China Mongolia

COUNTRY REPORT

China Mongolia

3rd quarter 1996

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Summary

China, Mongolia 3rd quarter 1996

August 14, 1996

China Political and economic structures pages 3-4

Outlook: Jiang Zemin’s position at the apex of state and party is being consolidated as the forthcoming party congress approaches. Political controls will be tightened, although debate about the boundaries of socialism will continue. Nationalism will remain an important rallying call. Pragmatism will continue to drive economic policy; a soft landing is assured and there are even fears that the austerity measures in place since 1993 have been overdone. But the EIU believes that growth, mainly investment-led, will be about 9% in 1996-97, with a recovery in export performance in the second half of the year. We also expect a lower trade surplus in both these years, combined with a rising invisibles deficit, to produce a modest current-account deficit in 1997. Inflation, having subsided, is likely to accelerate a little, adding to the need to correct for real appreciation of the renminbi in 1995-96. pages 5-9

The political scene: The 15th CCP Congress looms closer and some leadership changes are expected, although the current ruling group will remain dominant. The search for a contemporary ideology continues, manifest in debates about the role of socialism in the economy and a drive to rebuild moral in and outside the party. Corruption overshadows this quest. The clampdown on crime has continued. There have been reports of separatist activities in Xinjiang, and Tibet remains a thorn in Beijing’s flesh, but one that cannot be drawn. China is hoping that South Africa will switch recognition soon. Sino-US relations have undergone a (possibly only temporary) warming. China has adopted a less belligerent attitude towards Taiwan. pages 9-20

Economic policy and the economy: There has been a further relaxation in the form of lower interest rates. State enterprise reform has remained basically stalled, bar a few minor experiments. The political climate is not conducive to bold initiatives, but there are continuing, pragmatic moves on several fronts, including measures to aid the unemployed and incentives for foreign investment in the interior and in agriculture. The currency is now virtually convertible on current account. New incentives are being offered in some SEZs, and for investment in the centre and the west. GDP growth was 9.8% in the first half of 1996, a slowdown from 10.2% in the first quarter. Inflation has fallen into single figures, but a grain price rise from July will pull it back up. The investment growth rate has been falling. State-owned enterprises have continued to record large losses. pages 20-32

Sectoral trends: A record summer grain harvest has been gathered in, despite serious and widespread floods. The energy sector is the focus of concentrated state effort to alleviate bottlenecks and China avers that it can readily finance the Three Gorges project. Foreign investment is being sought in the coal sector. Retail trade is booming, as are aviation and the telecommunications sector. A

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bond issue of $700m marked China’s successful return to the international bond market in June. There has been progress in liberalising interest rates. Dow Jones has introduced China indices. pages 32-37

Foreign trade, investment and payments: The trade surplus was down to a meagre $880m in the first half of 1996, as exports fell by 8.2%. Low value added exports such as textiles, which compete on price, have fallen sharply. The inefficiency of state-owned trading companies has also hampered exports, as has the poor performance of SOEs. Foreign investment inflows continue to be robust, but little is devoted to infrastructure. Reserves have climbed again. pages 37-40

Mongolia Political and economic structures pages 41-42

Outlook: The surprise victory of a coalition of democratic parties in the June elections could lead to many changes, although the new government will meet strong opposition in the legislature. Economic policy will remain focused on the twin goals of marketisation and poverty alleviation and aid donors will retain a key influence. page 43

The political scene: The victory of the coalition of democratic parties in the June elections was a surprise, not least to the outgoing MPRP, which lost 50 seats and now has only 25. Complacency played a part in the MPRP’s defeat. The new government, led by the prime minister, Mendsaikhany Enkhsaikhan, will work well with the president, with whom the new prime minister has close personal ties. Various reforms are in the offing. Relations with Russia have improved. pages 44-47

Economic policy and the economy: Falling copper prices have taken a toll on government revenue as well as on the trade account. Liquidity management is proving difficult as efforts to increase confidence in the tögrög persist. Infla- tion has eased again, to a monthly rate 1.6% in May. Privatisation has hit a setback. pages 47-49

Sectoral trends: Industrial output growth has continued and Ulaanbaatar is to get a new landmark. Tenders are out for various energy and mining projects but electricity is in short supply and oil stocks need replenishing. Floods followed devastating fires from February onwards, delaying the 1996 sowing. Additional international flights have started. pages 49-53

Foreign trade and payments, and aid and investment: Exports fell in the first five months of the year, mainly because of falling copper prices. Imports of capital goods rose, bringing trade into deficit of $3.6m. Mongolia has become a member of the World Customs Organisation. Aid from Europe will rise. Japan is concerned about the application of its aid. pages 53-56

Statistical appendices pages 57-60

Editor: Georgina Wilde All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

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Political structure: China

Official name: People’s Republic of China

Form of government: one-party rule

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

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

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

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

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

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

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

Main political organisation: Chinese Communist Party (CCP)

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

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

Governor of the People’s Bank of China Dai Xianglong

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Economic structure: China

Latest available figures

Economic indicators 1991 1992 1993 1994 1995 GNP at current market prices Rmb bn 2,166.5 2,665.6 3,413.4 4,725.6 6,144.6 Real GDP growth % 8.0 13.6 13.4 11.6 10.2 Consumer price inflationb % 3.5 6.3 14.6 24.2 16.9 Population m 1,170 1,184 1,196 1,209 –1,227a Merchandise exports fobc $ bn 71.9 85.0 91.8 121.6 148.8 Merchandise imports cifc $ bn 63.8 80.6 104.0 115.6 132.1 Current account $ bn 13.1 6.2 –11.7 6.5 16.5a Total debt (incl undisbursed) $ bn 59.8 69.5 84.2 100.5 –107.0a Reserves excl gold $ bn (year-end) 43.7 20.6 22.4 52.9 75.4 Exchange rate (av) Rmb:$ 5.3 5.5 5.8 8.6 8.4

August 9, 1996 Rmb8.31:$1

Origins of gross domestic product 1995a % of total Components of gross domestic product 1995a % of total Agriculture 20.5 Private consumption 46.2 Industry 49.2 Government consumption 12.8 Services 30.3 Gross fixed investment 34.7 Total 100.0 Exports of goods & services 21.7 Imports of goods & services –19.2 Total incl others 100.0

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

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

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China

Outlook

Jiang Zemin is well Jiang Zemin is secure at the apex of state, party and military power, in the entrenched assurance that no one will rock the boat in the run-up to the 15th National Party Congress in 1997. A broker between the conflicting views of conservatives and moderates, the party general secretary will monitor closely the nominations for the Central Committee, Politburo, prime minister, chairman of the National People’s Congress and chairman of the Chinese People’s Polit- ical Consultative Committee. Whether or not he seeks promotion to a revived office of party chairman, Jiang’s security of tenure in the political firmament and influence beyond official retirement seems assured. Appointments at next year’s congress will reflect the enduring consensus for stability by preserving the collective leadership with Jiang “at the core”.

Tightened political The search for heightened internal control will continue. The years of Deng control— paramountcy between 1978 and 1994 marginalised ideology, which is now reclaiming lost ground. Political control is the counterweight to economic freedoms, which undermine central authority: so the party is restoring its pervasive grip on society. Targets for indoctrination are the armed forces, higher education, party cadres nationwide and at all levels, the peasantry, and state-sector enterprise employees. The clock, however, cannot be turned back. There is a constituency, prospering and sophisticated, which falls outside state institutions and political mobilisation. There is also a tiny minority of dissent- ing voices to challenge the regime’s conduct.

—but there are cracks in Chinese Communist Party (CCP) strategy is to stay in power: its tactics are the edifice propaganda, the building up of party ranks, perennial campaigns, and punishment of dissent. Widespread discontent over increased lawlessness feeds popular campaigns like Strike Hard. Legitimacy also depends on delivering prosperity: there is no sacrifice of economic pragmatism in the field. For this reason, the divisive debate over the extent to which China is still “socialist” as state ownership is eroded, will not be permitted to rage freely—economic progress is not to be derailed by political debate.

The CCP cannot openly acknowledge the fact that corruption has penetrated the party at a very high level. Failure to deal promptly with the investigation into senior leader Chen Xitong for corruption and graft in Beijing is evidence of this. There will, however, continue to be swift progress (or unseemly haste) in meting out justice to middle-ranking cadres across the country.

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Fear of fragmentation Some flames will not be extinguished. Tensions survive between Beijing and persists Chinese Muslim Uighur nationalists in Xinjiang in the west and Buddhist Tibetans to the south. China’s leaders live in constant anxiety over the remoter possessions, which constitute an important proportion of national territory and a repository for much-needed resources. Economic development in these regions has lagged far behind China’s east coast, which is cause for resentment. Beijing is securing its position in Xinjiang by cultivating its Muslim republic neighbours (notably Kazakstan) and cracking down on terrorists at home. The government has unintentionally guaranteed that the Tibetan problem will be permanent, polarising the people by appointing a pretender to the second holiest religious office, the Panchen Lama. Fragmentation is unlikely, but the fear of fragmentation is very real.

Nationalism will sour There is not much prospect of solid achievements to back up the strident international relations nationalism that the regime uses as its chief rallying cry. The resumption of sovereignty over Hong Kong in mid-1997 will be milked to the full. But the prospect of crowning that with the return of Taiwan is remote. The domestic agenda takes priority and China will not hesitate to bully and cajole Taiwan, no matter what the cost in terms of its wider international relations. It will stop short of the use of force, even as it strives to build up its military capabilities and worry its neighbours. The time has not come for such adventurism.

China’s stance towards Taiwan and its increasing assertiveness in pursuit of claims overseas will continue to worry its neighbours and trade partners. Rel- ations with the USA, in particular, are going to remain difficult regardless of who wins the US presidential election. However much the US administration may wish to put mutual relations on a more even keel, how to handle China has become a matter of national debate which it cannot control. In the face of many conflicting interests, the bilateral relationship has become too multi- faceted to be driven by officials.

Policy is based on securing Efforts to bring about a soft landing are paying off. GDP growth was down to a soft landing for the 9.8% in the first half of 1996, after 10.2% in the first quarter, despite selective economy— easing of credit after three years of austerity. There is now a fear that the slowdown has been too rapid, that investment will fall so fast that growth will fall below the 8% target, and the government is contemplating a second interest rate cut, to boost consumption, ease conditions for state-owned enterprises (SOEs) and assist this sector’s exporters, who are failing miserably. This, if it comes, will have more effect in the first half of 1997.

—with agriculture and The floods in central China this year, while devastating in human terms, have industry still strong not significantly affected prospects for the overall performance of agriculture, for which the EIU continues to forecast 4% annual growth in 1996-97. A 20% rise in grain procurement prices, announced in July, will help boost output, as will a number of other measures.

Industrial output, meanwhile, is set for another two years of, by recent Chinese standards, slow growth, of 12.75% in 1996-97. This slowdown conceals a continuing boom in the fast-growing sectors, especially private and collectively owned township and village enterprises and foreign-funded enterprises (FFEs),

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and a state of near slump among many of the hundred thousand-odd SOEs that have been the victims of austerity this time round.

The SOEs will not recover in the near future and the progressive and gradual withering of the state sector’s share of the economy will continue.

External demand has been On the demand side, the outstanding and rather surprising feature of 1996 has slow— been the performance of exports, which fell by 8.2% in dollar value in the first half of the year. The EIU is assuming some recovery in the second half as the dismal export performance of the state-owned sector is outweighed by continued buoyancy in other export sectors. But there are a number of problems. China is one among a number of Asian countries that have experienced a fairly sharp slowdown in the growth of exports during 1996 after a banner year in 1995. This slowdown has not been mirrored in a fall, for example, in import demand in the USA, and world trade is still expected to expand strongly this year. One reason that has been suggested is the strength of the US dollar against the Japanese yen. This has meant that those countries, China among them, which use the US dollar as a reference point for their currency management have experienced strong nominal and real appreciation against the yen and a measure of real appreciation against the dollar. This loss of competitiveness has apparently hit demand, especially for lower value added exports in the clothing and textiles areas. It has also held down the value of exports when expressed in US dollars, through the conversion of non-dollar revenue.

We expect only very modest volume growth in exports this year, of 4%, with a recovery in 1997 to 10% as the dollar ceases to gain against the yen and, presumably, as exporters seek to rebuild market share by product adaptation.

—but domestic demand Imports, meanwhile, have been boosted by special factors in the first quarter of will stay strong— this year, but will continue to be strong. Investment, a good portion of it in the form of foreign direct investment (FDI), will continue to suck in imports, as will the large-scale infrastructure projects being implemented and, to a lesser extent, the progressive removal of tariffs as China seeks to enter the World Trade Organization (WTO).

The fall in interest rates, along with continuing growth in disposable incomes, bodes well for consumption in 1996-97. But the engine of growth this year will be investment. With an average expansion of 14.5% per year in 1996-97, investment will be the driving force behind a GDP growth rate of 8.7% in 1996, which will rise to 9.5% next year, as exports recover momentum.

—pushing the current The volume forecasts for exports and imports presented above translate into a account into marginal reduced trade surplus this year, of $14.9bn, after a surplus of $19.7bn in 1995. deficit in 1997 The rising deficit on invisibles, which is being driven up by outflows of interest, profit and dividends and also by imports of services, will pull the current- account surplus down from $14.9bn in 1995 to $7.2bn in 1996.

Next year there will be a tiny current-account deficit; a smaller trade surplus will be outweighed by another rise in the invisibles deficit, for a current- account shortfall of $100m. This is a very small proportion of GDP but a harbinger of higher deficits and large financing requirements to come.

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Inflation has slowed, but The successful curbing of inflation, which we expect will average 10% in retail will rise again price terms (or 11% in consumer price terms) in 1996, and 11% (12%) in 1997, has taken some of the pressure off the real exchange rate. But not enough. The renminbi has stayed close to Rmb8.3:$1 this year. We still believe that it will be allowed to fall gently during the rest of the year, a move that would go some way towards restoring competitiveness. A further fall, of 10.5%, is in prospect for 1997, as well as a current-account deficit and a widening inflation differen- tial. But a fall of 12.1% against the US dollar is modest in the light of US inflation of around 3% and Chinese inflation over three times as high. Strong inflows of foreign exchange, including FDI, which are continuing to buoy the reserves, give the authorities, who are anxious to preserve stability, leeway with exchange rate policy.

State-sector reforms are Despite the success of the soft landing that has been engineered, there are and stalled will remain serious policy issues, which will be largely unaddressed, at least until the 1997 party congress is over.

The SOEs are the unsolved legacy of the planned economy. The government has engaged in limited structural reform based on corporatisation. Some 100 companies feature in one scheme, while the 15,000 large and medium-sized backbone enterprises are a separate focus of attention, with 131 singled out for debt conversion. Avoiding the wholesale state-sector reform attempted by a number of communist economies in the former Soviet Union and eastern Europe, because of the chaos that would bring, China has resorted to experi- mentation. There has been little success to date. Even the easing of credit restrictions offers inadequate relief. The government is trying to throw a welfare net to catch those laid off as companies fail. In so far as the government will not bale companies out, the market is doing some of the sectoral restructuring. Interest rate cuts offer limited succour, reducing the payment burden and making capital cheaper, but real rates are high.

Unemployment will need Urban unemployment is rising, and the government has begun to recognise in to be addressed its data that there are millions in China’s towns and cities who, while technically employed, are redundant. Add to these the army of migrants, as surplus labour leaves the land in the hope of work in the cities, and unemployment is

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

9 90 Rmb:DM

8 Rmb:$ 80

7 Rmb:¥ 70 6

60 1994 95 96(a) 97(a)

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

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clearly a rising problem. Job creation has to be supplemented by a social security net to catch the vulnerable and progress towards the creation of such a net is a political necessity.

Forecast summary (% real change year on year unless otherwise indicated) 1994a 1995a 1996b 1997b GDP 11.6 10.2 8.7 9.5 Agriculture 3.5 4.5 4.0 3.5 Industry 18.0 13.4 12.5 13.0 Services 10.0c 10.0c 9.0 9.0 Gross fixed investment 22.7 11.0c 14.0 15.0 Exports 29.7c 16.0c 4.0 10.0 Imports 6.7c 10.7c 10.0 12.5 Consumer prices 24.2 16.9 11.0 12.0 Average exchange rate (Rmb:$) 8.6 8.4 8.5 9.5

a Actual. b EIU forecasts. c EIU estimate.

Current account ($ bn) 1994a 1995b 1996c 1997c Merchandise exports fob 102.6 126.1 131.1 144.2 Merchandise imports fob 95.3 106.3 116.2 134.1 Trade balance 7.3 19.7 14.9 10.1 Current-account balance 6.5 14.9 7.2 –0.1

a Actual. b EIU estimates. c EIU forecasts.

Review

The political scene

The 1997 party congress Preparations are under way for the 15th National Party Congress of the Chinese looms Communist Party (CCP) in the autumn of 1997. Hu Jintao is to head the Pre- paratory Group which is overseeing preparations for the event. Candidates for selection to the CCP Central Committee are being listed after evaluation by party organisations across the country. Also to be nominated are the prospective members of the Politburo (the primary institution of collective power) and candidates for the offices of prime minister, chairman of the National People’s Congress (NPC—the legislature) and chairman of the Chinese People’s Political Consultative Conference (CPPCC—the pseudo-democratic advisory body).

The importance of a party congress cannot be overestimated: it selects the Central Committee, which chooses the national party leaders. The task of the incumbent leadership is to define the framework in which the formal selection process operates, in order to secure a smooth transition of power to the desired leadership. Senior figures will want to retain a hold on political power, formally through the grant of office, or informally through the relationships they have cultivated, and through their stature.

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While in theory the run-up to the congress represents an opportunity for political brinkmanship, the enduring consensus for stability that has character- ised the seven years since Jiang Zemin was appointed CCP general secretary— after the crushing of popular protests in June 1989—has blunted the edge of political competition. Jiang has therefore been able to consolidate his position at the “core” of the collective leadership sanctioned by China’s elder states- man, Deng Xiaoping.

Jiang Zemin for party There is speculation that Jiang is seeking promotion to CCP chairman, an office chairman? that was abolished in 1982—it is associated with the over-concentration of power in the hands of a single individual—but which he would like to see revived. Although Jiang occupies the three most influential offices in China— president, CCP general secretary and chairman of the Central Military Commission (CMC)—the accumulation of titles reflects the reality of weak personal authority: neither Mao Zedong nor Deng Xiaoping were dependent on formal positions for their supreme status. Party chairmanship would go some way to securing for Jiang a level of long-term authority over the Chinese political process. There may also be substance to additional speculation that Jiang would like the compliant Li Peng, currently prime minister but constitutionally barred from running for a third term of office, and the politically astute Qiao Shi, who is currently building up a power base as NPC chairman (2nd quarter 1995, page 11), promoted to vice-chairmen of the CCP. Jiang would thereby secure a loyal functionary in Li and neutralise Qiao, a man who can command fear as much as respect: he previously held the country’s top party intelligence brief as secretary of the Central Commission for Discipline Inspection.

There are various Li Peng will retire as prime minister when his term ends next year. Li Ruihuan candidates for the is being touted as a promising replacement for Li Peng as prime minister. He premiership completes a successful term as chairman of the CPPCC. Qiao Shi is another possible contender: he has managed the legislature expertly, promoting its parliamentary credentials and pushing the institution’s role in advancing China’s national interests. Beyond the NPC, Qiao remains an uncertain figure, of unconfirmed views and indistinct loyalties. He is said to have allies in the NPC vice-chairman, Tian Jiyun, but also, significantly if the mood were for a counterbalance to Jiang over the next few years, Li Ruihuan. Qiao is no doubt better connected than Zhu Rongji: China’s economics tsar has the seniority for the premiership, but his management style has alienated many. By contrast, Qiao has emerged as a credible defender of institutional change. He is understood to be pursuing reform of the NPC and provincial-level people’s congress that would entrench the separation of legislature and executive by barring representatives from holding concurrent posts as congressional deputies and civil servants. Qiao is also advocating the right of local legislatures to advance appropriate laws for subsequent approval by the NPC.

Senior leaders polish their The past few months have seen the country’s senior leaders apply themselves to images the nearest equivalent China has to political campaigning, which is to keep their profile sharp by touring the provinces, globetrotting, pronouncing on policies and pushing party loyalty. Li Peng fronted China’s delegation to neighbouring Vietnam’s 8th Communist Party Congress in late June. He was also on

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hand to discuss economic and trade issues with the US national security adviser, Anthony Lake, in July. Zhu Rongji inspected Guizhou and Jiangxi at the end of April and the beginning of May, proceeding overseas to Indonesia, Malaysia and Thailand in the middle of the month. The chairman of the State Planning Commission, Chen Jinhua, visited the UK in May. Vice-premier Zou Jiahua spent over a week in Finland and Sweden. Vice-premier Li Lanqing has loomed exceptionally large in the Chinese media, putting the State Council’s position on price controls and the government’s fight against inflation in a national televised event, followed by a speech on vocational education to senior government officials, meeting Japanese foreign ministry trade officials and, separately, US congressmen and a procession of US corporation senior executives, address- ing conferences on China’s foreign trade sector, inspecting Guangdong, touring Tianjin, travelling overseas to Hungary, Poland, and the Baltic states—all within three months. The Hong Kong press reported his pledge to improve trade with Taiwan and protect Taiwanese investor interests on the mainland. A Politburo Standing Committee member and CCP Central Committee member, Hu Jintao, toured Jilin in China’s industrial north-east in June, where he devoted much effort to upholding the role of grass-roots party organisations in state enterprises and in the countryside. Whatever criticisms can be raised against China’s leadership, a charge of apathy and inaction would be hard to sustain.

Jiang Zemin sets the Standard-bearer par excellence for all the major themes of the day, however, is policy tone Jiang Zemin. Typical of his style was Jiang’s June address in Henan on the importance of agriculture, laced as it was with the rhetoric of current crusades: ideological and political education of the peasantry; revitalisation of grass- roots politics; and the Strike Hard campaign against crime. Jiang spearheads campaigns: the remainder of China’s collective leadership brings up the rear.

At subordinate levels, meanwhile, decisions are often dictated by pragmatism. The fortunes of impoverished Giuzhou province should improve as a result of the July decision to transfer the governor, Chen Shineng, to the Ministry of Chemical Industry in Beijing, making way for a successor better qualified to put the province’s economy on a sound footing. The likely candidate is the vice- governor, Lou Jiwei, who has the ear of Zhu Rongji. Zhu was thought to lie behind the appointment of Lu Riuhua to Guangdong in February.

Ideology—ill-defined, but Jiang is not so secure that he can afford to alienate Deng loyalists, nor is his own high on the agenda ideological brand so well-defined that it could stand in the place of established communist ideology. He needs the legitimacy of continuity. He therefore adds his own ideological relief to the edifice of Deng Xiaoping Thought. He has also stressed a link with Mao: where the Great Helmsman had delivered “On the ten great relationships” in 1956, at the 14th CCP Central Committee fifth plenum in September 1995, Jiang sought to echo the historical significance of the piece with his own address entitled “On the correct handling of the 12 major relationships”. This ideological syncretism is being delivered to the masses at all levels, most recently to the army and to institutions of higher education.

Deng Xiaoping Thought is being propounded in an attempt to bolster the political legitimacy of the CCP on the back of the evident success of Deng’s economic reform programme. The official party paper, the People’s Daily, hailed

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Deng in June as the author of contemporary Marxism—the party is dressing the emperor before it borrows his clothes. Prominent editorial features of this nature are a sop to Deng loyalists and a challenge to a residual leftist clique that abhors the new economic direction of reform and opening. The sixth plenary session of the 14th CCP Central Committee is likely to see a development of the ideological strain, with Deng Xiaoping Thought at the centre, as well as the strong emphasis on “socialist spiritual civilisation” (2nd quarter 1996, page 11).

Old debates splutter on Reformist China has thrown up a glaring contradiction, the subject of irrecon- cilable debate between conservatives and liberals: how to keep the economy “socialist”. State-owned enterprises (SOEs) sit at the centre of the debate, which under Deng had been decided in favour of the separation of political and economic considerations for economic efficiency. The Politburo Standing Committee member, Hu Jintao, is just one senior leader prepared to articulate an apparent reversal, taking the view that the role of party committees should be reinforced in SOEs. Hu has even identified a security imperative in politici- sation: during his tour of Jilin he made it clear that control over grass-roots organisations was China’s safeguard for public security. The signals are confusing. In July the Beijing Review carried an editorial condemning “certain interests”, as proponents of containment rather than engagement with China, linking them with alleged attempts to force privatisation on China during negotiations on membership of the World Trade Organization (WTO)—but “China will not privatise SOEs and privatisation is not a goal of its economic policy”. Yet privatisation is an officially approved option for SOE reform.

The CCP seeks Recent months have witnessed an intensification of Jiang’s efforts to mobilise reinvigoration support. The 57-million member CCP is on a campaign of grass-roots reinvigoration—upgrading its 400,000 cadres at county level and above—and ideological dissemination. The strengthening of party structures and the mobilisation of party personnel have picked up momentum.

Jiang told the CCP Central Committee in June that building up a contingent of cadres to carry the “correct political line” to the country was a vital task. The People’s Liberation Army (PLA) has been in the vanguard of the process of political education and reappraisal for some months: a June circular issued by its Political Department confirms that intensive ideological study programmes have been under way since the beginning of the year. The PLA and the People’s Armed Police are building up grass-roots political organisations and higher party structures.

Socialist morality is part of the “spiritual civilisation”, which it is believed will provide the focus of deliberations at the sixth CCP plenum in the autumn. Party committees are to report back to Beijing on the state of “spiritual civilisation” and on programmes designed for its advance.

The CCP also published in April rules on grass-roots organisations in institutions of higher education, with the avowed aim of strengthening and improv- ing the leadership of the party over these institutions, and building up party leadership within these bodies. The president of the institution is to assume responsibility “under the leadership of the party committee”. The regulations make detailed provisions for the establishment of party committees and party discipline inspection commissions in student and teacher bodies.

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China’s token democratic parties met Jiang in June to be told that they too are expected to “stress politics” and that this was necessary for the democratic parties themselves to work towards the strengthening of “socialism with Chinese characteristics”.

Discipline for some, but A clean party image is also preserved by internal discipline. Those recently not all reprimanded include the party secretary of Shaanxi and local senior cadres for having a good time when they should have been setting an example on affores- tation day, the day in March when nationwide the citizenry take time off work to plant trees. Senior officials in Jilin, Shanxi, Hainan and Guizhou have been punished for indulging superstition and attending “extravagant” funerals, in one case at public expense.

The Chinese press reported in July the recovery of 116 residences that had been obtained illegally by the ex-deputy mayor of Beijing, the late Wang Baosen. He had been under investigation for corruption at the time of his death. The properties have been passed by the authorities to the deserving. In the related case of Chen Xitong (4th quarter 1995, page 10), there is still no news of the longstanding investigation of the former secretary of the Beijing Communist Party and disgraced Politburo member, but rumour has it he has been trans- ferred from Beijing to comfortable house arrest in Inner Mongolia. Some 18 cases are still outstanding on misappropriation of significant sums in Beijing.

Some complaints of One victim of the Beijing corruption scandal has complained to the party injustice leadership of unfair treatment. The former deputy chairman of the Beijing Municipal People’s Congress has compared her treatment with that of Chen, who has yet to be stripped of party membership. An appeal has also been reportedly lodged in June by five well-connected officials from Tai’an, Shandong, currently under sentence of death for economic crimes. NPC Standing Committee members have been petitioned by the dissident Wang Xizhe, who is seeking judicial review of public security and judiciary decisions as unconstitutional. None of the aforementioned can expect relief.

Striking hard against China is in the grip of a new campaign to stem lawlessness (1st quarter 1996, crime page 12), called Strike Hard. Under way in earnest since the beginning of May, Strike Hard involves mass rallies, public executions and a cursory form of justice where sentence, appeal and execution follow in unceremonious haste. China executes thousands annually, mostly ordinary people from the undistinguished masses, often for offences that would merit only a few years in prison in many jurisdictions outside China. There are reports of capital punishment for theft of telecommunications equipment in Sichuan, and for car theft in Beijing.

Strike Hard is reportedly catching significant numbers of migrant peasants, who are popularly perceived as the root cause of rising urban lawlessness. That there is increasing lawlessness is not disputed: foreign journalists confirm the change in atmosphere and report personal experience. The UK Foreign and Commonwealth Office issued a warning in May that foreigners were increas- ingly the target for theft and muggings, and mentioned incidents of extortion against foreign businessmen. A UK businessman was killed in Shenzhen in March in his room in a luxury hotel. An NPC vice-chairman was murdered by

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his bodyguard in February (1st quarter 1996, page 12). Illegal weapons manufacture and distribution from Qinghai, sometimes involving local cadres, has abetted the proliferation of handguns across China; the government admits their use in violent crime and in the resolution of petty personal disputes. Government plans to expand the police force by some 45%, and the People’s Armed Police by 20%, by 2000, reflects official concern that despite campaigns like Strike Hard, the problem of criminality will only get worse.

The influence of the Deng The fortunes of family members and associates are ebbing with the physical entourage wanes and mental decline of China’s former paramount leader, Deng Xiaoping, who is 92 this month and has made no public appearance since early 1994. His sister, Deng Xianqun, has reached the statutory retirement age of 65 and is therefore retiring as a director within the PLA Political Department. It is not clear whether the CCP Central Committee actively ensured that she did not stay at her post beyond retirement age, a common enough practice in China. Uncertainty also surrounds the departure of Deng’s son-in-law, He Ping, from the presidency of Poly Technologies, a company tarred by allegations of association with an arms smuggling racket recently exposed by the US authorities in California (below). He may have come under pressure from above.

Also in difficulties is Deng’s niece, Ding Peng. She controls a firm which has an important stake in Shenzhen Fountain, the property developer based at the Special Economic Zone (SEZ). Shenzhen Fountain was founded by an Australian businessman, James Peng, who is currently languishing under an 18-year sentence imposed in September 1995 for corruption after the SEZ local government took over the firm in 1992. Ding has run into difficulties with a development project on the SEZ side of the Hong Kong border and faces litigation in Hong Kong courts over the seizure of assets from Peng. Her friends in local administrations will be of more use to her than association with Deng Xiaoping.

Still in place, however, are Deng’s sons Deng Pufang, as chairman of the Chi- nese Federation of the Disabled, and Deng Zhifang, president of Shougang Concord Ltd. But Deng Zhifang has made a quiet exit from his once high- profile business interests in China and Hong Kong after Shougang Concord was linked to a corruption probe in 1995. Deng Pufang, however, hit the foreign headlines for his spirited defence of his father in July at a gathering of the Federation, mentioning the unmentionable (Tiananmen Square, June 1989), proffering unsolicited advice to the party, and expounding on his father’s policy achievements, to applause. Deng’s daughter, Deng Nan, remains vice-minister at the State Science and Technology Commission.

Political connections The Ministry of Personnel is introducing regulations to counter nepotism and remain necessary the opportunity for corruption in the civil service. In June, new rules prohib- ited civil servants from holding positions of authority over personnel or fi- nances where there was a relative in a senior post within the same department or organisation. The ministry has also acted to prevent ties becoming too close: jobs will be rotated on a five-year basis.

However, in an indication that CCP membership has re-acquired importance as a means of personal advancement, official figures report that over 3% of college students are now CCP members, an improvement for the party on the 1% in

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1989. The proportion climbs the higher the education level: Shanghai claims 7% of four-year college students as CCP members, and a quarter of postgraduates. Applications pending are about four times the 7% membership in Shanghai. The membership rate is around 22% for those studying for higher degrees. The Chinese press also reports that more than one-fifth of college students in Beijing are applying to join the CCP, claiming a record in the period of reform. The government also seeks reassurance in statistics that reveal that over 98% of middle-school students surveyed in Chengdu said they believed in communism, with 95% hoping to join the party. This is probably youthful idealism, whereas further up the education ladder it is career pragmatism.

Trouble in Xinjiang A side-effect of the very public appeal for national unity and patriotism that is part of the communist regime’s strategy for survival and loyalty has been the rare disclosure that separatists have been active in China’s remoter regions, where there are significant minority—that is, non-Han—populations. Xinjiang party leaders held a meeting in May on combating separatism. Xinjiang’s party secretary, Wang Lequan, has been outspoken in his denunciation of Uighur nationalism and “illegal religious activity”. The Xinjiang Daily reported the revival of separatist activity, and claims links to foreign forces. A commentary in May called for resolute action against party members, “especially leading cadres, who continue to be devout religious believers despite repeated education, instil separatist ideas and religious doctrines into young people’s minds, publish distorted history, books or magazines advocating separatism and illegal religious ideas, or make audio or video products propagating such ideas”. The Strike Hard campaign has justified the arrest of 1,700-odd “terrorists, separatists and criminals” at the end of April, many, if not all, ethnic Uighurs. Reports refer to police shoot-outs, with at least one group of nine Muslim separatists killed, attempted bombings, and politically motivated assassinations, including the killing of a pro-Beijing mullah. A vice-chairman of Xinjiang’s political consultative conference was reportedly killed at the end of April. Hong Kong’s South China Morning Post reported 20 killed in street fighting in Xinjiang at the end of May, citing a Uighur spokesman speaking from Kazakstan. The spokesman added that fighting was continuing “in several towns”.

Separatist violence is, however, the exception and not the rule in Xinjiang. It traditionally feeds off widespread disaffection among the Muslim population, resentful of the influx of Han Chinese and Han exploitation of the region’s natural resources. Han Chinese constitute over one-third of the population, Uighurs less than half, in a population of 16 million. The current surge of activity is also singular in that it has been reported in the local press and confirmed by officials. At a time of strong rhetoric from the centre on patriotism, good order and control, local figures will want to be seen to be clamping down hard, a public mark of loyalty to Beijing. In a related development, the Xinjiang People’s Publication House monopoly on publishing material on Islam has been confirmed. Reports of significant redeployment of army units in Xinjiang suggest the military and ancillary forces are mobilised to counter terrorist activity, in an area representing considerable logistic obstacles for China’s troops.

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Beijing courts Central To counter the support restive minorities might elicit from sympathisers or Asian neighbours fundamentalists in neighbouring Muslim republics, Beijing has courted Central Asian governments. Jiang Zemin secured a commitment from the president of Kazakstan, Nursultan Nazarbayev, against Uighur separatists; the official Chinese news agency, Xinhua, reported that the former Soviet republic supported “all measures taken by the Chinese government in maintaining national unity”. Discussions held in Alma-Ata between the two countries on the extradition of criminals are undoubtedly related. Jiang’s July tour of central Asian countries also took him to Uzbekistan and the Kyrgyz Republic. Talks were held in Moscow in May between Russia, Kazakstan, the Kyrgyz Republic and Tajikistan on reducing forces along common borders; another round of talks is scheduled for later this year.

The search for stability in China signed protocols in June with Mongolia and Russia defining common relations with neighbours borders, after four years of discussions which are still ongoing. The Russians say some 1,700 km have been covered by legal agreements, of the 4,300-km shared border with China. The apparent warmth of Sino-Russian relations conceals uneasiness in Moscow and the Russian Far East. The Russian Federal Security chief in the Khabarovsk Territory intimated in June that foreign intelligence operatives were active in the region, and that Chinese might be among them.

Maintaining stability is also the motivation behind China’s decision to supply North Korea with oil (1.1m-1.2m tons of crude annually to the year 2000) and coke (1m tons annually to 2000), a commitment apparently made in June 1996 which effectively continues supplies at 1995 levels. It is not clear what terms govern these supplies: there is speculation that the deal is an open-ended loan or grant-in-aid, which would represent a softening of Beijing’s recent insistence that its ally pay the going rate for its imports from China.

Beijing versus Tibet Tibet represents a different order of secessionist threat from Xinjiang. The unrelenting propaganda offensive was cranked up for the 45th anniversary of the “peaceful liberation of Tibet”: a leading article in the party paper, the People’s Daily, reaffirmed sovereignty over Tibet and restated the official history of China’s Himalayan possession.

In the Tibetan Autonomous Region itself, Beijing continues to silence dissent. Buddhist monks have been killed and hundreds more detained in May in a crackdown on support for the exiled spiritual leader, the Dalai Lama. Regul- ations banning images of the Dalai Lama are being enforced. Meanwhile, an amnesty was offered to Tibetan separatists who submitted to the authorities before the end of June. In addition, Beijing has set the seal on division by recognising last year a pretender to the second holiest religious title, the Panchen Lama (1st quarter 1996, page 13). The Dalai Lama had already recog- nised Gendun Choekyi Nyima, from central Tibet, as the reincarnation of the tenth Panchen Lama, who died in 1989. He is now under guard with his family, probably in Beijing, while Beijing’s appointee, Gyaincain Norbu, is educated by the regime for a role in later life that will include—which is his significance for Beijing—recognising the reincarnation of the Dalai Lama on his death. He has been installed at the Panchen’s traditional monastic seat at Tashilunpo. Reports suggest there were protests at the monastery in Shigatse, and arrests were made.

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Unlike Xinjiang, Tibet receives widespread coverage abroad. Germany was the most recent Western power to incur the wrath of the Chinese, prompting the cancellation of its foreign minister’s July trip to Beijing and other senior bilateral contacts, and the closure of the Friedrich Naumann Foundation office in China. The German Bundestag in June had become the latest European parliament to support a resolution condemning China’s human rights record in Tibet, calling on the German government to intercede with Beijing and for the Chinese to enter a constructive dialogue with the Dalai Lama. In the same month there were calls in the Czech Republic in June for parliament to con- demn China on Tibet, while Belgium’s parliament voted unanimously in favour of a resolution which described Tibetans as a persecuted people. Norway engaged with Jiang on human rights during his state visit in July. Western democratic parliaments are Beijing’s scourge: it can neither control them, nor, whatever a government’s desire for an uncomplicated relationship with Beijing, have them silenced. Beijing is already warning Canberra of the risk to Sino-Australian relations of the Dalai Lama’s September visit.

The international respectability of the Dalai Lama infuriates Beijing. In July he was in the UK taking tea with the Queen and Queen Mother, the first time he has received hospitality from the royal family. A group of politicians received him at the Palace of Westminster (the seat of the UK parliament), and he met the foreign secretary, Malcolm Rifkind. He subsequently took his campaign against what he perceives as the cultural destruction of Tibet to the USA. China vilifies him as a “splittist”, and denounces the Dalai Lama’s non-violent, non- secessionist stance—he does not insist on independence—as a pretence.

China courts Africa— Having friends in Africa gives China leverage in international forums like the UN. Voting together, they represent a counterbalance to US and broader Western influence on international bodies. Africa also represents markets for Chinese goods and services, and raw materials in short supply at home. Jiang undertook a major tour of Kenya, Ethiopia, Egypt, Mali, Namibia and Zimbabwe over two weeks in May, crowning significant senior leadership activity in the continent in 1995: three vice-premiers visited (Zhu Rongji, Li Lan- qing and Qian Qichen) and the NPC chairman, Qiao Shi. Jiang signed bilateral trade and technological cooperation agreements, granted soft loans, delivered a speech to the Organisation of African Unity in Addis Ababa, and presented US$300,000 to the organisation by way of a gift.

—while South Africa Rumours that China was putting pressure on South Africa to switch recog- hesitates on diplomatic nition to Beijing from Taipei or face the loss of diplomatic representation in recognition Hong Kong and the cancellation of air landing rights have been denied by Pretoria. South Africa is reluctant to sever ties with Taiwan, with which the government has traditionally had close relations, cemented under the apart- heid regime, but is expected to come to a decision on the China question shortly. For Beijing, recognition from Pretoria would be the crowning victory in its offensive to isolate Taiwan diplomatically, and a jewel in its Africa policy. South Africa is by far the most important of the 31 countries which currently accord recognition to Taiwan. South Africa’s trade with the mainland last year was US$1.3bn, almost a hundred times the amount it had been in 1992.

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China said in July that it could wait if South Africa needed more time to consider establishing relations. But terms will be the same as for all countries: Beijing will not permit dual recognition. The two sides were nevertheless able to agree preferential treatment on trade in May.

Sino-US relations emerge The US president, Bill Clinton, renewed Most Favoured Nation (MFN) trading from a trough— status for China on June 4 to safeguard the USA’s sizeable trade and investment interests. A late June motion in the US House of Representatives to remove China’s MFN status was defeated. The ritual of an annual MFN debate serves the single useful purpose of calling the country’s leaders to account on China and China to account on the many issues that bedevil Sino-US relations. Beijing wants trading norms restored permanently: it resents the “farce” of annual debate. The US business lobby also favours a permanent foundation for bilateral trade relations; the former president, George Bush, has lent his voice in support of permanent MFN renewal.

The White House strategy for simplifying a complex relationship is to disen- gage distinct issues and suffer the policy ambiguities a case-by-case approach throws up. Mr Clinton’s U-turn taking human rights considerations out of the MFN decision sacrificed the anti-Beijing credentials of his presidential campaigning years on the altar of economic and political expediency. Similarly, the intellectual property rights dispute in May-June was kept well apart from the MFN deliberations.

The drama of the threat of multibillion-dollar sanctions and late-night negotiations leading to a last minute settlement in June was an unwelcome repeat of the intellectual property rights fracas of early 1995. However, the US trade representative, Charlene Barshefsky, came away with something a little better than the February 1995 agreement, which foundered on weak enforcement. There was justification on both sides: suspecting a lack of political will, US critics see a contradiction in China’s ability to mobilise the forces of law effectively, for example against dissidents, but failure to close known pirate CD, laser disk and CD-ROM plants; Beijing can argue the novelty of intellectual property protection as a legal concept in China—laws, courts and specialist intellectual property divisions are in place, but it will take time for an effective judicial process to emerge.

—but some serious The discovery of illicit arms and ammunition shipments from China in late problems remain May was well-timed for the MFN debate. Arrests were made after the seizure of 2,000 Chinese AK47 assault rifles in California. Senior officials at China’s North Industries Group (Norinco), which comes under the direct control of the State Council, were named in the US arrest warrants. Also implicated was Poly Tech- nologies, a company with well-connected executives on the payroll, including Deng Xiaoping’s son-in-law, He Ping. China’s embarrassment was com- pounded by a customs find in Hong Kong of undeclared shipments from China to Israel of fighter-trainer bombs, albeit unarmed. Both incidents severely dented China’s self-made image as a responsible global power, and raise ques- tions of accountability and central leadership control over the arms industry. Only a couple of weeks had elapsed since the USA had pulled back from sanctions to punish China for selling ring magnets to Pakistan, transfers of

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technology with nuclear application that Beijing had not authorised. The foreign ministry in Beijing has since announced new regulations for nuclear technology exports.

Meanwhile, the USA stands accused by China of using the country as a dumping ground for harmful waste. The Chinese media have alleged that scrap iron and steel with unacceptably high levels of radiation were landed in Tianjin from the USA. Recent finds of hazardous waste were present in more than 13,600 tons of “substandard waste” that has entered China from the USA through Shandong ports alone since 1991, mixed in with waste paper for recycling, according to a Chinese press interview with a port official. A ship was recently turned back from Fujian to Hong Kong carrying plastic and domestic waste.

The USA is worried The way has, however, been cleared for improved relations—until the next spat. Mr Clinton’s national security adviser, Anthony Lake, flew to Beijing for a series of high-level meetings in early July, the first at this level since the defence secretary’s visit in 1994 and said a Sino-US summit was a possibility. The US secretary of state, Warren Christopher, met the Chinese foreign minister, Qian Qichen, in Jakarta in July, and will visit Beijing in November. China’s defence minister, Chi Haotian, and security adviser, Liu Huaqiu, are provisionally pen- cilled in for visits to the USA after the November presidential election.

But the air is not clear. US diplomats and businessmen perceive increasing anti-US feeling at all levels, from senior officials to ordinary Chinese. They see political significance in the award of contracts to Europe’s Airbus Industrie and not Boeing; in calls for a domestic food industry to challenge McDonald’s; and recently in the publication of the anti-Western diatribe “China Can Say No”.

Taiwan—calmer waters Beijing’s confrontational military posturing of March has given way to a more cooperative attitude towards Taiwan. The political calendar has been quiet enough for the rhetoric to subside and for the two sides to get on with a very real attraction between them: commerce. Beijing will still not countenance the direct cross-straits links that Taiwan seeks, but it has allowed the state-run China National Overseas Offshore Oil Company to enter into an oil explor- ation deal with its counterpart in Taiwan, Chinese Petroleum Corporation. While the economic rapprochement shows no sign of spilling over into the political arena, Taiwan has indicated that mainland Chinese officials will be allowed to visit Taiwan after 1997 in their capacities as officials in the Special Administrative Region.

China hedges its claim in In May the NPC Standing Committee ratified the UN Convention of the Law the South China Seas of the Sea, proceeding promptly to announce that it was extending its claim to maritime areas under its control from 370,000 sq km to 2.8m sq km, based on its sovereignty over the Xisha (Paracel) and Nansha (Spratly) Islands. Six other countries dispute China’s sovereignty over these islands (2nd quarter 1995, page 13). China evaded the prickly question of its intentions under the convention—whose terms may permit it to make a wider claim over the seas, depending on the status it adopts over the Paracel archipelago—at the meeting of the ASEAN (Association of South-east Asian Nations) Regional Forum in July. Malaysian armed forces exercised off the Spratlys at the end of May. China has

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placed cultural protection signs on a reef in the Paracels, the site of a Song dynasty shipwreck.

Further north, Taiwan has been worried by the presence of mainland Chinese fishing boats encroaching close to defence outposts in the vicinity of Quemoy (Kinmen). The four island fortresses in the area fall well within the territorial waters under the extension announced in May.

The Chinese military lack the blue water capability to press home their furthest territorial claims. The impact of the presence of US aircraft carriers in the waters off Taiwan in the March debacle will have impressed on the leadership the need for China to develop its own carrier. Until then, the best China can do is improve support vessel capabilities.

No more nuclear tests Beijing has announced an indefinite moratorium on nuclear testing after its highly unpopular second test in July. The Comprehensive Test Ban Treaty is under discussion again in the hope that something can be saved from the earlier Geneva talks, scuppered by India and by China’s reluctance to accept on-site inspections. Agreement is needed ahead of the convening in September of the UN General Assembly.

Economic policy

Broad policy is The headline policy outlined in Ninth Five-Year Plan (1996-2000), approved at unchanged— the March plenary session of the National People’s Congress (NPC; 2nd quarter 1996, pages 18-21), is now being translated into detail. Gloss is being applied as technological upgrading of industry and foreign investor incentives in the Special Economic Zones (SEZs) and major cities are announced, while measures are taking place to tempt foreign capital in to the interior of the country, and into agriculture. These initiatives are limited, and it is highly unlikely that Beijing will introduce more radical domestic policies in the run-up to the Chinese Communist Party (CCP) 15th National Party Congress in the autumn of 1997.

—but slower investment Following the downturn in export performance over past months, attention growth promotes a cut in has been focused on the significance of a deteriorating international trade interest rates— account for the economic growth targets set in the plan, and the possibility that austerity measures introduced in 1993 to cool an over-rapid expansion of the economy were excessive. In the first six months of 1996 fixed asset investment climbed 18.6%, a full 6.9 percentage points down on last year’s 25.5%. There has consequently been an easing in credit, which is presented as an adjustment, not a reversal, of policy, in that new credit is to support operating costs, not capital expenditure. Interest rates on savings came down on average by 0.98% and on loans an average 0.75% on May 1. Rates currently range from 2.97% on short-term deposits to 12.06% on long-term and from 9.72% on short-term loans to 15.12% on long-term loans. The most pertinent rate for state-owned enterprises (SOEs) is the one-year loan rate, cut from 12.06% to 10.98%. The cuts are good news for SOEs. But the relief is mitigated by the fact that the sums they owe, often with little hope of repayment, continue to mount. When SOEs are unable to secure additional loans despite the more relaxed credit policy, they will continue to find money on informal markets.

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Saddled with non-performing loans to SOEs, China’s banks will be grateful for the reduction on deposit rates, which are now 23 basis points above the new lending rate The broader spread means higher returns. The People’s Bank of China (PBC, the central bank) has intimated that there may be a cut in central bank reserve ratios from the current level of around 13%.

—and a further credit The governor of the PBC, Dai Xianglong, has confirmed that a second interest relaxation is possible rate cut is being considered, to stimulate demand and investment. Dai says falling inflation and the good summer harvest make this possible. The government believes that the recent severe flooding will not derail grain output forecasts for the year. An additional cut in rates would be particularly welcomed by overburdened state banks and exporters suffering from tight credit and unpaid export tax rebates. It would also slow the growth of savings, which planners would like to see switch to consumption and stock or bond investment in companies. The PBC is gradually shedding its reluctance to countenance corporate bond issues, which should see an upturn in the second half of the year as a means of injecting direct investment into the corporate sector. The PBC also supports large state enterprises setting up their own finance companies.

Inflation will come under Notwithstanding the taming of inflation from a historic high of 21.7% in 1994 pressure from grain prices (retail prices) to 8% in the first quarter of 1996 and 7.1% for the first half, price stability is not a certainty. The state procurement price for grain was increased by 20% on July 1. In response, the Beijing Municipal Government increased the grain retail price by almost 11% for urban residents, from Rmb2.80/kg to Rmb3.10/kg; and wheat flour by 28%, from Rmb2.14/kg to Rmb2.74/kg. Food is the key constituent of the retail price index. Furthermore, longstanding structural problems remain inflationary: the state—and thereby the public purse—are the ultimate guarantors of the critically indebted state-owned sector, where 40% of SOEs are loss-making and 30% suffer chronic debt.

There is little movement Reform of the SOEs is stalling. The sector is the most visible legacy of the in state enterprise pre-reform command economy, with serious overemployment, bearing the full reform— burden of welfare costs in the absence of adequate independent state provision, and recording appalling debt-asset ratios and heavy indebtedness. Yet the implications for unemployment and social instability rule out a comprehensive overhaul.

The most recent indication of poor progress is the admission in July by the State Commission for Reconstructing the Economy (SCRE) that the government is struggling with its 1994 “modern enterprise system” initiative, which was to turn 100 SOEs into modern, market-responsive shareholding corporations by the end of 1996. The scheme’s completion date has now been post- poned to end-1997. In a separate development, China has recorded a measure of success in converting SOE loans to government equity, but on a limited scale: a mere Rmb24.2m ($2.9m) in debt has been wiped off 131 SOEs, reducing the debt-asset ratio from just under 61.8% to 59.2%. The dimensions of the overall problem were borne out by the report, in June, in the Chinese Business Weekly that bad debt at end-1995 was Rmb805bn (up from the earlier estimate of Rmb700bn), of which Rmb400bn was probably unrecoverable.

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—as the political climate Independent of the socioeconomic complexities surrounding SOE reform is the blows cold political dimension, which threatens to assume a disproportionate importance in the current climate of ideological rectitude. China is unable to define what is politically an acceptable level of dilution of socialist industry. Conservatives advocate continued state-ownership and control. Reluctance to commit to privatisation as an option for reform is visible at the very top: questioned by the Spanish daily newspaper El Pais at the end of June, the president, Jiang Zemin, confirmed that China would not privatise SOEs, and would maintain public ownership as the mainstay of the ownership system. The private economy on the official view is an adjunct to a socialist economy, not a substitute for it.

To calm conservatives, the government undertakes surveys to demonstrate that SOEs and collectively owned enterprises constitute the bulk of the economy. According to figures released by the State Commission for the Economy and Trade, the 104,000-odd SOEs hold 60% of industrial assets, 55% of industrial sector sales and 60% of pre-tax profits. The conclusion of a four-year study into state property in Guangdong, the province that prospered earliest under reform and opening, is that the predominance of state-ownership has not been weak- ened: the province has the highest number of state-run enterprises, and ranks first in state assets.

Public-sector enterprises in Guangdong, end-Mar 1995 (Rmb bn unless otherwise indicated) No of state-operated enterprises 19,476 of which: large & medium-sized 2,843 No of state-run administrative units 33,100 Property value of enterprises & units 306.8 SOE capital assets 797.9 of which: large & medium-sized enterprises 494.7 SOE debt-liability ratio (%) 67.1 Source: Press reports.

Progress towards The government has sanctioned a range of solutions for restructuring SOEs: corporatisation of large merger, acquisition, partnership, bankruptcy, debt-conversion and privatisation and medium-sized SOEs— are identified options. The thrust of reform is the corporatisation of enterprises selected on their economic promise, concentrating effort and support on the large and medium-sized; smaller enterprises fall outside the strategy, get guid- ance, but must find their own way. China’s economic planners want the SOE sector honed to a backbone of 1,000 key enterprises (2nd quarter 1996, page 25). The State Commission for the Economy and Trade is currently selecting 360 of the 1,000—across 15 key industries and on the basis of sales volume, taxable profit and other criteria—for special attention. The government is toying with granting greater management and operational freedom for smaller SOEs, and novel ownership-management arrangements to include public ownership but private management, leasing of enterprises, disposal by auction, or merely highly specific reform tailored to the deficiencies characteristic of a particular company. Examples of action taken in restructuring include an initiative in Liaoning in June that saw property rights transfers of 100 of the province’s enterprises, of which 60 were SOEs, with assets of Rmb5.3bn, and 40 collectively

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owned, with assets put at Rmb300m. The Guangdong provincial government also complies with national policy favouring economies of scale: 70 large enterprise groups—representing over 44% of the assets, 41.9% of sales volume and 53.5% of profits earned by SOEs in Guangdong—are slated for improved investment, finance and international trade powers. Mergers are encouraged, where appropriate. Of the 70 groups, 50 are industrial and ten trading enterprises, with the rest operating in building, transportation, posts and telecommunications or in more diversified activities. Inner Mongolia has taken a similar road, setting up 93 enterprise groups to boost local economic growth and give energy to SOEs. In the region’s textiles and light industrial sectors, nine enterprise groups were set up by mergers, share issues and other arrangements. One group, consisting of 33 enterprises based on the wool trade, has expanded its business into electronics and medicines manufacturing, commerce and trade.

—while “true” SOEs are to In further clarification of the programme, the SCRE has decided to restructure be treated differently— national security and defence enterprises, public utility companies and a number of other enterprises along corporate lines but they will remain in the sole ownership of the state: monopolies in these industries are to be broken where possible. The state will hold majority stakes in pillar and key raw material, processing, services and basic industries that are to be restructured into limited liability companies, or joint-stock companies. A number of large enterprise parent groups will be set up, with satellite subsidiaries linking one with the other through ownership states, to operate across regions. Small processing, retail, catering and service enterprises will be modernised into solely owned, partnership, stock cooperation or limited liability operations, with some small SOEs acquiring the right to transfer property rights to collectives or individuals. City and town collectives will be restructured into partnership, stock cooperation enterprises and limited liability companies.

—and SOE reforms have Where reform programmes have been implemented—most obviously in the limits 100 companies chosen in 1994 for the pilot project of SOE reform—enterprises have not been able to shake off all the shackles of their pre-reform condition. Corporate modernisation has brought in board directors, decision-making autonomy and freedom to set. But management remains under the supervision and ultimate control of local government so that the latter can safeguard state property and capital. While newly independent cost and production centres will contribute to an enterprise’s profitability, the latter will still be bound to deliver revenue to the parent body.

Unemployment is rising The official unemployment rate has edged up to 2.9% of the estimated 150 million in the urban labour force. In a move that reflects mistrust of the unemployment statistics, which are understood to ignore the ranks of workers technically in employment but effectively redundant, Dai Xianglong has offered a revised figure of 8%, made up of the 5-6 million registered unemployed, and an additional 7 million of surplus labour. This estimate is ominous if Chinese media estimates of a rise from 2.9% to 7.4% by 2000 are accepted: a parallel trend for surplus labour would yield a figure of almost 18 million.

Added to the regiments of those being made redundant in the towns and cities are the rural jobless and the young entering the job market for whom the State

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Planning Commission says 180 million jobs will be needed before 2000. Yet only 64 million jobs were created between 1991 and 1994.

Moves to assist the The labour ministry wants local governments to establish funds to catch the jobless— millions of state-sector workers who are not being paid or who cannot find alternative work. The ministry supports the idea of an assistance scheme providing support of Rmb70-120 per month, varying according to local and individual circumstances. This compares with average monthly wages of around Rmb440 ($53). The central government has distanced itself from the initiative by committing reluctant local government to finance and accountability. Im- plementation of the scheme is urgently required in areas like China’s north- east, where effective SOE reform entails massive redundancy. Shanghai pioneered a welfare scheme in 1993: over 100 cities are currently following suit.

—and to reassess the Rural surplus labour is on the move in droves. This migrant workforce attracts contribution of migrants a negative press; it swells city populations and strains urban resources, and is blamed for the rise in crime. The migrants congregate in makeshift communi- ties like Zhejiang village in Beijing, with a population of around 100,000, which was razed on Li Peng’s orders in late 1995.

But there is undoubtedly a positive contribution. Migrants bring enterprise to city centres and do the jobs that others avoid. They provide an information channel between cities and countryside, communicating everything from work opportunities to the novelty of foreign brands. Their value is the subject of expert debate, most recently in June at a Rural-Urban Transformation Conference, which brought together academics, policy-makers and other interested parties. Government urbanisation programmes intend that surplus rural labour be absorbed by new towns and small cities—an experimental migration project currently embraces 57 cities—but migrants head for prospering economic centres. World Bank aid is financing employment schemes for migrants in the cities.

Seeking foreign Agriculture is a priority in the Ninth Five-Year Plan (1996-2000) and the govern- investment for ment is looking for foreign investment in this sector: it predicts that in the five agriculture— years to 2000 agriculture will use some $6bn of foreign capital, of which $4bn will enter the country as foreign direct investment, $1.7bn by way of international financial institution loans, and $500m in bilateral government loans. It intends to direct loans on commercial terms to the most promising projects or to the modernisation and re-equipping of agricultural enterprises, while infrastructure, processing and other agricultural projects will receive concessional loans and preferential government credit. Overseas aid will be injected into research, technology promotion, and projects in areas of poverty. Foreign direct investment (FDI) will support farming operations, aquaculture and processing industries.

Central government policy recognises regional differences. In the east it pro- poses that foreign investment be directed to intensive processing, technology value added and technological modernisation, while central China requires the upgrading of medium- and low-yield farmland, rural infrastructure and technology for dry farming, and foreign investment in the west is to target the

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broad development of agricultural resources, in part to alleviate poverty, but in the main to drive sustainable development.

—will be difficult In the absence of incentives, these plans betray an unrealistic dependence on foreign capital. The official figure for foreign investment (bilateral, multilateral, governmental and non-governmental) through agricultural departments from 1979 to end-1995 is only $3.4bn, with the agricultural sector as a whole receiving $10bn in foreign funding. There have been early successes, however: the Beijing Jinhe Flower Culture Centre is a $28m project currently under construction in Beijing.

The State Statistical Bureau (SSB) is forecasting a 1% expansion in 1996 of land devoted to grain, or 1.1m ha, to 110.95m ha. The greatest expansion is forecast for Xinjiang, which with other regions will have to make up for the decreasing acreage in provinces such as Inner Mongolia, Gansu, Beijing and Liaoning. Cotton-growing land will contract by 25,000 ha, or 0.5%, to 5.46m ha, without yields falling.

The renminbi will be The pilot scheme which has permitted renminbi convertibility on current acc- convertible on the current ount in Shanghai, Shenzhen, Dalian and Jiangsu since March is to be extended account— nationwide before the end of 1996. This means that foreign-funded companies can now enjoy the same access to local currency as their domestic counterparts, which had acquired the right in 1994 when the dual currency system was abolished. The swap markets will continue to operate, but the requirement that foreign companies transact their foreign exchange needs through these centres is being dropped. As of July 1, foreign companies were able to get their foreign currency at designated banks, which includes authorised foreign banks.

—but there are some At the same time, limits have been imposed on the amount of foreign ex- restrictions— change a company can hold on its books in settlement accounts: any excess has to be sold to designated banks. The same restriction applies to domestic firms. China has been monitoring the foreign currency reserves of foreign firms since March, under a new system of annual audits, before it gives a company the green light to open a hard-currency account.

As indicated above, authorised foreign-funded banks can transact foreign exchange, but the deputy governor of the PBC, Chen Yuan, has confirmed that they still have not acquired the right to undertake renminbi deposit and loan business. They will in due course, on an experimental basis probably confined to Pudong.

—and capital-account Capital-account controls remain in place: that is, although foreign-funded controls remain companies are free to open foreign exchange accounts for trade payments and profit repatriation, and for services payments and receipts like transportation, the authorities will continue to monitor and control capital investment flows in and out of the country, such as international loans, foreign direct investment, securities, bank credits and leasing. Restrictions are also to stay in place on individuals’ transactions in foreign exchange, although the amount of foreign exchange they can buy from the bank is due to go up.

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Hainan diversifies

The island province of Hainan is a Special Economic Zone (SEZ). Its economy is diversifying and maturing, away from real estate, towards manufacturing, agriculture and petrochemicals. The island is also developing its tourism industry: 1.23 million tourists came to the province in the first four months of 1996, a surge of almost 52% on the previous year.

There are currently some 430 foreign-funded agricultural enterprises in the region, with investment valued at $350m. A total of 28 Taiwanese companies have invested Rmb185m ($22.3m) in farming projects for crops, livestock and processing in Sanya, a city on the south of the island.

The SEZ wants to further exploit a number of pillar industries: it is ideally positioned to command oil and gas exploitation and downstream production from China’s maritime reserves in the South China Seas. Plans for the development of the island’s petrochemicals industry propose that the sector should contribute 30% of the SEZ’s total industrial output by 2000, and generate exports of $25m. Hainan intends to build the country’s foremost urea base, producing 3.64 tons annually. Two oil refineries are planned, with annual processing capacity of 12m tons. There will be major petrochemicals projects in ethylene, polypropylene, polystyrene, polyester and paper.

The 21 projects agreed or in negotiation for this year include: a multibillion-dollar Sino-Australian joint venture for refining oil and the production of ethylene; a $1.85bn Singaporean facility for paper production; South Korean and US involvement in nylon production; an Rmb10bn chemical fertiliser project financed by the China Offshore Oil Corporation; a Rmb9.15bn auto project; a South Korean-financed container manufacturing project; a US-financed facility for the production of alcohol; and a US-French $3.1bn polyester project.

The provincial capital, Haikou, is looking for foreign investment for its second high- technology development zone. The 200-ha site will focus on bio-engineering, ocean- ography, microelectronics, ecology and environmental protection research. Haikou approved 69 foreign-funded enterprises (FFEs) in the first five months of 1996, with total investment valued at $237m. This compares with 487 FFEs approved in Beijing in the first six months of the year, with total contracted investment of $1.2bn; and 156 foreign-invested projects in six months in Xiamen, worth $490m. Hainan’s pillar industries are chemicals, vehicle manufacture, food and drink, textiles and fibres, medicines, pulp, and construction materials. The province reports fixed investment growing at an annual 42.7% since 1988, totalling Rmb12.7bn, with gross industrial output exceeding Rmb14bn.

Guangzhou tries to enhance its foreign investment appeal

The Guangzhou Foreign Economic and Trade Committee predicts that one-third of funds for investment between 1996 and 2000 will be foreign capital. The committee says that 40% of the city’s fixed asset investment will be foreign-funded by the turn of the century. The city forecasts that Guangzhou will use $2.5bn of foreign investment for this year, an improvement of 9% on 1995. The figure in 2000 will be $3.7bn. Beneficiaries will be the city’s development zones, infrastructure, SOE modernisation, urban regeneration, housing, and the expansion of the services sector.

continued

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Against this background measures are being introduced to entice foreign capital, after a poor showing in the first four months of 1996 when contracted foreign investment in the city fell 0.6% on the year-earlier period, to $1.6bn. The measures appear remedial rather than persuasive. Some of the fees and charges associated with maintaining a business presence in Guangzhou are to come down by between 10% and 20%, and charges will be simplified. FFEs and domestic companies will get equal treatment on all charges except taxes, although this is described as a trial measure, which could mean that it is only temporary. A complaint office responsive to foreign business is to be introduced. There will be a relaxation on the controls for the more heavily invested companies ($5m actual) or strong export performers ($5m annual), and on their senior personnel. Priority on import and export quotas and licences will be accorded to those foreign-funded ventures using domestic raw materials and components in export production where sales exceed $5m. FFEs with a strong high level of investment ($30m or above) and a strong construction or infrastructure project participation record will be allowed to set up investment and development companies.

Incentives for investment in central and western China

Measures are being introduced to boost development in central and western China, the less favoured regions. More areas are to be opened to foreigners, including border localities and inland cities. Foreign capital is intended to accelerate the exploitation of resources and the construction of essential infrastructure. The centre and west will enjoy improved export quotas for local products and other, unspecified, preferential treatment. The examination and approvals process for production enterprises and research bodies supporting the export drive will be made more efficient. China’s interior provinces already benefit from the priority accorded by state investment banks. The State Development Bank (SDB) devoted 67% of its 1995 loans to the centre and west, amounting to just over Rmb58bn; SDB loans to Tibet, Xinjiang and other minority areas rose by 31% in 1995 to Rmb557.2m.

Meanwhile, after three years of effort the Qinghai-Tibet plateau has set up its first economic development zone, the Kunlun Economic Development Zone. The zone is in Golmud, and is intended to exploit the resources of the Qaidam Basin.

Another peripheral area, Yunnan province, has identified Lincang prefecture in the south-west as the site for an experimental investment programme that will target the area’s poor. The programme is to be extended province-wide involving expenditure of Rmb7.2bn over five years on 62 infrastructure projects. This will include the construction of Lincang airport, scheduled for completion in 1998, and due to receive Rmb120m per year of local government money. Yunnan is in need of diversification: tobacco provides about 85% of the province’s tax revenue. Much is made of the strategic positioning of the province for access to Asia along the Mekong River, where official figures record an international trade of 40,000 tons in 1995, double the 1994 volume, with a forecast of 60,000 tons this year.

While the government is now looking into convertibility on capital account, the deputy head of the State Administration of State Control, Xu Bin, has confirmed that this would “take some time”.

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Insufficient funds go to The SSB has remarked on an imbalance in investment between renovation and renovation and upgrading of existing plant, which improves returns at relatively low cost, and upgrading— new construction. Domestic loans for renovation fell 6.4% year on year to Rmb40.7bn in the first four months of the year, while domestic loans for construction rose over 21%. For primary industry the rates were -11.4% (to Rmb300m) and 16% (to Rmb3.1bn) respectively. Moreover, there are substantial differentials across regions. Renovation of primary industry recorded a rise of 13.1% year on year in Central China while both eastern and western China registered falls (of 1.6% and 8.2% respectively).

—for which priorities are The State Commission for the Economy and Trade has produced a list of defined priorities for renovation: improved and new technologies in the textiles industry; better quality, a broader mix of products and improved production technology for coal and steel; energy and cost savings on power, steel and in non-ferrous metals; restructuring of power grids; updating of generation equipment; technology to combat emission pollutants; modernisation and upgrading of shipyards; mass production of medicines; improved medical products; the creation of modern cement producer groups, and specialisation bases; manufacture of underground trains; improved load bearing and higher speed rail transportation; coastal harbours; vehicle manufacture; road maintenance companies; transport construction machinery; and improved aviation systems and ground systems. The machinery industry should get support for specific machines, parts and components, for thermal power plant equipment and farming machinery, and for the electronic goods and mechanical goods export sectors. China wants to introduce new types of components and parts and make its own telephone exchanges, optical telecommunications equipment, computers and software, automobiles and medical electronics. In automobiles, mass production of components and parts is a priority. In petrochemicals, the priorities are processing and enhanced quality of oil products, provision of raw materials in the production of chemicals, chemical fibres and light industry sectors. Finally, in light industry, the commission lists large-scale paper pulp- ing, pollution control, and improved product quality.

New incentives in Shenzhen is opening retail, wholesale and exhibition activities to foreign invest- Shenzhen and Xiamen ment. Some manufacturing firms and developers will be permitted to add retail trade to their activities, and three or four international corporations are to be invited to form wholesale distribution ventures. Three joint-venture exhibition companies are to be opened on a trial basis. The city is also seeking to diversify its export market, and, in line with the national priority to agriculture, develop farming, vegetable cultivation, animal husbandry and fish farming.

Meanwhile, new incentives in fast-growing Xiamen (see table) include the easing of restrictions on product sales to the Chinese market. Capital contribution stipulations are to be relaxed. Foreign-funded businesses may be authorised to extend the scope of their operations to related activities, while preferential terms are offered to those companies sourcing raw materials and other inputs domestically.

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Performance indicators in Xiamen, 1996 % change Jan-Jun year on year GDP Rmb13bn 22 Industrial output – 34 Agricultural output Rmb930m 5 Foreign trade $3.11bn 14 of which: foreign-funded enterprises $1.42bn n/a Source: Municipal government.

Expansion of the duty As forecast, the duty security system (1st quarter 1996, page 22) introduced last security system year to counter rampant tax fraud and evasion in the processing trade was nationwide— extended nationwide in July, from the pilot schemes in Dongguan, Ningbo and Suzhou and from the 25 other cities where it had been implemented since April 1. Based on Chinese Customs figures, contracts covered by the scheme at banks amounted to $9.2bn at the end of May in the three pilot cities.

—and more tariff cuts No sooner had the Chinese media noted in early July that China planned to readjust the weighting in customs duties in central government revenue in the next two years, than confirmation came at the end of the month with tariffs coming down by as much as 50% on goods mailed to individuals and carried as luggage. Tariffs on textiles, electronic appliances, bicycles and watches are being cut to 30% from the current 50%. (A complete list was awaited at the time of writing.)

Foreign trading is being The Ministry of Foreign Trade and Economic Cooperation has drafted regul- opened up ations for joint-venture trade companies to operate on an experimental basis in Pudong. Since the beginning of the year, controls had been relaxed on the granting of foreign trading rights in China’s SEZs: manufacturing plants now have an automatic right to engage in foreign trade but non-manufacturing firms are still excluded. Eventually, China will dispense completely with applications to engage in foreign trade. There are now about 10,000 Chinese enterprises engaged in trading, plus over 100,000 FFEs with the automatic right to import materials and export products.

The economy

Growth remains ahead of The State Statistical Bureau (SSB) has recorded a rise of 9.8% in GDP in the first target— half of 1996. This is down from the 10.2% rate registered in 1995 and through the first quarter of 1996, but above the 8-9% target for this year. The uneven- ness of growth is reflected in regional data: GDP was up 22.2% in Xiamen in the first half of 1996 and 12.1% in Shanghai.

Industrial output rose 13.2% compared with the first half of 1995, 3 percentage points slower than the State Planning Commission had predicted in late spring on the basis of short-term loans granted by lending institutions. Retail spending reached Rmb1.14trn ($137bn) in the first half, a nominal rise of 21.2% on the same period in 1995, or 13.1% in real terms.

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Recent economic highlights, 1996 % change Jan-Jun year on year GDP Rmb2,976bn ($358bn) 9.8 Industrial output Rmb909.8bn ($109bn) 13.2 Retail price index – 7.1 Consumer price index – 9.2 Grain prices – 4.2 Urban real wages Rmb2,202 ($265) 4.2 Rural real incomes Rmb921 ($111) 11.0 Contracted foreign investment $45.6bn 43.6 Source: State Statistical Bureau.

—while inflation is In the first half of 1996 national retail price inflation was 7.1% and consumer coming down— price inflation was 9.2%. In July the rate of retail price inflation fell to 5.8%, the lowest level for three years and down from 5.9% in June. The July 1 rise in the procurement price for grain, of 20%, will feed into second-half inflation—the index is heavily weighted by food—although the government believes the good first grain harvest and an adequate second harvest mean that there will not be the excessive inflation that food prices caused in 1994, when retail price inflation peaked at 21.7%. Official forecasts are for an inflation rate between 9% and 10% for 1996.

This year’s consumer price inflation compares favourably with the first half of 1995, when it was 21.1%. Services have been a key contributor this year, with prices up 15.7%: in 1995 retail inflation (ie excluding most services) was 14.8%. Rail freight fees and electricity charges rose in April. However, May saw the price of some goods fall, compared both with the year-earlier period and the previous month: non-ferrous metals registered falls of 12.1% and 0.4% respectively.

National retail price index National retail price index % change, year on year % change, year on year 9 25

8 20

7 15

6 10

5 5

0 Dec Jan . . Apr . . Jul 1990 91 92 93 94 95 96(a) 1995 96 (a) EIU forecast. Source: Press reports. Sources: State Statistical Bureau; EIU.

—and money supply Money supply figures show that adequate monetary control is being exercised, growth is under control with growth in M1 below the annual target (18%) in the first half of this year and in M2 slightly above the 25% target.

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Money indicators, end-Jun 1996 % change year on year Rmb trn $ bn (Rmb terms) M0 (cash in circulation) 0.77 92 9.5 M1 (M0 + enterprises’ current deposits) 2.46 296 15.0 M2 (M1 + personal savings + enterprises’ fixed deposits) 6.81 818 28.2 Loans outstanding 5.44 654 7.7 Personal savings 3.55 426 19.2 Source: People’s Bank of China.

The table above also indicates a slowdown in the growth in savings deposits since the anti-inflation interest rate subsidy was withdrawn in April and interest rates were cut in May. Savings deposits had increased by Rmb496bn ($59bn) between January and May, nearly Rmb162bn more than in the same period in 1995, to end 39.5% up on the end-May 1995 figure. But new deposits in May were well down on April, partly a result of a Treasury bond issue, and by the end of June savings deposits were up only Rmb570bn on the year-earlier figure, or 19.2%. There is some evidence that spending, and therefore consumption, will rise marginally as a result of falling interest rates: but the general propensity to save is high, and the more certain effect is a restructuring of savings portfolios.

Investment growth is Fixed asset investment rose by 18.6% year on year to Rmb670.8bn in the first falling half of the year, down on the 25.5% rise recorded in the same period in 1995. The easing on interest rates in May should stimulate some acceleration in the pace in the second half.

Fixed asset investment by sector, Jan-Jun 1996

% change year on year Rmb bn $ bn (Rmb terms) Agriculture 7.73 0.93 25.3 Energy 89.59 10.77 20.3 of which: generation construction 56.09 6.74 40.1 Raw materials industries 50.06 6.02 39.1 of which: chemicals industry 25.70 3.09 51.1 Transport 59.36 7.13 16.8 Post & telecommunications 20.64 2.48 33.3 Source: State Statistical Bureau.

In the first five months of the year state sector fixed assets grew 16.5% overall. Broken down into its components, with the year-on-year increase in brackets, the total Rmb312.65bn was made up of:

• capital construction investment, Rmb171.14bn (10.2%);

• technical innovation and transformation, Rmb58.41bn (6.7%);

• property investment, Rmb67.01bn (32.5%); and

• other investments, Rmb16.09bn (53.5%).

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The state sector continues State enterprise losses rose by 49% in the first quarter. However, the good news to underperform for the economy as a whole is that the proportion of bank credit to state-owned enterprises (SOEs) is falling from an estimated three-quarters six years ago and, on present trends, will soon be half. But loans to SOEs were up by Rmb100bn in the first half of the year on the same period of 1995: 80% of this went to China’s top 300 SOEs. Based on figures released by the SSB, net profits in the state sector in the first five months of the year were just Rmb300m, a paltry 0.9% of the total profits of industrial firms nationwide. Inventories at the end of June had risen by Rmb30bn over the figure at end-June 1995, to Rmb257.9bn.

Budget spending runs The finance minister, Liu Zhongli, has reported that budget expenditure in the above target first half of 1996 rose above target, while enterprise tax arrears were becoming a serious problem. The minister revealed that first-half revenue to the state was up 17.7%, with the central government portion rising 7.5% and provincial revenue 28.3%. On the expenditure side, the Treasury was 5% over target: state spending rose 15% with central government’s up 5% and provincial expenditure 19.9%. It is not known whether the Treasury will achieve the target cut in the full-year deficit to Rmb61.44bn from Rmb66.28bn in 1995.

Agriculture

A record summer grain A record summer grain crop of 110m tons was harvested before the heavy harvest— summer rains (see below). The State Statistical Bureau (SSB) said in July that central and provincial grain reserves were healthy, and officials now predict a record overall grain harvest of 471m tons in 1996, just exceeding the 1995 record of 465m.

Grain prices rose by only 4.2% in the first half of 1996, but there was a 20% increase in the state grain purchasing price, as of July 1. Agriculture officials now predict a rise in grain prices this year of below 15%, although specific grains could experience much sharper price rises.

—before floods strike the Torrential rain hit the centre and south of China in mid-June. At least 10m ha centre and south of farmland were damaged, and crops had been lost on 1.04m ha (as of July 18). However, the State Planning Commission said that losses had not been as bad as in the past and the area under grain had been increased by 1m ha this year.

Energy and the retail sector

A nationwide power The government has moved with urgency to address the most pressing bottle- corporation is to be set neck holding back economic development nationwide, announcing the crea- up— tion later this year of a national power corporation. The new Federation of Chinese Power Enterprises, with total assets of around Rmb400bn ($48.1bn), will be detached from the Ministry of Power, whose role will consequently be only regulatory and no longer administrative. (Electricity transmission had already been taken out of the ministry’s hands.) The new corporation will be authorised to issue shares on the home and overseas markets, issue bonds, raise finance, and establish equity ventures with foreign partners.

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—and will look to foreign The new corporation can be expected to set about financing new generating participation— capacity as a priority, as the sector requires foreign capital and equipment.

China can count on a measure of cooperation in the development of its nuclear industry, from those countries with a commercial interest in the sector. Canada signed an agreement in June under which its Atomic Energy Control Board will provide regulatory training and technical cooperation to China’s National Nuclear Safety Administration. China currently has ten such agreements with a number of countries. China and Canada have agreements to build six nuclear reactors in China, while France’s Framatome has agreed with the China Nuclear Power Research and Design Institute to provide support services for the Daya Bay nuclear power plant in the south, where the company has already had commercial involvement.

—although not necessarily By far the most ambitious power scheme in China is the Three Gorges Project, in financing the Three in the mid-reaches of the Yangtze river. It dwarfs all other infrastructure projects Gorges Project in its objectives, cost and significance. On completion it will deliver 84.7bn kwh/year of electricity to the national grid. The cost of the whole project— embracing the dam, and a host of ancillary programmes such as population resettlement, environmental protection, and step dams along headwaters and tributaries—is variously computed between $10bn and $30bn over the 17 years of construction to completion in 2009. The official figure is Rmb90bn at 1993 prices, of which Rmb50bn is for construction and Rmb40bn for resettlement. With inflation and loan interest payments taken into account, the figure will reach Rmb200bn. The government says, on the current record, financing the project is attainable: expenditure of Rmb6.5bn in 1995 constituted only 0.11% of GDP and 0.33% of total fixed asset investment (Rmb1.94trn). Certain funding avenues are closed: the USA has denied its export credit agency authority to back US company involvement, citing environmental uncertainties, and neither the World Bank nor the Asian Development Bank will assist. But the EU, led by France and Germany, is interested, and Japan is bending over backwards to provide export credit insurance and buyer credits. Japan’s Nomura Securities and Daiwa Securities are putting together a project-finance package for listing. Lending to China’s State Development Bank (SDB) has the advantage of indirect financing of the project and being sovereign covered by guarantee.

China could turn to international capital markets for project funding, or it could divert domestic funds earmarked for other projects by attracting foreign capital. In the meantime, China will continue to rely on income from the Gezhouba Hydropower Station, the proceeds of electricity charges across the country, and annual loans of Rmb3bn from the SDB to the year 2004, when electricity from the project, and therefore income, comes on line. These first two options taken together, the Chinese claim, will provide half the Rmb200bn required, while SDB loans will add Rmb30bn, leaving a shortfall of only Rmb79bn. Foreign exchange reserves of about $75bn and domestic savings levels running close to Rmb3trn at the end of last year could support further funding.

Opening up coal to Coal lies at the heart of the country’s energy strategy, accounting for 75% of foreign involvement energy consumption mix, according to the geology and minerals minister, Song Ruixiang.

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The Ministry of Coal is looking for foreign investment in a sector that claims 17% of the world’s total coal reserves are accessible to 1,000 metres—some 2.6trn tons. By the end of 1995 it had taken only $3.8bn in foreign capital. China wants to invest Rmb180bn in the sector between 1996 and 2000, and as much foreign capital as the international community can be persuaded to deliver. The government is offering joint ventures for 16 new mines capable of producing between 1m tons and 8m tons per year. Some older mines will be overhauled and passed to Sino-foreign joint ventures as coal-electricity com- bines. Foreign participation is wanted for pipeline laying, coal seam gas exploitation (see below) and the building of pit head power plants. The project approval system is to be revised to give authority for the approval of investments under $10m to the Ministry for Coal and provincial governments; Special Eco- nomic Zones (SEZs), coastal open cities, open cities along the Yangtze River and border areas, and open cities of the interior will be allowed to approve projects up to $30m. Tax breaks, majority stakes and other incentives are planned.

The State Council recently gave the go-ahead to the coal ministry, the geology and minerals ministry and the China Oil and Natural Gas Corporation to set up the China United Coal Seam Gas Company to exploit seam gas as an alternative to coal, oil and natural gas. The company will have a monopoly on cooperation with foreign parties in coal seam gas operations. Currently $10m of UN Development Programme (UNDP) money is funding pilot projects evaluating coal seam gas.

The rapid expansion in The Ministry of Internal Trade forecasts that an expansion of chain store oper- the retail sector is forecast ations by some 1,500 will bring their sales to Rmb120bn, or 5% of all retail to continue sales, by 2000. The 1,500 will operate 60,000 stores. China wants supermarkets, shops, laundry and other services to serve residential areas. The outlook for the retail sector in China is excellent: continuing economic growth supports rising real incomes, fuelling consumption. In the single month of May this year, Shanghai saw retail sales of Rmb9.25bn ($1.1bn), almost 19% up on May 1995. Urban retail sales saw a rise of close to 20%, with surrounding counties in the municipality recording just under 15%. Food saw the biggest increase, at 21.5%; daily necessities registered 18.7% and clothing 13.7%.

Transport and communications

Negotiations with new Beijing broke off negotiations in mid-June with South Korea on proposed col- partners on aircraft laboration on the development of a 100-seater aircraft. The two countries were manufacture unable to agree on China’s insistence on retaining a majority interest and keeping the bulk of assembly operations in China to avoid the added cost of finishing manufacture in South Korea. It has begun negotiations with a Euro- pean consortium, Aero International Asia (British Aerospace, France’s Aero- spatiale and Italy’s Alenia) and a Singaporean partner, Singapore Technology Aerospace. The Europeans will provide the technology and expertise, Singapore will finance for the $2bn project, and China will retain overall leadership of the project. Boeing of the USA had been South Korea’s preferred choice as technical partner.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 China 35

The background to these plans is the sustained and rapid growth in passenger and freight traffic since the beginning of the decade, at an average of 15-20% per year. The national carrier, Air China, has managed turnover and profit growth of 22% and 6% respectively, even while austerity measures were in place. Its freight capacity is forecast to grow 12.4% per year to 2000, during which time 40 aircraft will have been added to its fleet of 64.

Telecommunications—no In another of China’s boom sectors, the Ministry of Posts and Telecommun- holding back ications (MPT) says it will invest Rmb90bn ($10.8bn) in telecommunications this year: projects include the construction of 40,000 km of fibre-optic cables; increasing switchboard capacity by 7 million lines and 13 million in new telephone subscribers (2.8 million of which will be mobile phone users and 6 million pagers). In the next five years fixed asset investment in posts and telecommunications is expected to reach Rmb500bn and China will have 174 million telephone lines and 18 million mobile phone subscribers by 2000. At the beginning of 1996 China had 3.6 million mobile communications subscribers: the number had risen to 5 million by the end of June. The MPT has a near monopoly in a sector that is poorly penetrated. The penetration rate for fixed line is 4.75% (56.4 million), which is forecast to rise to 10.5% (126 million) by 2000. Telephone switching capacity is expected to grow from 66.3 million to 170 million in 2000.

A memorandum of understanding was signed in July with Vietnam, Laos, Thailand, Malaysia and Singapore for the construction of an 8,000-km optical fibre linking the five countries, which is due to open in 1998. China will pay $140m of the total $400m cost in what will be its third international cable project.

Development of Shanghai The first phase in the development of Shanghai’s No 2 underground railway is No 2 underground railway due to begin this year. Four stations in Puxi will be linked along the 13.6 km imminent stretch, with six stations on the south side of the Huangpu river, in Pudong. The line is scheduled to open in late 1999.

Finance

China returns to the China launched a five-year global bond offering of $700m in June. Confidence international bond market had been shaken by the disappointing reception given to its first international bond issue—$1bn over ten years—in February 1994. Perceptions have since changed: the economy has been brought under control towards sustainable, low inflation growth, with the debt/GDP ratio under 15%.

China’s first international China International Capital Corporation (CICC), based in Beijing, has been set investment bank up as the country’s first international investment bank. Morgan Stanley is the driving force behind the venture: it will handle the international paper transactions arising from CICC business in China, and will thus have a lead in opening the Chinese market. Through its links with Morgan Stanley, the CICC gets access to expertise and an extensive distribution base. The People’s Construction Bank of China has the largest stake in CICC (42.5%).

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 36 China

A few steps forwards to Interbank lending rates were freed in May, allowing the market to influence the market the level of the Chibor (China Interbank Offered Rate). In a separate development, the president of the Shanghai branch of the People’s Construction Bank is reported as saying that the loan quota system will be abolished over the next three years in line with plans for reform of the financial system: loan quotas are one weapon used by the People’s Bank of China (PBC, the central bank) to control money supply. The PBC moved towards monetary control by market forces in April when it introduced open-market operations; trading in Treasury bills gives the bank influence over interest rates. However, the PBC retains decisive influence through its control of savings and deposit rates, which are determined by the State Council. A national credit plan controls state bank lending so that Chibor cannot be totally market-driven.

Moody’s downgrades BOC At the same time as the New York branch of the Bank of China (BOC) became affiliates in Hong Kong— the first Chinese bank to join the Institute of International Finance, a club of the world’s largest financial institutions, the US credit agency Moody’s was according inferior ratings to 11 of the BOC’s Hong Kong-based affiliates on the grounds that the resumption of sovereignty in 1997 would bring the mainland’s BOC closer to the banks, and give it greater influence over their capital, with adverse implications for disclosure and transparency.

Insurance—an elusive Manulife of Canada and China National Chemicals Import and Export have dream formed China’s first life insurance joint venture. Foreign insurers are queueing to enter an industry recording premium income of Rmb60bn ($7.2bn) in 1995, up from a 1978 base of only $200m. Licences are not expected to be granted for another few years. There are only about 30 insurance firms operating in China, where expenditure per head on insurance is still only around $7 per year.

Equity markets remain 1995 was a bad year for equities: neither of China’s two bourses, Shanghai and sluggish Shenzhen, paid enough attention to the quality of trade being transacted on the exchanges. The authorities have since tried to bring order to the market—Shang- hai suspended six companies in May—and secure greater transparency from listed companies. Three years of austerity measures depressed listed company performance, and bad debt provisions hurt profits. The National Securities Law is still stalled in Beijing, so that it falls on the China Securities Regulatory Commission to police the bourse. The cut in interest rates in May livened up trading, as some investors switched from savings deposits to equities: there are only limited investment options in China. Prospects for listed companies are better now that credit is easier. But the real cost of borrowing is still high and companies will continue to suffer from tight liquidity, soaring accounts receiv- able and rising inventories. The reduction of export tariff rebates has exacerbated liquidity problems, while some companies are more vulnerable to tariff cuts, and competition, than others.

Shenzhen’s B share index shot up to an 18-month peak in mid-June: although HK$- and US$-denominated for the exclusive use of foreigners, as much as 40% of B share trading in Shanghai is believed to be Chinese: a Chinese element will have been driving speculation on Shenzhen. The Shenzhen index stood at around 50 in May, compared with over 100 in early 1994. Shanghai compared favourably, with A and B shares consolidating in the first five months of the

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year. But markets remain slow: Beijing may reduce brokerage fees and introduce new products this year. The CSRC is considering a trial with convertible bonds.

There are new Dow Jones has introduced the Dow Jones China 88 index, the Dow Jones stock-market indices Shenzhen index and the Dow Jones Shanghai index, all based at 100 on the last day of 1993 and weighted by traded shares. The first is a composite index covering movements on both mainland exchanges. They track A shares, which are reserved for Chinese investors. A shares are highly volatile: at any given time the index may represent speculation, without reflecting on fundamentals of the market.

More overseas listings are While the government continues to evaluate advice offered by overseas securi- planned ties agencies as it drafts regulations on companies seeking approval for listing overseas, it is also preparing a fourth group of companies for listing in Hong Kong, Japan, the UK and Australia. This would add to the 24 companies currently listed on Hong Kong (20) and New York (4).

Foreign trade, investment and payments

Trade edges into surplus— Total trade in the first half of 1996 reached $127.24bn, up 0.6% on the first half of 1995. The value of exports fell 8.2% year on year to $64.06bn; while imports grew 11.6% to $63.18bn. Consequently, the (fob/cif) deficit registered at the end of May had turned into a surplus of $880m, down sharply on the year- earlier figure of $13.2bn.

Foreign trade, 1996 ($ bn) Exports % changea Imports % changea Balance Jan 10.13 55.9 9.16 –0.2 –0.97 Feb 8.14 14.2 8.65 –3.0 0.51 Mar 11.13 8.7 10.42 –23.7 –0.71 Apr 10.93 6.3 11.38 –5.1 0.45 May 12.01 4.5 12.15 –5.1 0.14 Jun 10.90 –0.01 12.25 –17.4 1.35 Total 64.06b 8.2 63.18b 11.6 0.88

a Year on year. b Figure as given.

Sources: Official statistics; press reports.

—as tax-based distortions The rush by foreign-funded enterprises (FFEs) to beat the April 1 deadline for are removed the loss of tax exemptions on capital equipment had boosted imports to 23.2% growth in the first quarter. But as expected, demand for imports subsided after April 1. (First-half FFE imports were 18% up on the year, at $32.3bn, but they were 28.5% up in the first quarter.) Companies benefiting from a period of grace after the deadline, before they too lose the tax exemption, will exhibit marginally higher import demand throughout that period, without the urgency that propelled first-quarter import figures.

Low-quality exports are Customs data for the first five months of 1996 show year on year declines in faring badly— the value of textiles (23.3%), travel goods (25.5% in value), garments (10.8%)

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 38 China

Quarterly trade data $ bn 45 Exports, fob 40 Imports, cif 35

0 1993 . . . 94 . . . 95 . . . 96 .

Sources: IMF, International Financial Statistics; press reports.

and toys (4.9%). That these relatively low value added manufactures should be especially vulnerable to competition is no surprise and shows the need for Chinese exporters to pay close attention to the cost base. Some electrical and electronic goods, notably colour televisions and some telecommunications equipment, showed buoyancy. Part of the fall in US dollar value of exports in the first half of the year can be attributed to the strength of the dollar. The EIU expects a recovery in the second half of 1996 (see Outlook).

—for a number of reasons The poor export performance in the first half of 1996 is in part due to the lacklustre performance of China’s trading enterprises, whose exports have tum- bled, but also saturation in world markets for the low-quality end of the range of export goods coming out of China. Exports by state-owned enterprises (SOEs) fell steeply, by 25.5%, in the first half of the year. Moreover, complacent during export boom years, the state trading companies are paying the price for failing to restructure for a competitive international environment. They rode on the back of the renminbi devaluation on unification of the currency in 1994. But inflation has eroded exchange rate advantage, and high costs have begun to hurt. Exports by FFEs, by contrast, climbed 38% in January-June this year, to $26.15bn. By the end of May FFEs’ share of total exports was already above 41%.

In addition, exporting firms have had liquidity problems during the prolonged period of tight credit, exacerbated by reductions in export tax rebates from July 1995 and late payment of the reduced sums. The State Planning Commission now plans to accelerate exporters’ tax rebate payments in the second half of this year and increase financial assistance. In the first half, Rmb41.82bn ($5bn) in export tax rebates were paid, up Rmb8.33bn on the same period of 1995, and meeting 64.3% of the target for the year.

Foreign investment keeps Although fewer foreign investment contracts are being signed, values are coming— rising—the trend is away from small manufacturers and speculative real estate development, towards large investment projects. In the rush to beat the April 1 deadline for the elimination of tax relief on equipment imports, $45.6bn in foreign investment was agreed in the first half of the year, up 46.3% overall; the rise in the first quarter was 86.8% and in the second quarter only 12%. Actual

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foreign investment rose 20.2% to $19.8bn; the figure for all of 1995 was $37.7bn. However, foreign direct investment figures need to be read with caution: as much as 15% may be domestic investment routed via Hong Kong to take advantage of tax breaks and other benefits.

—but that flowing into Only about one-tenth of the $100bn in foreign investment that has entered infrastructure is modest China has fed infrastructure. Most has been agency funding. The government has been slow to agree appropriate financing schemes, such as build-operate- transfer (BOT) deals, or provide state guarantees to offset risk accruing during the long horizons of infrastructure projects. Departments such as the Ministry of Communications and the Ministry of Railways are trying to formulate better foreign investment policies. Housing has scored a recent success: New World Development and Shui On, both Hong Kong companies, are to commit $500m each to real estate developments.

Foreign exchange reserves China’s foreign exchange reserves climbed from $80.8bn in late March to a reach record levels new record of $86.6bn by the end of June. This compares with $73.5bn at the end of 1995. High reserves guarantee that China can meet its debt-service needs, can intervene should the Hong Kong economy falter during the run-up to the end-June 1997 handover, and could support the exchange rate through market mechanisms.

The issue of WTO The obstacle to China’s accession to the World Trade Organization (WTO) membership is still remains the terms of access. The developed countries argue that China is an outstanding untypical developing country: its successful economic performance requires that it enter the international trading community in close compliance with existing WTO terms of free trade and market access. China argues that it has not reached the stage of development that would permit it to join on these terms, and so should be allowed gradual compliance over time as the economy devel- ops—which entails protecting vulnerable industries and markets. The WTO debate is not helped by China’s allegation that politically motivated “containment” is obstructing entry. The WTO meets again in Geneva, Switzerland, in October.

The prime minister, Li Peng, said in early June that conditions were right for China to enter the WTO. It had dropped tariffs and intended to come down further to the average tariff level of developing countries. But barriers remain to market access, and therefore to WTO entry, including quotas and licences and the failure to enforce intellectual property rights.

Agency lending to China The case for international development agencies extending funds to China is becoming harder to argue, when there are poorer countries fending less well than the Asian giant. Funds are tight: China is technically eligible for soft loans from the Asian Development Bank (ADB), but the USA is in arrears on contrib- utions. China has commercial banks replete with high savings to tap for capital, an argument against hard loans from agency commercial arms such as the World Bank’s International Finance Corporation. China’s case for agency concessional funding is undermined by the country’s dollar diplomacy, which has recently included an interest-free loan of Rmb50m to Lebanon, $13.5m in aid to Palestine, and $3.5m in grant to Madagascar to complete a sports stadium.

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Agency funding will continue to flow in where it most obviously meets development mandates. China was the World Bank’s largest borrower in fiscal 1996; it received $2.97bn in loans for 16 projects, targeting infrastructure, industrial and agricultural reform, the environment and social projects.

There will be no shortage of demand for such funds from China; the prospect of a current-account deficit next year will add to an already fairly substantial repayment requirement of around $10bn.

Political structure: Mongolia

Official name: Mongolia

Form of state: Republic

The executive: cabinet to be appointed

Head of state: president, Punsalmaagiin Ochirbat

National legislature: the State Great Khural and the Little Khural were abolished under the constitution of February 1992 and replaced by a single-chamber parliament, the State Great Khural, which has 76 members, of whom 50 are members of the democratic coalition, consisting of Mongolian National Democratic Party (MNDP), Mongolian Social Democratic Party (MSDP), and three independents

Last national elections: June 30, 1996 (State Great Khural); June 6, 1993 (presidential)

Next national elections: June 2000 (legislative); June 1997 (presidential)

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

Chief members of the cabinet Prime minister Mendsaikhany Enkhsaikhan

Key ministers To be appointed

Economic structure: Mongolia

Latest available figures

Economic indicators 1991 1992 1993 1994a 1995a GDP at 1990 prices Tg m 9,497 8,392 8,140a 8,327 8,835 Real GDP % –9.2 –11.6 –3.0a 2.1 6.1 Consumer price inflation % 54.4b 321.0 183.0 66.3c 65.7c Population m 2.23 2.27 2.32 2.36 2.40 Exports fob $ m 346.5 355.8 365.8 360.5 511.6 Imports fob $ m 447.6 384.9 344.5 362.7 388.7 Current account $ m –104.2 –55.7 31.1 n/a n/a Reserves excl gold $ m 76.00 16.35 59.74 81.39c 117.03c Total external debt 10.3d 350.3e 374.7e 443.0e n/a Exchange rate (av) Tg:$ 9.52 42.56 n/a 412.72c 448.61c

July 1996 Tg531.4:$1 (free-market rate)

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

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

Main destinations of exports 1994 % of total Main origins of imports 1994 % of total Russia 28.0 Russia 69.0 China 19.5 China 7.8 Japan 13.2 Japan 4.5 Kazakstan 12.8 Hong Kong 3.0 South Korea 6.0 Germany 3.0 Switzerland 5.2 USA 2.7 USA 4.0 South Korea 2.5 Italy 3.2 Switzerland 1.8 a EIU estimates. b Price increase after the exchange rate reform on January 16, 1991. c Actual. d Transferable Rb bn. e $ m.

Mongolia

Outlook

The electorate throws out The surprise victory of a coalition of democrats at the polls on June 30 was the former communists hailed at home and abroad as a triumph for the democratic process. This has after 75 years put power into the hands of young and largely inexperienced politicians. A few members from the previous government remain, including the former prime minister, Puntsagiin Jasrai, in the form of the opposition 25-seat strong Mongolian People’s Revolutionary Party (MPRP). This is sufficient to give the new government a hard time and to block legislation. The new leader of the State Great Khural, Radnaasümbereliin Gonchigdorj, is committed to the development of a legitimate role for the opposition in the State Great Khural. After 75 years in government and four years of refusing to give the democratic opposition a vote, the MPRP is likely to drive a hard bargain in securing its own position in the incoming parliament. Relations between the new government and the presidency are likely to be friendly, for the time being at least, as the head of the chancery, Mendsaikhany Enkhsaikhan, has also been appointed prime minister. The success of the new regime will depend not only on the effectiveness and popularity of its policies but also on its ability to remain united and avoid the kind of fractiousness that lost the democrats the 1992 elections. If the new regime can handle these problems and if capable and energetic people are appointed to key posts, there is some hope of a breath of fresh air in Mongolian political life.

New means toward The economic aims of the new government are to speed up market reform, existing ends? tackle poverty and strengthen the social security net. How it plans to do this will not be clear until a detailed programme is published. The defeated MPRP remains sceptical that it can be done at all without sacrificing the successes of the past four years, particularly the control of inflation and the general reversal of economic decline. The new government will have to deal with the recurring problems of power supply, food supply, debts in former state-owned enterprises, and low budget returns, as well as the consequences of this year’s fall in export earnings and the substantial damage incurred as a result of steppe and forest fires. As the new leaders are aware, the country will continue to be dependent on external aid and will have to honour the policies agreed with multilateral and unilateral donors for a considerable period. Only time will show whether the democrats can work creatively within such limits and retain the confidence of the electorate.

Review

The political scene

The parliament elected in The session of the State Great Khural which began on March 22 continued 1992 finishes its work until the end of May. Legislation passed included the long-awaited anti- corruption law, as well as legislation on culture, road safety, population policy, protection of the rights of children, the status of the Academy of Sciences, state and public property, the protection of steppe and forest from fire, and railway transport security. The marriage, health and labour laws were amended and a resolution was passed on rural policy. Legislation enshrining a concept of national development was passed in May. Two international conventions were ratified: the convention on the law of the sea of 1982 and the 1965 convention on settling disputes over foreign investment. At the end of May parliament rose for a temporary recession until after the national election on June 30 and reassembled on July 16 when the Khural, which was elected in 1992, was declared at an end.

Democrats win a surprise To the considerable surprise of Mongolians and outsiders alike, a coalition of victory in the national democratic parties won a landslide victory in the national election on June 30, election taking 50 of the 76 seats in the State Great Khural. The Mongolian People’s Revolutionary Party (MPRP), which had held 70 seats in the outgoing parliament since the previous election in 1992, and as a communist party had con- trolled the political life of Mongolia since the revolution of 1921, won only 25 seats. Only four of the nine former ministers who stood as candidates won seats: the former prime minister, Puntsagiin Jasrai; the former minister of infrastructure development, Razdakyn Sandalkhan; the former education minister, Sanjbegziin Tömör-Ochir; and a former chairman of the National Development Board, Chultemiin Ulaan. The former parliamentary speaker, Natsagiin Bagabindi, was also returned. The result of the election was all the more surprising in view of the recent refusal of parliament to amend the election law in favour of a proportional representation system (1st quarter 1996, page 39). The democratic coalition comprises the two former opposition parties, the Mongolian National Democratic Party (MNDP), which won 34 seats, and the Mongolian Social Democratic Party (MSDP), which won 13 seats, and the Believers’ Party and the Green Party, neither of which won seats. Three independent candidates who were returned are also supporters of the coalition. A further seat went to a member of the Mongolian United Traditional Party (MUTP), a conservative group which had aligned itself with the MPRP. Some 87% of the electorate turned out to vote, which was higher than expected. In spite of accusations of mudslinging and vote-rigging levelled against all parties, international observers, including the former US secretary of state, James Baker, pronounced the election fair and the results a triumph for democracy.

Why did the electorate The surprise result has naturally prompted the question: why? In the run-up to reject the MPRP? the election, members of the outgoing government spoke of the positive achievements of the past four years: the halting of the recession; the substantial fall in inflation; the development of infrastructure; and foreign relations.

However, the electorate was clearly more exercised by poverty, unemployment, high consumer prices, low salaries and pensions (often in arrears), and an inadequate social security net. The policies on which the various parties cam- paigned differed only in details. The winning democratic coalition pledged to continue existing policies for promoting democracy and the market economy but it also promised to speed up market reforms, raise pensions and salaries and strengthen social security provision. However, these promises alone do not fully account for its victory. The MPRP was slow to start its election campaign and did not publish either its manifesto or its list of candidates until May. Complacency played a part in its defeat; the MPRP was confident that the electorate would support the party that was tried and tested in government rather than opting for a motley collection of young and inexperienced people. In fact, the youth vote is likely to have been another factor in the coalition’s success. In 1992 younger members of families tended to follow their elders in voting for the MPRP for reasons of tradition. Four years later they were less inclined to do so, having become more confident about voting according to their own conscience and in their own interests. Further reasons for the defeat of the MPRP were the gold dealers’ case, which has dragged on since 1992, and the failure of the government to respond satisfactorily to charges of corruption among public and government figures. In this context, the calling-off of the privatisation of the State Department Store, following a hunger strike of employees and allegations of collusion between the government and the Tüshig company, four days before the election (see Economy and economic policy) may well have been the last nail in the MPRP’s coffin.

Cordial relations between The new parliament assembled on July 18 and appointed as its chairman the the new government and leader of the MSDP, Radnaasüereliin Gonchigdorj. He has been at the forefront the president are likely— of the democratic movement since 1989 and was an MP in the previous parliament. Furthermore, Mr Gonchigdorj was the chairman of the Little Khural and vice-president of Mongolia during the interim government of 1990-92, before the passing of the democratic constitution of 1992. This has given him valu- able experience for the post he is likely to occupy for the next four years. The man who will lead the new government is Mendsaikhany Enkhsaikhan, who was, until recently, the head of chancellery in the office of the president. In fact, Mr Enkhsaikhan’s relationship with the president, Punsalmaagiin Ochir- bat, goes back to the perestroika period in the late 1980s when he was a senior economist in the Ministry of External Economic Relations then headed by Mr Ochirbat. The fact that both the new chairman of the State Great Khural and the new prime minister have worked closely with the president in recent years suggests that the relationship between the new government and the presidency could be rather easier than that of the past four years, for the time being at least. Mr Ochirbat was returned for a second presidential term in 1993 as the candidate of the parliamentary opposition parties, following his rejec- tion by the MPRP.

—but the opposition will The relationship between the majority coalition and the minority MPRP in the be tough State Great Khural itself is likely to be more volatile. Mr Gonchigdorj has said that the opposition will be afforded a proper role in the work of parliament as a matter of democratic principle and it has been mooted that members of the

MPRP will chair two of the parliamentary committees, perhaps ethics and finance. In the previous parliament the MPRP, as the ruling party, refused to allow the opposition to have any kind of official role. In the new assembly, principles apart, the MPRP holds sufficient seats to block any legislation it wishes. This is likely to give the MUTP member, O Dashbalbar, the casting vote. The MPRP has already given the ruling coalition some indication of what it is up against. On the very day the State Great Khural opened, opposition members walked out in a dispute over the appointment of a deputy chairman, leaving the assembly inquorate. They only agreed to return the following day when Mr Ochirbat negotiated a compromise whereby the MPRP was to be given a seat on the National Security Council.

Cabinet reform is In the next few months the leaders of the coalition will elaborate a series of promised policies and an agenda for the State Great Khural when it reassembles in September. Cabinet reform has been promised, with a reduction in the number of ministries, of which justice, finance and external relations would be the most important. Some senior posts in the ministries will be abolished and the new government intends to control the activities of ministers more strictly in order to allow both the State Great Khural and local government to fulfil their proper functions in line with the constitution.

Conditions in Mongolian In May the Mongolian national press drew attention to the high number of prisons are still deaths in prison hospitals. In 1995 there were 225 such deaths, of which 51% unsatisfactory were due to tuberculosis while another 12% were attributed to inadequate nutrition. In the first four months of 1996 a further 120 people died in prison custody. The international human rights organisation Amnesty International first alerted the outside world to the poor conditions in Mongolian prisons in a report published in April 1995. The government ordered measures to improve the provision of food, medical care and water supplies (2nd quarter 1995, page 47) but the latest reports suggest that these were, at the least, inadequate.

The Russia and Mongolian The leader of the Russian Duma, Gennadi N Seleznev, arrived in Ulaanbaatar parliaments recognise on May 28 for a two-day visit on his way back from Pyongyang. This received their mutual interests— extensive coverage in the Mongolian national press as the first Russian state visit to Ulaanbaatar in 20 years. Mr Seleznev held talks with his Mongolian counterpart, Natsagiin Bagabindi, who assured the visitor that although Mon- golia had made new friends abroad it would not forget old ones. An agreement on cooperation between the State Great Khural and the Duma was signed. Mr Seleznev also met Mr Jasrai, and had an audience with Mr Ochirbat who told him that Mongolia welcomed the recent ceasefire in Chechnya. On his return to Moscow Mr Seleznev referred to Mongolia and North Korea as strategic partners with whom Russia must have all-sided relations.

—and there is hope for a While Mr Seleznev was in Mongolia, the Russian Duma announced that reduction in the debt to Mongolia’s debt would be reviewed. Mr Seleznev was reported as saying that Russia the part of the debt which had accumulated as a result of aid given to Mongolia from the 1960s ought to be treated as such and therefore annulled. The fact that 98% of Nicaragua’s debt to Russia had recently been annulled was of considerable encouragement to the Mongolians and Mr Ochirbat stated that

the development of Mongolia and Nicaragua were similar. While none of these remarks, nor the willingness of the Duma to consider the debt issue, are any guarantee that the amount of the debt will be reduced, there could well be some movement towards a settlement on the part of Russia.

A new Russian The Russian ambassador to Mongolia for the past four years, Sergei Razov, ambassador arrives departed in early June. He was replaced by Nikolai Pavlov, whose period of service will coincide with that of the new coalition government as Mr Razov’s did with Mr Jasrai’s government.

Ulaanbaatar receives a The chief of general staff of the Chinese People’s Liberation Army (PLA), PLA delegation General Fu Quanyou, arrived in Ulaanbaatar for a six-day working visit on June 15 en route to Kazakstan. While in Mongolia he held talks with the Mongolian defence minister, Shagalyn Jadambaa, and other defence officials on developing and strengthening relations between the armed forces of the two countries. General Fu also had an audience with Mr Ochirbat, who is ex officio com- mander-in-chief of the Mongolian armed forces. Mr Ochirbat told the general that Mongolia supports a five-nation confidence-building accord in the military field on border areas. This accord was signed in April by China, Russia, Kazakstan, the Kyrgyz Republic and Tajikistan.

New agreements are On May 10, during a visit to Pyongyang, the Mongolian deputy minister of signed in Pyongyang external relations, Choijilsérengiin Baatar, signed an agreement on cooperation between the foreign ministries of Mongolia and North Korea. A transport cooperation agreement was also signed.

The Malaysian prime The Malaysian deputy minister of primary industries was in Ulaanbaatar in minister will visit in July June where he signed a communications agreement. Opportunities for trade and investment were explored, including the possibility of Mongolia import- ing palm oil for domestic and industrial use. An agreement on the joint explo- ration of tin deposits in Töv aimag was also reached. Before leaving Mongolia the deputy minister discussed arrangements for the July visit of the Malaysian prime minister, Mahathir Mohammed.

Economic policy and the economy

World copper prices fall, In the first five months of 1996 there was a budgetary deficit of Tg6.5bn hitting the budget ($12.2m). State income amounted to Tg50.2bn, of which 81% was derived from tax returns. Budgetary expenditure was Tg56.7bn, of which 25% went on wages, salaries and social insurance and Tg4.5bn was spent on debt service. Industrial production was sustained at Tg86.1bn, just 1.6% up on the same period in 1995. However, a fall in copper prices on the world market combined with growth in imports, particularly of vehicles and machinery, reversed the foreign trade surplus to a $3.6m deficit. As copper makes a major contribution to the state budget, the decline in copper prices, together with falling cashmere prices, will have a negative impact on government income and expenditure in the coming months.

The central bank has a In the second quarter of 1996 the Mongol Bank (the central bank) was faced liquidity problem with liquidity problems. Foreign exchange reserves fell due to balance-of- payments settlements. Bank reserves declined because of lending credit, including a Tg600m ($1.13m) loan to the central grid to buy foreign exchange, and because the public showed an increasing preference for cash in the hope that interest rates would be lowered from 4% to 3%. Consequently, the amount of money in circulation increased. To reduce this, the central bank offered bank bills with three months’ maturity at 3% interest to the public through the commercial banks from June 25.

Foreign currency In the past 12 months the central bank has introduced several measures to transactions are banned— stabilise and increase confidence in the national currency, the tögrög, and to discourage “dollarisation”. The fall in the exchange rate in the first quarter of the year continued into May and June as a result of the export slump. It had reached Tg531.39:$1 by the beginning of July while on the black market a rate of Tg570:$1 was being offered. From July 1 domestic retail transactions in foreign currency were forbidden in the latest effort to prevent people from converting their income into hard currency. Exceptions were made for businesses such as hotels, restaurants and travel agencies.

—and stricter controls Street trading in foreign exchange also became illegal from July 1. The central bank placed on foreign granted licences for additional foreign exchange bureaux under the strict controls exchange bureaux laid out in the law on foreign exchange in order to meet increased demand.

Mongolia plans to print The Mongolian government has concluded an agreement with a UK company, its own money Thomas de la Rue, to set up facilities in Mongolia for the production of cheques, certificates and transport tickets. Printing is expected to begin early in 1997 and by 2001 it is intended that the country’s banknotes and internal and foreign passports will also be produced there. At present Mongolian banknotes and passports are printed in the UK.

Inflation falls below 50% The central bank’s tight monetary policy continues to encourage a decline in inflation and at the end of May the year-on-year rate had fallen to 46.8% from 51.5% at the end of April. The monthly inflation rate fell from 2.5% in April to 1.6% in May. Price increases were registered in some foods, including flour, rice, meat, meat products, butter, carrots and swedes, and some items of clothing.

A strike forces a reversal The furore over the decision to privatise the State Department Store in February of privatisation (2nd quarter 1996, pages 51-52) intensified when the government rejected claims of corruption in the tendering process and the Privatisation Commis- sion refused to allow the store to revert to public ownership. Opponents of the privatisation alleged that the store had been undervalued and that Tüshig, the company which had agreed to purchase it for a sum of Tg1.8bn ($3.39m), owed debts of Tg102m in taxes and Tg262m to other companies. When the government refused to reverse the privatisation, 400 employees at the store went on strike on June 5. Nine days later they intensified their action as five demonstra- tors went on hunger strike. On June 20 two women hunger strikers were taken to hospital and on June 26 the prime minister announced that the privatisation had been called off. At the same time, the value of the store was

reassessed at Tg3.4bn. The fact that the national election was only four days away may well have had a bearing on the outcome of the strike. The whole affair reflects the considerable unease that some ordinary people still have about the policy of privatising state assets.

Industry

Industrial output growth In the first five months of 1996 Mongolia produced goods to the value of is maintained Tg86.1bn ($162m), a rise of 1.6% on the same period of 1995. There was little change in the performance of the categories of goods, however. Growth was registered in power, non-ferrous metals, chemicals, building materials, timber and some finished textile goods. In general, many former state-owned industries continue to perform poorly due to debts and a shortage of raw materials.

Privatised companies face A carpet manufacturer, Erdenet Khivs, borrowed Sch81.6m ($7.8m) between court action 1991 and 1993 through the Trade and Development Bank. As a result of the continuing recession in the textiles industries, the company was unable to keep up with its repayments. Negotiations between the bank, the Mongolian Ministry of Trade and Industry (MTI) and the Austrian creditors resulted in a reduction in the interest paid but Erdenet Khivs still failed to meet the necessary repayments and consequently court proceedings were initiated in May. A similar fate has been forecast for the Ulaanbaatar carpet factory, Ulaanbaatar Khivs, and other former state industries.

A new company produces On May 26 a new company started producing windscreens. Fitted with equip- windscreens— ment from a US company, NVS, the products are predicted to cut the price of replacement windscreens by up to half. There are approximately 56,000 cars on the road in Mongolia and 11,000 other vehicles, excluding motorcycles. Many of the private cars have been imported secondhand and replacement windscreens are in constant demand.

—and another fills a gap A joint venture between Gobi Ltd and a UK company, Russell, recently began in the roofing materials producing roof shingles for small order customers who might wish to roof a market single building or replace lost or damaged shingles. The company’s products are of the “double Roman” type and made from locally produced cement. They are available in five colours; the pigments are imported from the UK. The manufacturers claim that the shingles have a life of at least 70 years and will stand up well to the extremes of the Mongolian climate.

Construction

A new landmark for Work began on the 25-storey Bod’ International building (4th quarter 1995, Ulaanbaatar page 48) in central Ulaanbaatar on June 6. The director of Bod’ International, Luvsanvandangiin Bold, described the tower, which will be the tallest structure in Ulaanbaatar, as a landmark to be compared with the Eiffel tower in France and the Statue of Liberty in the USA. Its construction, which will provide 1,000 jobs, is expected to take three years to complete at a cost of over $50m.

Mr Bold, who was elected a member of the Great State Khural in June, has been described as Mongolia’s first millionaire.

Straw houses provide An experimental project to assess the suitability of straw bales as a structural accommodation for poor material for domestic housing provided two very poor families with homes for families the winter of 1995/96. The houses, which were erected in one month, measure 75 sq metres and were constructed from 350 bales of straw sealed with a 5cm layer of cement to render them relatively fire- and insect-proof. The occupiers were instructed to keep records of fuel consumption and at the end of the winter reported that they had used only 20% of the 2.5 tons of coal used to heat an urban gers (a traditional tent-like dwelling) in an average winter. The straw house project is directed by the American Adventist Development and Relief Agency (ADRA) and further trials are intended, including the construction of a kindergarten. The ADRA also arranged a seminar on the project at the end of May.

The affluent can invest in A company called Gangarinvest has come up with a scheme to enable citizens a flat for Tg7m— of Ulaanbaatar to acquire new flats by purchasing certificates. Gangarinvest is offering the certificates at Tg23,500 ($44) each. Holders of 300 certificates are entitled to a two-room flat in a new block financed by Gangarinvest. When completed the block will contain 284 flats; 120 are expected to be ready for occupation before the end of 1996 and the remainder the following year. The building work is being carried out by Mongolian and Russian construction companies using mainly Russian materials. Chinese companies may be contracted to carry out internal work. At present, about 40% of the capital’s population lives in flats.

—and Tg2m buys a The sale of state-owned flats is not authorised at present. In spite of the ban, at state-owned flat least 200 have already been sold into private ownership. The asking price for a one-room flat is currently Tg2m ($3,760).

Mining and energy

The Baganuur mine In May the Ministry of Trade and Industry (MTI) invited bids for the procure- renovation goes out to ment of trucks, earthmoving equipment and explosives initiator systems tech- tender— nology to renovate the Baganuur mine under the Mongolian coal project. This part of the project is to be financed by a loan from the International Develop- ment Association, the World Bank’s soft-loan affiliate.

—and bids are invited for In June the Ministry of Energy, Geology and Mining invited tenders for supply- Number 4 power station ing technology and equipment for the rehabilitation of Number 4 power station in Ulaanbaatar. This part of the programme is funded by a loan from the Japanese Overseas Economic Cooperation Fund for converting four boilers from a pulverised coal-firing system to a direct system. The sealed bids are to be opened on August 15.

Baganuur threatens to Although the rehabilitation of the central grid continues with foreign aid, this is halt coal deliveries to not always used efficiently, as the State Audit Commission revealed in July after power stations conducting a detailed inspection of the energy sector (see Aid and investment).

However, domestic financial constraints cause many of the regular disruptions to the electricity supply. At the end of May a spokesman for the Baganuur mine, which is the major supplier of the grid, threatened to stop deliveries to Ulaan- baatar’s Number 3 and Number 4 stations if a Tg800m ($1.51m) debt to the mine was not settled. At the time the two power stations had estimated that stocks would last for no more than three weeks. An additional problem is the theft of an average of 100 tons of coal per month from rail trucks en route to the power stations from Baganuur. The stolen coal is sold at flea markets and bus terminals.

Electricity rationing In the western town of Khovd, five to six hours of electricity is supplied to half handicaps Khovd’s of the town on alternate days. This is the latest in a round of cuts in provincial industry centres (2nd quarter 1996, page 53), resulting from debts and outdated equipment. The Khovd generating station runs on 20-year-old diesel generators. One new generator alone would cost approximately Tg120m ($225,800), which the station is unable to afford as it already owes Tg170m for its diesel fuel and a further Tg30m in other debts. Some Tg180m is owed to the station by its customers and, like other regional power companies, the Khovd station continues to sell its electricity at a loss. In June the Mongolian government ordered aimag authorities to eliminate outstanding debts and to make early plans for securing electricity supplies. However, it is difficult to see how Khovd can do this when the shortage of electricity puts a serious restraint on local industrial production. Officials in Khovd believe that the situation is unlikely to improve until the region is properly linked to the Krasnoyarsk power grid in Siberia, although they hope that the power station can remain in production over the coming winter.

Price controls have Neftimport, which supplies 80% of Mongolia’s oil, has expressed concern at reduced oil reserves the low level of oil reserves. It blames the government’s 1994 anti-inflationary measure of fixing the price of oil products for the loss of Tg2.3bn ($4.33m) in 1995. At the end of April Neftimport called on the government to allocate more money for laying in further stocks of oil which is crucial for economic security. The situation was aggravated by the high consumption of petroleum products used to extinguish the steppe and forest fires in the first half of 1996 (see Agriculture). Payment difficulties in June caused some petrol stations to run out of supplies for a brief period.

Agriculture

Floods extinguish fires Since February some 385 separate fires have broken out in the steppes and after 20 weeks forests of Mongolia and a natural disaster was declared in April (2nd quarter 1996, page 54). Of the country’s 21 aimags, 15 were affected. As a result, 24m ha of forest and 7.8m ha of steppe land which supports 20% of the national herd were destroyed. The ecological damage has been assessed at $2.2bn. A total of 7,800 domestic animals died and 75,000, together with 2,010 herdsmen’s camps, had to be moved 50-100 km to safety. There were also 27 human fatal- ities and many buildings, communications and other installations were damaged or destroyed. Some 88,000 firefighters were mobilised to extinguish the fires in operations that cost the country Tg371.6m ($699,000). The majority of

the firefighters were private individuals without proper equipment or protective clothing. In some districts members of the armed forces dropped carbon dioxide on clouds from the air and fired silver iodide from the ground which caused light snowfalls. The last fires, which were threatening Ulaanbaatar, were put out in early June by heavy rain. This caused flooding in Töv aimag resulting in damage to local livestock and installations. Two children were drowned as their ger floated away. Legislation for the protection of forests and steppe land was hurried through parliament (see The political scene) and further legislation is to follow, including higher penalties for starting fires. While it is not unusual for fires to break out in Mongolia after a dry winter, human carelessness was admitted to be behind many of this year’s conflagrations and arrests were made. In response to the appeals of the Mongolian government the international community, including foreign governments, non-governmental organisations (NGOs) and commercial organisations, have been generous in providing humanitarian aid. However, the environmental damage and its consequences for the rural economy will not be repaired quickly.

Farmers struggle to sow Mongolia’s crop farmers began the 1996 sowing campaign on April 27 with a crops target of 363,000 ha under crops. The deployment of machinery and fuel to extinguish fires caused some delay but by May 13, 88,700 ha had been sown. Other obstacles were the excessive dryness of the land after a winter with little rain which made ploughing difficult; a shortage of seed because some farmers had sold their reserves to cover debts; and a shortage of bank credit to purchase seed, fuel and spares. The state no longer subsidises the arable farmers but it did appeal to the commercial banks to extend loans. As at harvest time last year, some banks believe that giving loans to farmers carries too high a risk (4th quarter 1995, page 49) but the Agricultural Bank and Ardyn Bank agreed to lend to a third of the farms. However, farmers in Töv aimag and Khövsgöl aimag received no credit.

Import substitution of Projects to assess the country’s capability for growing and processing sugar and sugar could start in oilseed crops were launched in 1990 in the hope of reducing the amount of food December the country has to import. Sugarbeet, rape and other oilseed crops have been successfully cultivated in the past three years and project managers are turning their attention to the question of processing. A Mongolian-Czech sugar factory was due to go into production on July 1 but although the Czechs had provided the Tg400m as promised, the Mongolian government’s share of Tg170m was delayed and sugar production is not expected to begin before December.

Live animal births increase By June 1, 8.3 million livestock had been born, an increase of 34,400 on last year’s births. Of these, 8.1 million are being raised.

Transport and communications

Osaka, Seoul and Berlin The Mongolian national airline, MIAT, introduced a weekly direct flight to are destinations for Osaka on April 25. On April 30 Korean Airlines (KAL) commenced regular regular flights weekly flights between Seoul and Ulaanbaatar. A single ticket costs $450 and a return $700. Charter flights have operated successfully on both routes for some time. From June 30 the regular Sunday flight from Ulaanbaatar to Moscow was

extended to Berlin. The flight takes 12 hours and will operate until the middle of October.

New Delhi may be the MIAT has held discussions with the Indian tourist authority about the possibil- next destination ity of a direct flight between Ulaanbaatar and New Delhi. Cultural links between the two countries dating back to the Middle Ages make tourism in both directions an attractive possibility.

Travellers can take an A third flight to Beijing commenced on July 15. This is operated by Air China extra flight to Beijing— on Thursdays, in addition to the Tuesday and Saturday flights. MIAT had three flights a week to Beijing until January 1996 when China withdrew its permission for the Wednesday flight (1st quarter 1996, page 49).

—or an express train to A twice-weekly express train service between Ulaanbaatar and Zamyn-Üüd on the south the Chinese border began on June 14. The train departs at 5pm on Tuesdays and Saturdays, stops at Choir and Sainshand and arrives in Zamyn-Üüd at 9am the following day. The new service cuts the usual time of the journey by three to four hours. The carriages used were recently acquired from Germany with a Japanese loan under the railway refurbishment project. Express services between Ulaanbaatar-Erdenet and Ulaanbaatar-Darkhan are expected to com- mence in the near future.

The air service to Transport officials in Ulaanbaatar indicated on June 24 that MIAT’s direct flight Alma-Ata is in jeopardy to Alma-Ata in Kazakstan is likely to be cut. The company has lost Tg180m ($339,000) since the service was introduced in 1994 because it is carrying too few passengers and insufficient freight.

Foreign trade and payments

Export income falls with In the first five months of 1996 Mongolia traded with 48 countries and had a world copper prices turnover of $343.4m. Goods to the value of $169.9m were exported, which was a fall of $15.6m compared with the same period in 1995. However, imports grew by $21.6m to $173.5m, resulting in an overall deficit of $3.6m compared with a surplus of $33.6m in the same period of 1995. The deficit had been expected because of a recent fall in world copper prices. The EIU expects the 1996 average price for copper to be $104.8/ton (London Metal Exchange cash basis). This is 21.3% down on the 1995 price. Copper is one of Mongolia’s chief export commodities. Falling prices for wool and cashmere have also affected Mongolia’s income from export. The rise in imports was the result of purchases of heavy machinery and transportation equipment. The former rose to $36.5m from $25m and the latter to $46.8m from $19.9m in the same period of 1995.

New markets for animal In May the Bayan Ölgii aimag authorities agreed to supply 50,000 yaks to products are found Kazakstan’s Semipalatinsk meat combine. The animals will be acquired from neighbouring aimags in the west of Mongolia by the end of August. The combine has also expressed an interest in purchasing 100,000 sheep and cattle. The feasibility of exporting horsemeat to Finland was discussed at the 13th meeting of the Mongolian-Finnish Commercial, Economic, Scientific and Technical

Commission held in Ulaanbaatar in mid-May. Mongolia already exports horsemeat to Japan.

Russia cancels duty on Russia recently informed the Ministry of Trade and Industry that duties im- Mongolian commodities posed on Mongolian goods of animal origin, including leather sheepskins and textiles, have been withdrawn. The tariffs, which ranged from 10% to 35%, were a cause of deep discontent and the Mongolian government had repeat- edly appealed against them in the past year.

Mongolia and China want The fourth meeting of the Mongolian-Chinese intergovernmental commission to expand trade— on trade, economic, scientific and technological cooperation took place in Beijing on May 8-10. Both sides expressed a commitment to expand bilateral trade. Trade between Mongolia and China has grown steadily in recent years and reached a turnover of $162m in 1995. Mongolia recently reduced tariffs on goods transported through its territory and asked China to consider a recipro- cal reduction for Mongolian goods in transit through China.

—and sign an arbitration On July 17 Mongolia’s Arbitration House of the Association of Industry and agreement Commerce concluded an agreement with the Chinese Arbitration Council for International Trade and Economy on procedures for arbitrating economic and trade disputes.

Mongolia is admitted to The passage of a new customs law on May 16 and new customs tariffs on May the World Customs 20 by the State Great Khural continues the overhaul of the customs service to Organisation enable Mongolia to integrate fully with the world market. At a meeting of the World Customs Organisation in Hong Kong in June, the general director of Mongolian Customs, Badrakhyn Sharavsambuu, signed an agreement with US customs to combat customs violation. In July Mongolia became a member of the World Customs Organisation. The country applied to join the GATT in 1991.

Aid and investment

Further aid is sought from The EU-Mongolia joint commission held its third meeting in Ulaanbaatar at Europe the end of April. Under the TACIS (Technical Assistance to the Commonwealth of Independent States) programme which was made available to Mongolia in 1992, the EU currently supports ten projects worth Ecu18m ($14.1m), which both sides agreed were being successfully implemented. The commission discussed aid and cooperation for 1996-97, for which further funding has been allocated, and the Mongolian government particularly requested assistance for the development of infrastructure and human resources, and enterprises and financial development. A request for an exhibition of European equipment and technology in Ulaanbaatar in 1997 was also made.

Germany will give a Germany, a major provider of loans and aid to the sum of DM120m ($80m), further DM50m allocated an additional DM50m in June. Of this, DM15.5m is in the form of loans, DM14.76m as aid for financial reform and technical projects and DM15.9m as preferential aid to improve communication systems to rural areas.

Projects for Chinese loans Agreement on the use of approximately Rmb120m ($14.4m) outstanding from are agreed interest-free loans allocated by the Chinese government between 1991-94 was reached at the intergovernmental commission in Beijing in May (see Foreign trade and payments). The money will be used for 16 small and medium-sized projects, which will include the renovation of a glass factory, the construction of hospitals, a hydroelectric power station and an international trade centre.

Kuwait supports the road On May 27 the governments of Mongolia and Kuwait signed a protocol on renewal programme financing a road between Darkhan and Erdenet. An $18m loan from the Kuwaiti Fund for Arab Economic Development has been allocated for 70% of the work and the Mongolian government must find the remaining 30%. The agreement will be signed in December and work is expected to begin in March 1997.

Japan will pay for On June 17 the minister of trade and industry, Tsevegmidiin Tsogt, and the improvements to water Japanese ambassador to Mongolia, Yoshihiro Hasumi, exchanged notes on the supplies— provision of ¥171m ($1.6m) non-returnable aid for improvements to Ulaan- baatar’s water supply. The project will include the sinking of 19 new wells, the provision of new technology for existing installations and the training of spe- cialists and other personnel in the water industry. Improved water installations will bring savings of both water and electricity and benefits to public health.

—but is concerned about The director-general of economic cooperation at the Japanese foreign ministry, the application of aid Atsushi Hatakenaka, wrote to the Mongolian prime minister on May 9 to express the concern of the Japanese government over the way some Japanese aid has been applied in Mongolia. Other points of contention were the changes in local conditions that had caused projects to become no longer viable, leading the Japanese government to cut aid before completion. This happened in the case of a silo for storing crop seeds at Darkhan, which the Japanese terminated before completion when falling harvests led to a considerable decrease in seed. The Japanese government is also concerned that the milk-processing factory at Ulaanbaatar and the cargo terminal at Zamyn-Üüd on the Chinese border are operating well below capacity. Mr Hatakenaka also took the Mongolian government to task for planning to sell shares in industries set up with Japanese aid. This, he said, contravenes the terms of Japanese government aid. Japan will only continue to help Mongolia if the latter abides by aid agreements.

Poor recordkeeping on aid In June the State Audit Commission carried out a detailed inspection of the received is criticised way aid allocated for the renovation of the energy sector is applied. Between 1991 and 1995 nine countries donated $118.3m to implement 34 projects, with many positive results. However, the commission identified problems in the fulfilment of the terms and objectives of tenders and contracts. This was mainly attributed to the inadequate level of English of those dealing with tenders and contracts. In addition, the audit commission criticised a general inadequacy among organisations receiving aid to keep the necessary records. This charge was also levelled at the National Development Board, which has overall responsibility for information concerning the receipt and application of external aid to Mongolia. As a result of these shortcomings, a large pile of spares and other materials given by Japan were going to waste in a warehouse

at Number 4 power station, officials at the Baganuur mine were unaware of the origin of nine lorries which had, in fact, been purchased with a World Bank loan and data on 20 projects commenced in the previous 18 months had not been processed.

Obstacles to foreign The US ambassador to Mongolia, Donald Johnson, speaking at a seminar in investment are Ulaanbaatar in May, said that attempts by Mongolian officials to renegotiate highlighted contracts soon after they had been signed were drawbacks to foreign investment. At the meeting of the Mongolian-Chinese intergovernmental commission in Beijing in May (see Foreign trade and payments), the Chinese complained about Mongolian interference in the internal affairs of Chinese investors.

Foreign investment in A new law on state and public property was to come into force by August 1. mines and mills is sought This law includes detailed definition of the regulations and procedures to allow foreigners to buy shares in property offered for privatisation. A spokesman for the State Privatisation Commission said that Mongolia was particularly looking for foreign investment in the mines and flour mills.

A UN loan will fight rural Mongolia is to get a loan of $5.04m from the UN International Fund for poverty Agricultural Development (IFAD). This will be used boost the incomes of some 12,000 of Mongolia’s poorer livestock herding families by up to 60% in order to raise them above a poverty level fixed at $435 per year for a family of five.

Humanitarian aid fights At the end of May the president, Punsalmaagiin Ochirbat, inaugurated a cam- polio and measles paign to vaccinate children in Ulaanbaatar against poliomyelitis and measles. Children up to five years of age were given protection against polio, the last case of which was recorded in 1993. There is an epidemic of measles in Mongolia on average every four years and in 1995 there were 555 cases mainly in Ulaanbaatar. The vaccines were donated by the World Health Organisation (WHO) and the Japanese Rotary Clubs. Infectious diseases are a serious problem in the health sector and can only be combated in the short term by external aid.

Appendix 1

Quarterly indicators of economic activity in China and Mongolia

1993 1994 1995 1996 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr CHINA Prices Monthly av Consumer prices: change year on year % 22.2 21.9 25.7 26.9 22.6 20.0 14.8 11.1 9.4 9.7a Moneyb End-Qtr M1, seasbnally adj: Rmb bn 1,710.7 1,903.2 2,007.9 2,075.1 2,211.7 2,336.8 2,414.5 2,466.0 2,568.0 n/a change year on year % 36.8 42.3 56.3 51.2 29.3 22.8 20.3 18.8 16.1 n/a Foreign trade Qtrly totals Exports fob $ m 19,102 29,335 31,012 41,607 30,944 38,842 37,215 41,778 28,248 23,544c Imports cif “ 20,404 28,709 28,872 37,631 23,864 32,726 33,998 41,496 29,342 22,935c Exchange holdings End-Qtr Goldd $ m 3,663 3,634 3,677 3,665 3,609 3,695 3,661 3,671 3,813 3,745e Foreign exchangef “ 28,618 31,863 39,969 51,620 57,960 62,659 69,800 73,579 80,829 81,824e Exchange rate Official rate Rmb:$ 8.708 8.653 8.530 8.446 8.427 8.301 8.319 8.317 8.334 8.326g MONGOLIA Industrial production Monthly av General 1990=100 64.9 66.1 61.6 68.5 n/a n/a n/a n/a n/a n/a Prices Consumer prices Jan 1991=100 2,131 2,288 2,649 2,985 n/a n/a n/a n/a n/a n/a change year on year % 138 99 73 68 n/a n/a n/a n/a n/a n/a Money End-Qtr M1 Tg m 34,326 42,428 48,906 43,422 44,380 49,439 53,072 54,576 n/a n/a change year on year % 167 161 128 81 30 17 9 26 n/a n/a Foreign trade Qtrly totals Exports fob $ m 62.2 68.4 94.7 98.9 n/a n/a n/a n/a n/a n/a Imports cif “ 25.4 48.9 66.2 82.2 n/a n/a n/a n/a n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 67.68 86.47 90.43 78.49 72.50 63.60 94.40 114.50 91.60 n/a Exchange rate Market rate Tg:$ 409.32 411.58 411.34 414.09 432.75 449.10 462.86 473.62 489.15 n/a a April only. b Consolidated accounts of the People’s Bank of China, domestic branches of the Bank of China and the Bank of Agriculture. c Total for April-May. d End-quarter holdings at quarter’s average of London daily price less 25%. e End-April. f Excluding foreign exchange holdings of the Bank of China. g End-May.

Appendix 2

Foreign trade of China ($ m) Total Japan USA Taiwan South Korea Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Imports cif 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 Food, beverages & tobacco 1,930 2,281 100 65 460 294 20 9 24 24 of which: cereals & preparations 878 1,058 4 4 346 131 9 1 1 1 Metalliferous ores & scrap 713 915 1 0 0 23 0 3 2 2 Mineral fuels 1,611 2,477 62 80 51 41 7 11 67 122 Chemicals 6,351 7,560 1,015 1,277 927 1,239 1,126 1,201 854 1,090 of which: organic 1,154 1,349 299 301 172 184 77 108 219 287 dyeing & tanning materials 283 324 47 56 19 25 64 62 36 53 fertilisers 1,181 1,348 1 1 370 450 2 3 2 8 plastics & manufactures 2,878 3,497 610 752 240 394 839 881 560 688 Rubber & manufactures 335 519 55 76 11 15 60 63 14 31 Hides, skins & leather 870 839 31 34 78 100 239 191 256 278 Wood & manufactures 563 602 4 5 20 27 22 21 17 28 Paper & manufactures 889 939 114 115 127 170 184 172 132 157 Textile fibres & mnfrsa 5,959 6,396 982 1,104 749 750 1,201 1,186 824 1,107 of which: synthetic fibres 2,393 2,689 508 576 119 102 637 636 528 705 Base metals & manufactures 4,108 4,868 1,394 1,444 259 311 455 553 343 482 of which: iron & steel & manufactures 2,806 3,341 1,155 1,155 75 143 205 297 269 375 copper & manufactures 588 737 123 154 91 73 132 148 24 48 aluminium & manufactures 432 490 61 71 70 69 53 55 23 27 Machinery excl electric 9,112 10,908 2,566 3,146 1,081 1,391 1,056 1,190 322 510 Electric machinery 6,815 7,131 2,432 2,433 629 731 800 710 368 544 Transport equipment 1,628 2,066 247 241 443 344 57 60 55 82 of which: road vehicles & tractors 768 906 223 180 47 99 56 60 54 54 aircraft 491 800 0 0 364 240 0 0 0 0 Scientific instruments etc 1,548 1,848 607 716 267 352 96 107 21 42 Total incl others 45,659 52,277 9,922 11,000 5,700 6,195 5,581 5,718 3,407 4,645

Hong Kong Germany Russia Australia Singapore Imports from other Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May main suppliers 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 Total 3,246 3,099 2,612 2,740 1,284 2,049 867 1,408 1,172 1,357 continued

Foreign trade of China (continued) ($ m) Total Japan Hong Kong USA South Korea Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Exports fob 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 Food, beverages & tobacco 4,361 4,113 1,465 1,541 1,041 745 216 208 207 249 of which: meat & fish & preparations 1,601 1,498 781 844 320 155 102 77 43 85 fruit & vegetables & preparations 1,405 1,094 504 487 258 109 73 71 35 37 Oilseeds 548 485 105 128 116 63 12 14 53 58 Mineral fuels 1,899 1,926 791 789 137 200 115 143 264 280 Chemicals 4,467 4,245 497 563 1,040 705 690 704 222 219 of which: organic & inorganic 1,964 1,966 304 333 228 176 201 220 243 154 plastics & manufactures 1,507 1,250 93 120 572 325 376 374 33 20 Leather handbags, travel goods e 1,917 1,498 195 222 629 231 423 351 37 28 Textile fibres & manufactures 13,830 11,568 2,933 3,343 5,232 3,398 1,258 942 635 552 of which: cotton & manufactures 1,597 1,206 129 103 821 282 81 40 71 64 clothing 7,760 6,932 2,253 2,662 2,657 1,641 849 666 147 188 Footwear 2,561 2,562 249 293 193 176 1,324 1,199 58 66 Non-metallic mineral mnfrs 1,066 891 212 239 133 99 196 159 32 36 Precious stones, metals & jewellery 881 453 17 15 698 285 62 50 4 6 Base metals & manufactures 4,346 3,708 863 542 764 661 450 454 439 474 of which: iron & steel & manufactures 2,606 2,277 550 363 299 281 248 248 336 407 Machinery excl electric 3,025 3,999 229 481 730 766 644 813 43 79 Electric machinery 7,119 6,960 960 1,277 2,724 1,773 1,201 1,359 155 255 Transport equipment 1,177 1,261 73 115 331 238 279 238 19 35 of which: road vehicles & tractors 676 623 57 88 49 38 228 174 6 5 Scientific instruments etc 1,678 1,846 378 482 544 443 309 347 13 29 Furniture 1,811 1,026 157 164 197 167 448 385 9 10 Toys etc 1,135 1,768 153 166 439 295 665 728 18 19 Total incl others 55,752 51,793 9,926 11,048 16,034 10,880 8,831 8,583 2,368 2,571

Germany Singapore Netherlands UK Taiwan Exports to other Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May Jan-May main markets 1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 Total 2,009 2,135 1,243 1,353 1,108 1,200 992 1,092 1,192 1,040 a Including clothing.

Appendix 3

Trade of China with east European countries ($ m) Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-May Jan-May 1990 1991 1992 1993 1994 1995 1995 1996 Chinese imports cif Former Soviet Uniona 2,213 2,109 3,889 4,987a 3,496 3,799 1,284 2,049 Romania 214 200 211 379 286 194 60 33 Czechoslovakiab 275 154 176 243bc 125 88 23 31 Hungary 113 36 19 62 20 31 8 23 Poland 253 88 90 224 105 84 14 21 Bulgaria 101 95 58 137 73 20 8 10 Slovak Republic n/a n/a n/a 24c 14 36 2 8 Total listed 3,169 2,682 4,443 6,055 4,119 4,252 1,399 2,175 Chinese exports fob Former Soviet Uniona 2,048 1,860 2,690 2,692a 1,581 1,665 555 692 Poland 71 56 119 248 294 472 144 216 Hungary 24 20 45 165 390 325 123 78 Romania 189 84 78 120 110 157 47 59 Czechoslovakiab 305 27 38 59bc 85 140 36 57 Slovak Republic n/a n/a n/a 9c 10 32 6 10 Bulgaria 36 24 20 36 37 32 15 8 Total listed 2,673 2,071 2,990 3,329 2,507 2,823 926 1,120 a From 1993, Russia. b From 1993, Czech Republic. c April-December.