, which provides insurance in crop planting and animal husbandry, financial insurance, as well as liability insurance. They operate under the mutual assurance system (where different insurances operate according to different systems; crop planting and animal husbandry follow ”independent operation, independent audit, independent subsidy and independently enjoy preferential policies”). At the same time, the CIRC can use this opportunity to study the laws and regulations of mutual assurance.

Finally, the one to be set up in Chengdu is a joint venture between the Agricultural Bank of China and France’s Groupama SA. This is the first foreign-invested agricultural insurance company to set foot in the Mainland. Groupama’s office was set up in Chengdu on October 26, 2004. In order to expand the Sichuan market, Groupama would provide residential residents in the province with insurances against crop planting and animal husbandry, household finance, personal accidents, medical and other forms of risks that could be encountered in daily life.

1 In 2003, Shanghai incorporated agricultural insurance subsidy into its public finance system. City and district level governments would make Rmb10 million annual subsidies, accounting for 25% of total insurance of agricultural and agricultural construction insurance. 80 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Upgrade commercial operation to complement administrative support

The Third Plenary of the 16th Central Committee of the Communist Party of China proposed to study and establish China’s agricultural insurance system policy. At the beginning of this year, Director of CIRC Wu Dingfu said that the government would give administrative policy support and study the commercial operation methods to find a path suitable to the development of agricultural insurance. These too means are not contradictory, as providing government policy support is not the only way for agricultural insurance to operate. Meanwhile, the CIRC already expects the demand for agricultural insurance to transcend the traditional agricultural insurance demand of planting and animal husbandry, and would develop related insurances such as those against financial assets. As such, the agricultural insurance sector would be made accessible to profession agricultural insurance companies, using their experience to perfect China’s agricultural insurance system.

Policy-supported vs. Non-policy-supported Agricultural Insurance

Policy-supported agricultural insurance is non-profit-oriented. With the government’s financial support, any commercial insurance agency can act as agent. Using an operation style suitable in the market system, it would create an expansionary effect, provide better guarantees for agricultural industry production and operation. Policy-supported agricultural insurance covers grains, crop planting and animal husbandry. Sectors designated for policy support range from rice paddies, cotton and milk cattle.

Non policy-related agricultural insurance refers to high value-added crop planting. Already possessing a certain level of economic foundation, commercial insurance companies can solely rely on market system operation. Rural residents can purchase insurance on their own, operate on their own, without the need for government subsidies.

Agricultural insurance becomes a channel for foreign funds to enter the market

Opening of agricultural sector insurance is likely to be more liberal than other types of insurances. In the Forum on International Capital’s China Strategy held in May, the CIRC announced decisions to undertake priority study to reform the agricultural insurance system, explore means to establish professional health insurance companies and initiate reforms in the marketing and sales systems of life insurance products. Meanwhile, the CIRC will also encourage and supported foreign-funded insurance companies to do business in the western regions and old industrial bases in north-eastern China. Among the different types of insurance, agricultural insurance may be one that Hong Kong investors are least familiar with.

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However, it is still practicable to find appropriate partners and experienced professionals in the city considering the fact that many foreign-funded insurance companies have established presence in Hong Kong. In October, China pilot-tested agricultural insurance in nine provinces. To this agricultural country of China, bright prospects for development lie ahead. As the country has always given much importance to agricultural development, if Hong Kong investors could strive to enter the Mainland market via this sector, it will be able to make better preparation for entry into the general insurance market in the Mainland.

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Memorabilia of Pan-PRD Regional Cooperation

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2004 Yunnan Cultural Industry Shanghai Promotion Week (October 24-28, 2004) At the promotion week Yunnan displayed its cultural resources, industries, development conditions and prospects, introduced cultural industries-supportive administrative policies and investment environment. It will also hold the Yunnan Cultural Industry Project Exhibition and Characteristic Cultural Products of Yunnan Promotion to introduce the colourful Yunnan culture to Shanghai, boosting investment and spurring the development of Yunnan’s cultural industry. Yunnan’s Party Committee’s Publicity Department, together with Shanghai Transportation University, the Academy of Social Sciences of Yunnan and Shanghai all signed cooperation agreements on research in development of cultural industry and cultivation of professional talents, as well as blueprints of cultural exchange between Yunnan and Shanghai, marking that cooperation and exchange between Yunnan and Shanghai has entered a new stage.

Bilateral cooperation agreement between APETA and Yunnan’s Haohong Logistics (November 10, 2004) The Asia-Pacific Economic Trade Association of Thailand signed bilateral cooperation agreement with Yunnan’s Haohong Logistics. According to the agreement, the former would participate in the construction of international logistics base and international passenger transportation base in the ASEAN Free Trade Area; join efforts to realise cooperation among Kunming, Bangkok and Chiangmai in the areas of international logistics, passenger transport and trade. This is the second logistics-related agreement after Solartech International Holdings Limited and Haohong Logistics signed the Rmb2 billion investment project in Thailand to cooperate in the construction of the Kunming-ASEAN International Logistics Centre.

Bank Account Settlement and Clearing Agreement between PBC and State Bank of Vietnam (November 14, 2004) An agreement to cooperate on account settlement and clearing between People’s Bank of China (PBC) and the State Bank of Vietnam has been signed. Meanwhile, PBC Guangxi Branch, Vietnam Bank of Investment and Development, Lang Son Branch, and Quang Ninh Branch signed a border trade settlement and clearance agreement. Both sides have agreed on the operating methods for opening, using, settling and clearing border trade remittance accounts. Guangxi Branch of PBC officially launched border trade settlement business with Renminbi and Vietnamese Dong as settlement currencies in networks in Dongxing and Pingxiang. It not only facilitated settlement of border trade between China and Vietnam, but also contributes to border trade improvement.

Investment Invitation Conference in Yunnan’s Honghe Prefecture (November 15, 2004) In the conference, Honghe Prefecture launched 31 investment invitation projects in the areas of agriculture, industry, infrastructure and tourist development to businessmen from Sichuan and Chongqing, and signed cooperation agreement with a total investment value of Rmb2.5 billion.

84 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Guizhou

Guizhou enterprises launched active promotions in Shanghai Industry Fair (November 5, 2004) At this year’s Industrial Fair, exhibition of property rights exchange introduced the concept of a “national property rights market”, attracting property rights projects from all over China to gather together. High-tech products developed by Guizhou enterprises went on promotion at the Shanghai Industry Fair.

Siemens’s first representative office in western area was located in Guizhou (November 10, 2004) Siemens (China) Corp., Ltd announced it would officially set up its Guiyang Representative Office. This is an important move for Siemens to accelerate its strategic exploration of the Mainland market.

Sichuan

The 6th China High-Tech Fair (October 13-18, 2004) At the fair, the Sichuan delegation concluded 40 agreements, intents and contracts. The volume of business totalled Rmb2.45 billion, 65% higher than last year. In particular, 13 formal contracts have been signed, involving Rmb783 million, 426% higher than last year. Automatic Gear Shifting Controller of Chengdu Imute Hi-Tech Corp., Ltd won a Rmb300 million cooperation agreement from Shenzhen Shengyitong Electronic Technology Corp., Ltd and topped the list of Sichuan delegation projects.

Ziyang promotes and invites investment in Chongqing (November 4, 2004) Ziyang went out of Sichuan for the first time to Chongqing, to launch a large-scale investment conference. The city launched 130-plus projects for investment. These ranged from industrial projects, municipal construction, agricultural industrialisation, foodstuff processing, to tourism, trade and medical and pharmaceuticals. 29 projects have been signed with total investment of Rmb1.15 billion, of which Rmb1.07 billion were actually utilised investment.

The Federation of Thai Industries negotiated with Sichuan enterprises (November 11, 2004) The Vice President of the Federation of Thai Industries led an economic and trade delegation to Sichuan to negotiate business. Among the 30-plus Thai companies, six were from the services sector, involving real estate, promotion of small- and medium scale enterprises as well as jewellery. It was the first time for Thai service companies to look for business opportunities in Sichuan.

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86 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

IV. DATA AND TRENDS

Guangxi ------88

Yunnan ------89

Guizhou ------90

Sichuan ------91

Major Economic Indicators of Nine Pan-PRD Provinces/Region 92 (Jan-Sep 2004)------

Nine Pan-PRD Provinces/Region: Statistics at a Glance (2003) ------93

Nine Pan-PRD Provinces/Region: 10-Year Economic Trend (1994-2003) - 95

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88 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

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V. ENGLISH-CHINESE GLOSSARY OF TERMS

Third-party logistics 第三方物流 Supply-chain management 供應鏈管理 Port-rail link 海鐵聯運 Twenty-feet Equivalent Unit (TEU) 標準貨櫃箱 Ocean vessel 遠洋船 River cargo vessel 內河船 Container terminal 貨櫃碼頭 Marine cargo terminal 海運碼頭 Trade port logistics centre 商貿港物流中心 Shenzhen-Hong Kong Western Corridor 深港西部通道 Hong Kong-Zhuhai-Macao Bridge 港珠澳大橋 Electronic customs declaration platform 電子報關平台 New Guangzhou Baiyun Airport 廣州新白雲機場 Sino-US Air Service Agreement 中美行權協議 Fifth freedom rights 第五航權 Mainland and Hong Kong Air Services 內地與香港航空運輸安排 Arrangement

World Trade Organisation 世界貿易組織 Freight forwarding agency 貨運代理 Mainland and Hong Kong Closer Economic 內地與香港更緊密關係的安排 Partnership Arrangement

Supply-chain management 供應鏈管理 Non state-owned enterprises 民營企業 Campaign to invite hundreds of enterprises 百企入桂 into Guangxi

New and High Technology Zone of Nanning 南寧高新技術產業開發區

97 Socio-Economic-Political Trends in Pan-Pearl River Delta Region Guangxi, Yunnan, Guizhou, Sichuan (2nd Monthly Report)

Guilin High and New Technology Industry 桂林高新技術產業開發區 Development Zone

Beihai New and High Technology 北海高新技術產業園區 Development Zone

Three dimensional rural problem 「三農」問題 Association of Southeast Asian Nations 東盟 (ASEAN)

China-ASEAN Free Trade Area 中國-東盟自由貿易區 China-ASEAN Expo 中國-東盟博覽會 Huidu International Shopping Complex 匯都國際 Mutual insurance 互制保險

98