CHINA

Economic A journey of ten Insight thousand miles...

...starts with a great leap into the WTO
11 December 2001
The phrase Chinas imminent accession to the WTO was starting to wear a little thin. At last, China is a WTO member. We see WTO membership adding 0.5 percentage points (pp) to GDP growth through 2006, and look for export growth to average 16% per annum in 2002-06. But while we see membership of the trade body as a positive, we dont see it leading to a workers utopia. We expect unemployment, especially in rural areas, will rise significantly given the uncompetitiveness of the agricultural sector. There will be pain elsewhere: the big state banks must purge their balance sheets before competition arrives and state-owned enterprises (SOEs) will have to accelerate restructuring if they are to compete a significant number of smaller SOEs will likely fail. Doubling of foreign trade, FDI. As a result of trade liberalisation, we expect Chinas foreign trade will double to more than US$1tn by 2006. Its share of global exports should increase to 5.9% in the same timeframe. On our projections, utilised foreign direct investment (FDI) will grow 16% per annum in 2002-06, with FDI seen to total US$100bn by 2006. Faster GDP growth. Our expectation of a WTO-driven 0.5pp boost to annual GDP growth should take GDP to RMB15.5tn in 2006, from RMB8.9tn in 2000. We see this growth being underpinned by greater productivity, improved efficiency and a rise in value-added output. No rush to be rid of exchange controls. Despite WTO membership, we dont believe the countrys capital account will be liberalised before 2006 at the earliest; nor do we expect the renminbi to become freely convertible any time soon. Pink slips aplenty. On our projections, 12m urban workers will lose their jobs as a result of accession, mostly owing to SOE restructuring. This argues for urban unemployment of 15% in 2004, from 11.5% this year. We expect even more job losses in agriculture: 13m by 2006. Agriculture in trouble; financial sector racing against time. We expect agriculture will be worst hit, owing to its high cost structure and surplus production. Chinese banks, meanwhile, will have to off-load bad loans and develop risk management systems if they are to compete with foreign players. Securities companies and fund management firms will face increasing pressure to merge, given the need for synergies and weak equity-market conditions.

PU Yonghao
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(852) 2536-1843

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Economic Insight

Contents
l Executive summary ....................................................................................................... 3 l The road to WTO membership ...................................................................................... 4 l Chinas obligations ........................................................................................................ 5 l Institutional changes and reform ................................................................................. 7 l Macroeconomic impact ................................................................................................ 9 l A boost for GDP growth............................................................................................... 12 l Rising unemployment ..................................................................................................13 l Renminbi convertibility and the capital account .........................................................14 l Sector impact ...............................................................................................................17 l Banking facing tough competition .........................................................................19 l Capital markets a gradual opening .........................................................................24 l Securities industry slow consolidation .....................................................................26 All share prices as at 4 December, 2001

ASIAN RATINGS Outperform - stock expected to outperform the local benchmark index by more than 10% over the next six months. Neutral - stock expected to perform in-line with the local benchmark index over the next six months. Underperform - stock expected to underperform the local benchmark index by more than 10% over the next six months. US RATINGS Strong Buy Buy Hold Reduce Sell stock stock stock stock stock expected expected expected expected expected to to to to to outperform the S&P 500 by more than 15% over the next six months. outperform the S&P 500 by 5% or more but less than 15% over the next six months. either outperform or underperform the S&P 500 by less than 5% over the next six months. underperform the S&P 500 by 5% or more but less than 15% over the next six months. underperform the S&P 500 by 15% or more over the next six months.

EUROPEAN RATINGS Strong Buy - stock expected to outperform the relevant sector index by more than 15% over the next six months. Buy - stock expected to outperform the relevant sector index by more than 5% over the next three months. Hold - stock expected to either outperform or underperform the relevant sector index by less than 5% over the next six months. Sell - stock expected to underperform the relevant sector index by more than 5% over the next six months. Strong Sell - stock expected to underperform the relevant sector index by more than 15% over the next six months.

11 December 2001

Economic Insight

Executive summary
We look at the impact of WTO accession from a macroeconomic perspective
Few doubt that WTO membership will have a profound impact on the Chinese economy, changing dynamics in every industry, both directly and indirectly. An analysis of the consequences for every industry is beyond the scope of this report, and we confine our discussion to the macroeconomic impact of WTO accession and focus on sectors that have seen and will continue to see the most radical reforms: agriculture, banking and capital markets. We expect reforms in these sectors will be accelerated over the next few years. The reforms are mostly aimed at making domestic participants in these industries more competitive prior to the entry of foreign players and at safeguarding domestic capital. The timetable for opening these markets suggests that the implementation of reform measures will be accelerated to prevent exogenous shocks to the economy when foreign participation becomes a reality. No freedom for the currency just yet. In addition to microeconomic reform measures, macroeconomic reforms will play a central role, though they are not tied specifically to WTO-agreed rules. In this regard, the convertibility of the currency and the opening of the capital account are of particular concern. Given the weakness of the domestic financial system and the consequences of painful corporate restructuring, now is not the time to be opening the capital account or making the renminbi fully convertible. These goals are most likely reserved for the long term. We expect the government will implement interim measures step-by-step, so as to render capital more mobile and to liberalise renminbi exchange-rate movements. Quality growth first. Taken together, we believe the governments micro- and macroeconomic policies are aimed not so much at increasing the headline rate of growth, but rather at improving the quality of growth and ensuring its sustainability. On the micro side, mergers and acquisitions, higher value-added output, cost cutting and changes in relative pricing will be the key driving forces for corporate earnings growth. From a macroeconomic perspective, a surge in foreign trade, FDI and increased technology-intensive capital inputs will likely augment each component of GDP. Agricultural sector hit hardest. The cost of grain in China is around 40% higher than the international norm. Given Chinas agreement to cut tariffs to 15% from 21%, we foresee job losses in the sector of around 13m by 2006. Still, the pain could be mitigated by a cap on imports at 5% of domestic production. Moreover, gains in other nongrain subsectors could add 1m jobs. The governments land reform programme, meanwhile, will allow farmers to lease out land, somewhat making up for lost income. Banking sector. Since the bank system is one of the greatest structural weaknesses in the system, the government is setting up a timetable for state banks to reduce NPLs and for expanded foreign participation in the sector. We note, however, that progress by asset management companies (AMCs) in resolving NPLs has been limited and we anticipate only a 15% recovery ratio on overall NPL disposal. We expect that state banks will eventually list on the domestic stock market and offer equity stakes to foreign investors. Once foreign participation starts, we think corporate banking will see more competition between domestic and foreign banks than retail banking. Capital markets. In a bid to open the domestic capital markets gradually, the authorities have introduced mechanisms that will allow foreign investors to invest in A shares while allowing local investors to gain exposure to securities listed outside China. In a related move, the government is preparing for the launch of Chinese Depositary Receipts to allow foreign firms access to Chinese capital. Meanwhile, weak equitymarket conditions have left domestic securities companies vulnerable and we foresee further consolidation in the industry and, perhaps, the formation of co-operative ventures with foreign companies.

Amid a weak banking system and painful corporate restructuring, we expect opening of the capital account will be deferred until at least 2006

We believe the governments micro and macro policies are aimed at inducing quality growth

We expect 13m job losses in the agricultural sector by 2006

The immediate goal for state banks is to purge their balance sheets

Domestic investors will be allowed to invest overseas while foreign investors will be welcomed in the Ashare market

11 December 2001

Economic Insight

The road to WTO membership

Historical overview
China was a founding member of the GATT, but abandoned membership in 1948
A little known fact is that China was one of the 23 founding members of the General Agreement on Trade and Tariffs (GATT) in 1948. However, following the Communist Partys takeover of the mainland, the Kuomintang then still recognised as the legitimate government of all China announced that China would abrogate its GATT membership. Although the Communist government never recognised this withdrawal, it took almost 40 years for China to inform the GATT in 1986 of its wish to resume its status as a GATT contracting party. This marked the start of negotiations for Chinas WTO accession. Chinas accession to the WTO has been managed by a working group which comprised representatives from all interested WTO member governments that sought negotiations with China. The working group on Chinas accession was set up under GATT in 1987 and was mandated only to deliberate matters relating to Chinas trade regime for goods. In 1995, it was converted into the WTO Working Group on Accession and its scope broadened to include trade in services, new rules on non-tariff measures and rules relating to intellectual property rights. A substantial part of the process involved bilateral negotiations between China and WTO members. The working group had two tasks: to compile a report based on its deliberations and to complete a Protocol of Accession, with a number of annexes attached, serving as a timetable for bringing the applicants trade regime into line with the WTOs rules and obligations. In September 2001, the working group concluded that China and its major trading partners had finally reached formal agreement on all required legal documents relating to Chinas WTO entry. Later China also concluded an agreement with Mexico. No voting procedure was required and China secured its relevant ministers consensus on its membership the voting was virtually a formality on the first day of a five-day meeting that took place from 9-13 November.

Chinas WTO accession has been managed by a working group

The accession process involved bilateral negotiations between China and WTO members

China ratified the WTO agreement on 11 November, 2001

To speed up Chinas accession, the Standing Committee of the National Peoples Congress convened a special session on the same day as the ministerial meeting in Qatar (11 November) to ratify the terms of membership. Under WTO regulations, the ratified terms would be lodged with the WTO secretariat for 30 days before membership became official.

11 December 2001

Economic Insight

Chinas obligations
900 pages of legal documents on the terms of the accession will be published soon
The successful completion of negotiations on terms for Chinas membership of the WTO paved the way for the ratification of 900 pages of legal text of the agreement for formal acceptance by the 142 members of the WTO Ministerial Conference in Doha in November. China has agreed to undertake a series of steps to open and liberalise its economy to foreign competition and offer a more predictable environment for trade and foreign investment in accordance with WTO rules. The WTO agreement (see WTO press release/243, 17 September, 2001) stipulates that China will assume the following commitments: l It will provide non-discriminatory treatment to all WTO members. All foreign parties will be treated on equal terms with domestic enterprises with respect to the right to trade. l All dual pricing practices will be abolished and differential treatment accorded to goods produced for sale in China and those produced for export will come to an end. l China will not exercise price controls for the purpose of protecting domestic firms. l China will implement the WTO agreement in an effective and uniform manner by revising its existing domestic laws and enacting new legislation in compliance with the WTO agreement. l All enterprises in China will have the right to import and export all goods and trade them throughout the customs territory within three years of accession. l China will not maintain or introduce any export subsidies on agricultural products.

China has vowed that the opening will be orderly and gradual

While China will reserve some rights of exclusive state trading on products such as tobacco, fuel and minerals and maintain some restrictions on transportation and distribution of goods inside the country, many restrictions that foreign companies now face will be eliminated or considerably eased after a three-year phase-out period. In other areas, such as the protection of intellectual property rights, China will implement the Trade-related Aspects of Intellectual Property Rights Agreement (TRIPS) in full from the date of accession. The agreement makes provision for the establishment of a special Transitional Safeguard Mechanism that will function for a period of 12 years, starting from accession. The committee will deal with cases where the import of products of Chinese origin causes market disruptions to other WTO members. At the same time, prohibitions, quantitative restrictions or other measures maintained against imports from China that are inconsistent with the WTO agreement will be phased out or otherwise dealt with under mutually agreed terms and timetables specified in an annex to the Protocol of Accession.

A safeguard mechanism will be implemented for a period of 12 years

Goods
Average Chinese import tariffs will be reduced to 15% for manufactured goods
Chinas average bound tariff level will decrease to 15% for agricultural products. For industrial goods the average bound tariff level will recede to 8.9% within a range of 0-47%, with the highest rates applied to photographic film, cars and related products. By 2004, tariffs will have been mostly reduced or abolished, but in some cases the deadline extends to 2010, at the latest. Textiles. Upon accession, China will commit to the Agreement on Textiles and Clothing and become subject to its rights and obligations. Quotas on textiles for all WTO members will end on 31 December, 2004.
11 December 2001

Economic Insight

Agriculture. China has agreed to limit its subsidies for agricultural production to 8.5% of the value of farm output.

Services
In the services sector, foreign shareholding will be gradually increased
Telecoms. Following accession, foreign firms will be allowed to take up to a 25% stake in wireless services in Beijing, Shanghai and Guangzhou, a limit that will be increased to 35% in these cities and 14 more one year after accession. Three years after accession the cap on foreign ownership will be increased to 49% with no geographic restrictions. Similar timetables will apply to fixed-line service and Internet service providers (ISP) with variations in the limits on foreign ownership. Banking. Foreign financial institutions will be permitted to conduct foreign currency business in specified areas of the country upon accession and conduct local currency business within two years of accession. Within five years of accession, foreign financial institutions will be permitted to provide services to all Chinese clients. Insurance. Foreign non-life insurers will be permitted to establish as a branch or a joint venture (JV) with a maximum ownership of 51%. Within two years of accession, foreign non-life insurers will be permitted to establish wholly owned subsidiaries.

11 December 2001

Economic Insight

Institutional changes and reform

Structural changes such as the break-up of monopolies and the removal of barriers to trade will be implemented
The commitment of Chinas leadership to further open domestic markets to foreign entry suggests that competition will become more intense. This provides added incentive for restructuring of the domestic economy. We believe the WTO commitments will force the state to manage the economy according to market principles and reorganise industries to prepare for competition. Even under a gradual phase-in of market-access concessions, WTO membership implies increased structural reform the dismantling of monopolies, the removal of regional barriers to trade, more M&A activity, layoffs and debt write-offs. We believe the governments immediate goal is not so much to increase the headline rate of growth, but rather to improve the quality of growth and ensure its sustainability. On the micro side, mergers and acquisitions, higher value-added output, cost cutting and changes in relative pricing will be the key driving forces for corporate earnings growth. Ownership restructuring will likely remain one of the key principles of reforming the state-owned enterprises (SOE) after accession. From a macroeconomic perspective, a surge in foreign trade and FDI, and increased technology-intensive capital inputs will likely induce quality enhancement and provide a stimulus for economic growth.

The goal is not to increase growth, but to enhance quality of the growth boosting efficiency and increasing higher value-added output

Broader and deeper industrial reform

The government recently released reform guidelines for the manufacturing industry...
The manufacturing sector is the backbone of Chinas economy, contributing 40% of GDP, 50% of fiscal revenue and 90% of exports. In June, the government published a detailed Tenth Five-Year Plan for 13 major industries. As a follow-up, the government published its "Tenth Five-Year Plan of Industrial Structure Adjustment", which addresses the structural adjustment required by the WTO. The plan aims to lift competitiveness and to maintain a 7% sustainable annual GDP growth from 2001-05. The main tenets of the plan include improvement to the state funds allocation system to achieve a higher return, encouraging large companies and enterprise groups to improve competitiveness, expanding the Western China regional development strategy to narrow the income gap between regions, devoting more resources to energy saving and upgrading information technology. In addition to restructuring guidelines, the government has announced a strategy of creating of 50 super league (similar to Fortune 500 companies) manufacturing companies through M&A, IPOs and restructuring as a first step in its industry reorganisation programme. Domestic companies, including big ones, lag multinationals in terms of sales value, market share, R&D and management. We believe the central problem is that these firms lack economies of scale. In the machinery sector, for instance, there are an estimated 115,000 machinery companies at and above the township level together employing 18m people, not including village enterprises. To create competitive companies in this sector will require a good deal of M&A, technological innovation, foreign investment, the formation of business alliances and stock market listings. The government envisions the super-league companies becoming leaders in each sector, with their own brand names, focused business, advanced technology and strong R&D capabilities. Measures required to create such companies will be implemented in two phases. First, to streamline production, non-core business activities and assets will be decreased. Second, core businesses will be expanded so economies of scale can be attained. We believe the governments policy focus on big firms has undergone a metamorphosis, moving away from encouraging the formation of diverse, chaeboltype companies to core competency-focused companies.

...and it wants to see the emergence of super-league companies

Enhancing productivity and streamlining production are key

11 December 2001

Economic Insight

SMEs have been left to fend for themselves...

Small and medium enterprises (SMEs) face a much less accommodating government policy environment only the fittest will survive. Last year, about 19,000 loss-making SOEs, all SMEs, were closed down, sold off or declared bankrupt. As a result, net assets of the state sector declined by RMB30bn. The government seems to have ruled out the possibility of assistance for smaller SOEs. We understand the State Economic and Trade Commission is nearing completion of legislation intended to create a fairer operating climate for the countrys 8m SMEs, which account for about 60% of total industrial turnover and exports. Key aspects of the draft legislation define special terms in the state budget for SMEs and establish dedicated funds to support their growth. The government will also provide assistance in SMEs efforts to upgrade technology, gain market access and to improve information and human resources. It seems the proposed legislation will not discriminate between SOEs and private SMEs. Over the past three years, the major domestic industries have made efforts to gain an understanding of the WTO rules and drawn up plans for dealing with foreign competition. Major corporations have adopted various measures aimed at improving managerial skills, including studying and adopting models of foreign enterprises. Still, we think the majority of SMEs have done little to prepare for WTO accession and we expect they will face significant competitive challenges. At the same time, we emphasise that SMEs by their very nature are flexible and can adapt to a new business environment within a relatively short period of time.

...but a fairer environment will be provided

SMEs have made little preparation for postWTO entry competition

Local protectionism to be contained

Bringing an end to local protection will be a lengthy but crucial battle
This year has seen the government launch a campaign aimed at rectifying and restoring market order (if indeed it ever existed in an appreciable sense). This drive entails cracking down on counterfeit goods, tax fraud, and suchlike. In May, the State Council unveiled regulations designed to prevent local protectionist measures. Included on the target list are regulations barring non-local companies from entering local markets, discriminatory rules preventing investment by non-local enterprises, and related infringements of legal rights. Clearly, this push wont be a panacea for the perils of regional protectionism. But we see it as a step in the right direction and envisage WTO accession adding further momentum to this effort. With some of the barriers dismantled, the result could be an increase in cross-regional M&A activity, investment and trade. The WTO itself could gradually push local governments to stop protecting firms by excluding goods made overseas or other regions. The reality is that many local and provincial governments have attempted to block or restrict the entry of outside goods to ensure the local population buys from companies the local government owns and taxes. This practice, although illegal, has been a custom for many years and is unlikely to come to an immediate end. We expect the implications of the WTO deal will have the greatest impact on provinces where the state sector the major provider of jobs, tax revenue, housing and medical benefits dominates.

The central government is starting to promote interprovincial co-operation

We expect the central government will encourage more inter-provincial exchanges as a start. These exchanges will probably involve exploiting comparative advantages between provinces and a boost to investment by one province in another. According the official government news service, Xinhua News Service, some cross-provincial projects, such as the transfer of electricity and natural gas, have already been launched. Jiangxi, a major agricultural base in eastern China, has enjoyed rising trade with other provinces. Interprovincial labour mobility has also increased significantly. For example, some 100,000 surplus labourers in Nanchang (Jiangxi province) have been offered jobs in Wuxi (Jiangsu province). Of course, these are examples of government initiatives, but market forces will likely provide the biggest incentive for inter-regional exchanges, resulting in the realisation of economies of scale and greater efficiency.

11 December 2001

Economic Insight

Macroeconomic impact
Foreign trade seen to double by 2006
Liberalisation and rising FDI should spur a rapid increase in trade
China is the sixth-largest trading nation in the world, but has more scope to develop its external sector, in our view. Various restrictions have prevented the country from fully exploiting its competitive advantages and inhibited greater expansion of external trade and capital inflow. As a result of the trade liberalisation required by accession terms reducing tariffs and abolishing quotas and the likely increase of exportoriented FDI, we believe Chinas foreign trade (combination of exports and imports) could rise to more than US$1tn by 2006 from an estimated US$500bn in 2001. We believe imports will initially surge on the heels of tariff cuts and the removal of non-tariff barriers. Tariffs on industrial goods will be reduced to an average of about 8.9% from 15%. We estimate that the expected tariff reduction, the dismantling of non-tariff barriers and a rise in FDI-induced imports (equipment and machinery) will generate an additional US$30bn in imports per year over 2002-06. On an aggregate basis, imports will likely rise to about US$500bn a year by 2006. Meanwhile, we expect exports will grow 16% per year over 2002-06, compared with a projected 9% under the assumption that China had no WTO membership. From 1996-2001, we estimate actual export growth was 10% per year. In total, exports will likely rise to about US$530bn in 2006, equivalent to 28% of GDP, up from 23% in 2000. Assuming world export growth of 6.9% annually in 2002-06, we project Chinas share of world exports will increase to 5.9% by 2006, compared with 4.4% in a no-WTO membership scenario. Our projection of an initial rapid rise in imports suggests that Chinas trade surplus will shrink, exerting a negative influence on the economy. However, export growth will likely exceed import growth two to three years after accession, as export-oriented FDI becomes productive. Growth in industrial production (IP), which accounts for about 50% of GDP, is likely to accelerate on the heels of strong exports (accounting for about 16% of IP in 2001). We expect rising manufacturing production will augment personal income and consumption and have a spill-over effect in other sectors. Hence, foreign trade should boost GDP growth by 0.085pp per annum during 2002-06, while trade- and production-led improvements in personal income and consumption should add 0.2pp annually to GDP growth over the same period. In sectors where China enjoys competitive advantages, WTO membership could significantly boost exports. Hence, we see a considerable rise in the export of products such as textiles, footwear, toys, consumer electronics and some information, communications and technology (ICT) products. Last year, Chinas exports of clothing and footwear grew 40% y-y to US$43bn. The corresponding figure for the first nine months of this year was 12.1% y-y, outperforming overall exports by 7.2%. Including related products such as yarn and fabrics, Chinas overall textile exports last year reached US$62.1bn (25% of total exports). The rise in exports has also benefited higher value-added products; in the first nine months of this year, ICT-related exports rose to US$42.2bn (20.5% of total exports), up 22.5% y-y. The timing of Chinas accession to the WTO is perhaps not perfect; a weakening global economy will likely have a negative short-term impact on the Chinese economy (in Market Insight, Optimism deferred, published 22 October, we provide a detailed discussion of the short-term impact of the US economic slowing following the 11 September events on Chinas economy). Yet, even before the terrorist attacks on the US, the external sector was plagued by declining demand; the value of exports grew 7.2% y-y in the January-September period, down sharply from the 28% increase recorded in 2000. In October, exports rose only 0.2% y-y, on the heels of a further slump in demand, particularly from the US, which accounts for about 20% of Chinas
11 December 2001

Initially imports should rise significantly...

...followed by a surge in exports...

...leading, ultimately, to an improvement in consumption

WTO accession should benefit exports of textiles and ICT products

Given the weakening global economy, we expect an export contraction in 4Q01

Economic Insight

total exports. Should one take into account indirect exports (such as those transshipped through Hong Kong), the US accounts for about 33% of Chinas exports. We foresee an export contraction of 5.3% y-y in 4Q01 and 3.1% in 1H01, returning to positive territory by 2H01. All told, annual growth in exports will likely slow to around 4.2% this year and 3.3% next year.

FDI seen to double by 2006

Chinas FDI will likely decelerate in the short term...
China is the second-largest recipient country of FDI after the US. In the first ten months of this year, utilised FDI rose 18.6% y-y, against a 1% y-y increase in 2000. FDI approvals, meanwhile, grew 27% y-y. However, FDI flows to emerging markets have not been spared the effects of a slowing world economy and the terrorist attacks in the US and will likely decline in the short term. The Institute of International Finance (IIF), a subsidiary of the World Bank, predicts that net private capital flows to emerging markets will drop to US$106bn this year from US$167bn last year, before rebounding to US$127bn next year. On the heels of this reduction in flows to emerging markets, FDI to China will likely decline in the near term, particularly from the US where many companies have suspended overseas expansion in the aftermath of 11 September. We think that despite a short-term decline in FDI flows to China, the country will remain a favoured destination for FDI over the medium to long term. In addition to the usual considerations such as the potential size of the domestic market and labour costs, we think Chinas WTO accession will add additional momentum to FDI inflows, based on three factors: l The promise of greater exports and the opening of the domestic market serve as a powerful driver for increased FDI flows. For the first nine months of this year, contracted FDI rose 32.4% in the textile sector, 47.1% in chemicals, 37.5% in pharmaceuticals, 72.9% in machinery, 184.1% in utilities, and 98.8% in construction. l Falling global demand and weakening Asian economies have prompted a shift of production to China as a low-cost outsourcing destination. This business has flowed from the likes of Taiwan and Japan, a trend enhanced by the fact that economic conditions in these countries are less favourable than in China. In year-on-year terms, contracted FDI rose 66.9% from Japan, 76.8% from Taiwan, 54.8% from South Korea, but dropped 14.1% from the US in the first nine months of 2001. l Intra-company trade flows induce FDI, owing to specialisation of the production chain.

...but in the long term, China will remain a favoured FDI destination

WTO membership could lead to utilised FDI growth of 16% through 2006 Opening up more sectors to induce more FDI

On our projections, Chinas annual utilised FDI growth rate will come in at 16% in 2002-06, bringing the total to about US$100bn by 2006. In the absence of WTO membership, we estimate Chinas utilised FDI annual growth rate would be 6% (the utilised FDI average annual growth rate was 4.7% during 1996-2001) during the same period. To meet WTO obligations, China needs to abolish most forms of FDI restrictions and most economic sectors are required to open to foreign competition, including agriculture, telecoms, retail and distribution, and financial services. Meanwhile, other sectors have seen tentative opening. The most prominent of these is the media sector, where limited JV formation has been approved. Chinas utilised FDI
By origin Hong Kong US Japan Taiwan Korea Singapore Germany Amount (US$m) 2000 9M01 15,500.0 4,383.9 2,915.9 2,296.3 1,489.6 2,172.2 1,041.5 11,166.3 3,443.9 3,064.7 1,969.1 1,403.3 1,337.7 878.7 Growth (% y-y) 2000 9M01 (5.3) 4.0 (1.9) (11.6) 16.9 (17.8) (24.2) 3.8 37.1 53.8 37.9 63.1 (7.6) 18.2 Share of total (%) 2000 9M01 38.1 10.8 7.2 5.6 3.7 5.3 2.6 34.6 10.7 9.5 6.1 4.3 4.1 2.7

Source: CEIC, Nomura International (Hong Kong) Limited

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Chinas utilised FDI by sector

Sector Electronics Real Estate Textiles Chemicals Utilities Machinery Construction Transportation Trade FDI (US$m) 2000 9M01 4,594.1 4,657.5 1,367.5 1,795.0 2,242.1 1,043.5 905.4 1,011.9 857.8 4,694.1 3,298.4 1,229.4 1,359.0 1,461.4 838.4 556.3 621.2 1,130.7 Growth (% y-y) 2000 9M01 46.0 (16.7) (0.2) (6.5) (39.4) 6.8 (1.2) (34.8) (11.1) 48.8 2.1 34.9 46.4 (6.2) 52.6 3.1 (22.9) 65.1 Share of total (%) 2000 9M01 11.3 11.4 3.4 4.4 5.5 2.6 2.2 2.5 2.1 14.5 10.2 3.8 4.2 4.5 2.6 1.7 1.9 3.5

Source: CEIC, Nomura International (Hong Kong) Limited

FDI contributes more GDP growth

On the whole, we believe Chinas WTO accession will result in both external and internal liberalisation, a boost to FDI flows and a rise in private investment. We expect fixed capital formation will grow over 11.1% annually over 2002-06. The investment boost from WTO accession slated for this period should be a major source of economic growth, contributing an additional 0.34pp per annum over the period.

Multinationals expansion plans in China

Company Motorola Erricsson General Motors Volkswagen BP-Amoco Bayer Dell Computer Carrefour Wal-Mart Coca-Cola McDonalds Code MOT US ERIC IM GM US VOW GR BP/ LN BAY GR DELL US CA FP WMT US KO US MCD US 35.62 US$28.08 59.0 US$55.17 US$46.55 US$26.87 Price US$17.05 27.14 US$49.80 49.10 Rating Hold Not covered Not covered Not covered Not covered Not covered Hold Not covered Not covered Not covered Not covered Investments Invested US$3.4bn, another US$6.6bn to follow in 2002-06 Invested US$2.4bn, another US$5.1bn to follow by 2005 Invested US$1.4bn, another US$700m planned Plans to invest RMB12bn in 2002-06 Plans to invest US$5bn in 2002-06 Plans to invest another US$3.1bn and double sales by 2005 from 1.1bn at present Plans to shift some production to China (US$0.15bn) Already has 18 branches, plans to establish five global purchasing centres in China Already 18 branches, plans to open another five Already has 28 factories, plans to open six more factories 300 outlets in China, plans to expand through franchising

Source: Bloomberg, Hong Kong Economic Daily (13 November, 2001)

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Economic Insight

A boost for GDP growth

Fiscal policy will likely be pro-active
Chinas real GDP growth is likely to moderate to 7.3% this year and 7.0% next year, from 8.0% in 2000. The government has made contingency plans should external demand collapse and the economy descends into a slump. We believe it will issue RMB80bn in special bonds early next year, in addition to the issuance of RMB150bn in long-term bonds slated for next year. State fixed asset investment (FAI) grew 17.4% yy in January-October. The increase in FAI in 1H01 was fuelled by funds left over (RMB50bn) from a bond issuance last year; the proceeds of this years issue have just been deployed. We forecast that Chinas entry to the WTO will boost GDP growth by 0.5pp in 2002-06 to an average 7.7% per year, assuming that the US economy will recover no later than 2003. Our projected growth trajectory for China suggests total GDP will rise to RMB15.5tn in 2006 from RMB8.9tn in 2000, an increase of 74% over six years in nominal terms, assuming a 2.1% per annum inflation rate. Assuming an appreciation of 1% in the renminbi relative to the US dollar, GDP could increase to US$1.9tn in 2006 from just over US$1tn in 2000. We expect the Chinese economy will record the fastest growth in Asia during this period. We believe the added economic growth will primarily be induced by efficiency gains and a rise in higher value-added output. Such efficiency gains will more than offset the consequences of shrinking employment on economic growth and will flow primarily from sector consolidation, economies of scale, the exploitation of comparative advantages in both the internal and external markets, improved technology and rising FDI. We foresee economic growth losses of 0.1-0.2pp per annum in the first two years after accession, owing to rising unemployment and a surge in imports, including a sharp increase in FDI-related capital equipment. Rising imports will likely result in a shrinking current account surplus, compromising GDP growth. Likewise, rising unemployment will likely depress consumption. Still, in a no-WTO membership scenario, fiscal spending would likely be higher, thereby offsetting the negative impact that WTO membership will have initially. China GDP growth rates after WTO accession
(%) GDP No-WTO membership WTO membership Private consumption As a percentage of GDP Change (y-y) Government consumption As a percentage of GDP Change (y-y) Investment As a percentage of GDP Change (y-y) Net exports (G&S) As a percentage of GDP Change (y-y) 2000 2001F 8.0 8.0 48.2 9.1 13.1 14.0 36.6 10.9 2.5 (0.2) 7.3 7.3 48.3 7.7 13.1 7.3 37.9 11.2 1.6 (34.4) 2002F 2003F 7.2 7.0 48.5 7.5 13.2 7.5 39.2 10.6 0.8 (45.9) 7.8 7.7 48.2 7.2 13.2 7.5 39.9 11.1 0.7 0.6 2004F 2005F 2006F 7.5 8.1 47.5 7.0 13.0 6.7 40.2 11.5 1.0 45.7 7.2 8.2 46.8 7.5 12.7 5.8 40.2 11.0 1.4 57.4 7.0 7.9 46.6 8.0 12.5 5.5 40.1 11.1 2.1 59.3

We believe Chinas economy will record the highest growth in Asia

Economic growth should gain a boost from improved quality rather than a rise in output In the first two years after accession, we expect a loss to GDP growth of 0.1-0.2pp

Chinas WTO accession should contribute an average 0.5pp to GDP growth in 2002-06

Source: CEIC, Nomura International (Hong Kong) Limited

Impact of WTO accession on GDP components

GDP growth (2002-06F) Growth (pp) Private consumption Government Investment Net exports Other adjustments Net adjustments No WTO: 7.2% 7.0 7.0 10.2 -35.2 WTO: 7.7% 7.4 6.6 11.1 -28.2 WTO impact on GDP +0.205 -0.052 +0.343 +0.085 -0.082 +0.500

Note: Other adjustments capture the net impact of changes in weights, the deflator and inventory. Source: Nomura International (Hong Kong) Limited

11 December 2001

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Rising unemployment
Unemployment will likely rise; we see the loss of 12m jobs, primarily in the state sector...
Officials have publicly admitted that the actual unemployment rate in China is around 7-8%, instead of the recorded rate of 3.3%, which does not include workers in re-employment training centres. On our estimates, average unemployment in 2001 will be 11.5%. While the civil service and the state-owned sector axed nearly 26% (28m) of staff in 1996-2001, we estimate collectively owned enterprises reduced employee numbers by more than 50% (15m). In contrast, only 15m jobs were created by foreign and privately owned enterprises during the period. In the immediate period after WTO accession, we estimate unemployment will surge, mainly in the state sector. As a result, urban unemployment could rise from 11.5% this year to around 15% in 2004 before declining to 13.5% by 2006. This implies about 12m more redundancies in urban areas, mainly from SOEs, than under a non-WTO membership scenario. Still, other sectors, such as textiles, garments, construction, trade and services could serve as net job creators. This could take place on the heels of further policy measures to spur employment, encompassing the purchase, rent or lease of SOE assets. The state can provide a number of incentives such as tax breaks, more realistic criteria for market entry and easier access to banking services. Some local governments are already pursuing preferential policies to encourage non-state firms to take over state assets. For example, the Yunnan provincial government has pledged three-year tax cuts and tax exemptions for non-state firms that merge with or acquire state SMEs. We see this move as a reflection of the states desire to withdraw from most industries, with the specific goal of creating a fair and open market that encourages expansion of the non-state sector. In urban areas, we expect employment in the state sector will decline from 67% to around 55% by 2006.

...but employment could rise in some sectors such as textiles

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Renminbi convertibility and the capital account

WTO membership does not require China to open the capital account or to free the currency
The WTO agreement contains no explicit or implicit requirements to liberalise the capital account or to make the renminbi fully convertible. The capital account regime is a matter for the IMF, which has, of late, encouraged China to gradually open the capital account and opt for a more flexible regime. But even as a member of the IMF, China is not obliged to make its currency fully convertible on capital account transactions. In our view, authorities are not yet ready to commit to a complete liberalisation of the capital account. The impact of WTO membership on the mobility of capital and the exchange rate regime has been a vigorously debated issue in recent years and many observers have advocated the opening of the capital account and convertibility of the currency in the near term. In our view, Chinas controlled capital account system, while saddled with shortcomings, has served the country well so far (for a detailed discussion of CHinas capital controls see article by Pu Yonghao "Chinas New Economic Agenda: Policy Implications for Liberalising the Capital Account", Cato Journal, Vol 21, Spring/ Summer 2001. We believe this policy has helped to: 1) prevent an outflow of capital; 2) implement a highly effective monetary policy; 3) preserve public confidence in the domestic financial system; and 4) protect the country from the contagion of the Asian financial crisis. We believe that given the importance attached to WTO accession, liberalisation of the monetary regime has been shifted to the back burner. We do not foresee opening of the capital account and convertibility of the currency at least until 2006. Before the authorities turn their attention to liberalisation of the monetary regime, we think the following issues will feature as policy priorities: Converting domestic savings into productive investment. In recent years, China has suffered from what appears to be oversaving, despite the fact that interest rates on deposit accounts have dropped to historical lows (for a detailed discussion on excessive saving in China, see article by Pu Yonghao, Squaring the cycle in Financial Times, 10 August, 1999). This year, household savings growth started to accelerate again, amid weakening of the domestic equity market. Oversaving is a pernicious trend considering that many regions and projects are starved of capital and unemployment rates on the whole have risen to around 11.5%. We think the absence of proper investment channels and a legal framework that would encourage private investment have contributed in large part to this phenomenon. In our view, under-utilisation of domestic savings is a problem that must be addressed as a matter of urgency. Reform of the financial sector. When a financial system is weak, managed liberalisation of the capital account becomes a hazardous exercise. In China, domestic financial institutions have a limited ability to assess and manage risks associated with large capital inflows, while regulatory authorities have limited experience and capabilities to exercise proper supervisory authority. From a macroeconomic management point of view, China needs to develop a healthy financial system that features well-functioning and regulated financial institutions, capital markets and financial products before the capital account can be opened. As these systems are put in place, less sophisticated policy measures that could restrict capital flows are probably a necessary evil to preserve macroeconomic integrity. Refining interest-rate policy. To balance domestic supply and demand in a closed economic regime, interest-rate policy is an instrument that has proved highly effective. When capital controls are lifted other factors enter the equation, making interestrate policy less effective. Authorities then have to contend with the international economic environment in addition to domestic economic conditions since interestrate differentials between countries become a major driving force for cross-border
11 December 2001

In the past, a closed capital account and fixed exchange rate served China well

We believe the capital account will remain closed until at least 2006 since... ...the capital allocation system is not efficient...

...the financial sector is fragile...

...interest rates are constrained...

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capital movements. For now, domestic interest rates are relatively fixed and the system is designed to respond to domestic conditions only. A policy mechanism to deal with capital account liberalisation will have to be established prior to the actual opening of the capital account.

...and the exchange rate is not flexible yet

Establishing a more flexible exchange-rate regime. Since 1994, domestic firms have been obliged to sell any hard-currency earnings to designated state-owned commercial banks. Chinas central bank, the Peoples Bank of China (PBoC), imposes a quota on each commercial banks hard currency balance. When this balance is below or above the quota, the bank in question is required to take action to restore its foreign currency holdings to the quota either through inter-bank operations or swaps. From time to time, the PBoC has to intervene in the forex market to maintain the stability of the exchange rate. In recent years, China has maintained a positive balance of payments on the heels of a trade surplus and strong FDI inflows. Without the PBoCs intervention, the renminbi would likely have appreciated significantly. Appreciation pressure could mount on the currency, given the divergence in Chinas economic performance relative to Asia and the world. The trading band of the renminbi will likely be expanded to allow for more exchange-rate flexibility. There are indications that China has begun its transition to a managed float regime. We believe that after Chinas WTO entry, the country will adopt a more flexible exchange-rate regime to respond to increasing capital mobility. Measures will likely include widening the exchange-rate band. By allowing SOEs to be taken over by foreign companies, opening up previously closed sectors, such as telecoms and the financial sector, and permitting offshore funds to enter the domestic capital market under a Qualified Foreign Institutional Investor (QFII) system (perhaps allowing them to invest in A shares) will likely attract a significantly increased inflow of capital. Under such circumstances, a more flexible exchange-rate regime would be required to avoid real exchange-rate appreciation or depreciation and to achieve domestic monetary objectives. Setting capital free involves significant benefits, but comes at a cost. Once free capital mobility is achieved, economic power and influence of the government becomes a function of external factors as well, disturbing the congruency that exists between economic and political power in a closed economy. As a result, the political environment will invariably become less predictable. We believe that liberalising capital mobility will have to be achieved in intermediate steps, to avoid a policy void and market volatility. Following WTO accession, we foresee a rapid rise in imports in the short term on the heels of lower tariffs and market opening. This will likely result in a decline in the current account surplus, a trend that will probably continue until improved market access for Chinese export products improves and export-oriented additional FDI becomes productive. Still, Chinas balance of payment (BoP) position should remain stable throughout, given the offsetting effect of higher FDI inflows immediately after WTO accession. Appreciation pressure has mounted on the renminbi as the capital account surplus accumulated over the past few years and China gained the status of safe haven during and after the Asian financial crisis. We note that the renminbi exchange rate to the US dollar on the black market is at around a 1% premium to the official RMB8.28:US$1 rate. We expect the projected weakening of the US dollar to the euro will relieve some of the pressure on the Chinese currency. We look for the renminbi to remain stable this year while firming moderately in the next five years on the heels of robust capital inflows and a positive current account. Since membership of the WTO entails the adoption of internationally accepted policy standards and adherence to international rules, we think China will evolve to embrace a more open and transparent policy regime, leading to greater consistency, transparency and predictability in policy making.
11 December 2001

The exchange band for the renminbi could be gradually widened

Liberalising capital could render the political environment less predictable

WTO accession points to a surge in imports and a shrinking current account surplus

We expect the renminbi will remain stable in the post-WTO accession era

WTO accession will likely enhance policymaking transparency

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The government has changed the measurement of outstanding foreign debt to arrive at more realistic figures

Two recent events point to the improvement in this regard. First, at the beginning of November, the government announced outstanding foreign debt at end-June was US$170.4bn, up sharply from the official US$145.7bn at end-2000. The significant rise was the result of a change in the compilation of the data. The new figures include overseas borrowings of foreign financial institutions operating in China, offshore deposits at Chinese banks and some trade-related loans the standard measurement recommended by the IMF. Second, Chinas state banks have adopted the internationally accepted five-category loan classification system to disclose non-performing loan (NPL) ratios. Applying this measurement, the banks announced an NPL ratio of 40% before the transfer of some NPLs to asset management companies (representing around 10% of NPLs). This is in stark contrast to the NPL figure of 10% announced at the beginning of 2000, based on the Chinese four-category classification system. Implementing standard reporting measures, enforcing timely disclosure and setting transparent regulatory supervision will likely reduce the degree of risk in investing in China debt securities, brought on by regulatory uncertainty. Hence, sovereign and corporate debt ratings will likely improve.

11 December 2001

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Sector impact
Agriculture more pain
Grain prices in China compare unfavourably with international prices
The agricultural sector will likely suffer the greatest negative impact from WTO accession, mainly owing to dated production methods and high costs. The cost of grain (wheat and cotton), we believe, is about 40% higher than international market prices. The government has traditionally kept the grain purchasing price below production cost to subsidise industrial and urban development. Implementation of this policy over an extended period of time has resulted in economic backwardness for farmers. Growth in farmers income in 2000 was a mere 2% y-y, compared with around 8.5% for urban dwellers. In first three quarters of this year, per capita income in cities rose 7.4% y-y versus 5.2% in rural areas. The current income of urban residents (per capita disposal income was RMB6,280 in 2000) is 2.5x that of farmers. We believe there are about 300m surplus labourers in rural areas, resulting in low productivity and high unit costs. After WTO entry, tariffs on agricultural produce will be reduced to 15% from 21%. No subsidising of agricultural exports will be allowed a somewhat insignificant proviso since the government terminated subsidies in 1994. More crucially, import quotas on major grain (wheat, corn, cotton) will be lifted from 3% of total domestic production to 5% in five years following accession, implying grain imports will rise from 12m tonnes to 20m tonnes by 2006 and about 30m tonnes by 2011. As a consequence, we estimate job losses will amount to 2.5m in corn production, 5.5m in wheat production and 5m in cotton production. In aggregate terms, we see total job losses in the sector reaching 13m by 2006, representing 3% of the total numbers of workers employed in agriculture. Still, it is not all doom and gloom for agriculture. We believe the opening of domestic and overseas markets will help create jobs in non-grain production sub-sectors, such as animal husbandry, fishery and vegetable, fruit, flower, greenfood, and medicine plant cultivation. We expect 1m jobs to be created in animal husbandry and another 1m in other non-grain production. Policies to ease the pain in rural areas China has recorded bumper grain harvests over the past few years, resulting in depressed prices. As mentioned, we estimate the number of surplus farm labourers at 300m. This poses the threat of social instability, compounded by the imposition of more taxes and levies by local authorities a move that has led to a number of protests and clashes between farmers and local authorities. Moreover, there is almost no social safety net in rural areas, except for more affluent regions such as Shanghai. Keenly aware of the danger that unemployment in rural areas poses, the central government has implemented a number of reform measures such as relaxing residential permit controls and accelerating urbanisation. We foresee a net increase in the number of farmers migrating to urban areas from 6m per year at present to about 15m by 2006 and we expect the rate of urbanisation to reach 40% by 2006 from 36% at present. In addition, the government has increased assistance to privately owned township and village enterprises (such as the extension of bank credit) to help with the creation of jobs. One of the most significant land measures enacted as part of Chinas open door policy in the late 1970s was the de-collectivisation of farms. Now another wave of significant land reform is in process. This involves the encouragement of switching from household production to large-scale agricultural production, which implies a shift toward corporatisation of farms. The government has embarked on a process of land reform under which farmers will be entitled to lease land on a long-term basis. This policy, in our view, forms the basis for consolidation and corporatisation in the sector. Equally import, it empowers farmers to lease out land on a sublease, a significant compensation for the lack of a social safety net since it will provide a supplementary income stream.
11 December 2001

Job losses could reach 13m by 2006...

...but some sub-sectors may benefit

Social problems in rural areas are compounded by the lack of a social safety net

The central government has implemented some reforms to benefit the rural population

Allowing farmers to lease land in the long term will allow for consolidation and corporatisation of agriculture

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Rural areas need more investment and policy support

In our view, the development of agriculture will depend on shifting the policy focus from increasing grain production to diversification of crops, specifically the cultivation of profitable agricultural produce (eg, fruit, flowers, biomedical produce). Meanwhile, a government proposal to increase investment in agriculture will help too. We expect the government will issue RMB50-80bn in special bonds to upgrade infrastructure and the education system in rural areas. Other measures include a reduction in the tax burden, the cutting of various fees and levies and the provision of policy and financial support measures to farmers to adopt new technologies and shift to high value-added production. The competitiveness of the agricultural sector will likely improve only if these policy measures are implemented successfully not an easy task in Chinas countryside.

11 December 2001

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Banking facing tough competition

Timetables have been set for the reduction of NPLs Opening the banking sector will be gradual...
Probably one of the greatest structural weakness in the Chinese economy is the high level of NPLs in the banking system. The government seems to be aware of the pressing need to address banking sector problems and has set a timetable to allow the health of the banking sector to improve before the liberalisation of financial instruments. The PBoC recently published a timetable of banking sector reforms in accordance with WTO accession terms. These reforms include allowing foreign banks to conduct renminbi business without any geographic restrictions within five years of accession. At present only about two dozen foreign bank branches are allowed to conduct limited renminbi business in Shanghai and Shenzhen. By end-September, China had extended approval to 190 foreign-bank branches and offices (including 158 branches and six sub-branches) to conduct banking business in the country. However, the bulk of the banks are only allowed to engage in foreign currency business with foreign clients and with certain restrictions in place. The next step in the opening process is to allow foreign banks to conduct renminbi transactions with foreign-funded companies in China. Within two years of accession, this business will be extended to Chinese companies in general. Five years after accession, foreign banks will be allowed to conduct renminbi business with clients of their choice, including individuals. Renminbi business timetable
Time horizon Present Immediately after accession One year after accession Two years after accession Three years after accession Four years after accession Five years after accession
Source: Xinhua News Service

...in both business and geographic terms

Lifting of geographic restrictions in: Shanghai, and Shenzhen Dalian, Tianjin Guangzhou, Qingdao, Nanjing, and Wuhan Jinan, Fuzhou, Chengdu and Chongqing Kunming, Zhuhai, Beijing and Xiamen Shantou, Ningbo, Shenyang and Xian All geographic restrictions lifted

On 9 December, the PBoC announced new market opening measures that will come into effect when China becomes a full member of the WTO. These include: l Client restrictions on foreign banks foreign currency business will be abolished, allowing such banks to deal with both corporate and individual clients in foreign currency business. l The Shanghai and Shenzhen branches of foreign banks will be allowed to commence renminbi business, while foreign bank branches in Tianjin and Dalian will be allowed to apply for renminbi business operations. l Non-bank, foreign financial institutions will be allowed to apply to engage in motor vehicle financing, either through a JV or a wholly owned subsidiary. l Foreign companies will be allowed to establish financial leasing companies either through JVs or wholly owned subsidiaries.

NPLs remain at an alarming level, but will likely be reduced consistently

Dai Xianglong, governor of the PBoC, acknowledged that NPLs at the "big four" stateowned commercial banks Industrial and Commercial Bank of China (ICBC), Agriculture Bank of China (ABC), China Construction Bank (CCB), and Bank of China (BOC) accounted for 29% of their total loan portfolios at end-2000. This was even after the transfer of some RMB1.4tn in bad loans to four asset management companies, implying that the initial figure was around 39% at banks, which account for 80% of domestic banking assets. We believe NPLs in the domestic banking system prior to the transfer of NPLs to the asset management firms stood at around 45%. At this level, many domestic banks would be considered insolvent by international ratings agencies. Against this background, we believe the banking sector is the most vulnerable to foreign
11 December 2001

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competition after WTO accession. While a number of reform measures have been put in place to improve the health of the system, we think a lot remains to be done. This all but obliterates the possibility of an early opening of the capital account.

Banking reform progress

The first step in the banking reform process was to establish four AMCs to take over NPLs from banks. In 1998, the government issued RMB270bn in bonds to recapitalise the banks and enhance their capital adequacy ratios. It also acted as an implicit guarantor for RMB1,400bn in bonds issued by the four AMCs. By 2000, the four AMCs assumed about RMB1.4tn in NPLs from the big four banks, resulting in a 10pp drop in the NPL ratio. We think the big four will issue corporate bonds in future to enhance their capital base and bring capital ratios to the required 8%. Chinas AMC asset transfers (1999-2000)
NPLs transferred Company Orient Great Wall Cinda Huarong Total
Source: Nomura International (Hong Kong) Limited

Share of bank loans outstanding (% end-1998) 20.4 24.6 21.9 17.9 20.8

Assigned bank BOC ABC CCB ICBC

(RMBbn) 267.4 345.8 375.6 407.7 1,396.5

Banks have implemented reform measures of their own to constrain NPLs

Meanwhile, the banks have also made efforts to reduce NPLs. In July, the PBoC announced growth in NPLs slowed in 4Q00 and became negative at the beginning of this year. In 1H01, the big four banks NPLs dropped another 2.1pp through the write-off of NPLs against operating profit. Banks have established loan management systems, which involve the separation of loan application assessment from approval and auditing processes and the introduction of a risk management system. We understand the government has set a target for an NPL reduction of 2-3pp per year for commercial and policy banks. According to the China Trade News (May 2001), Bank of China (BOC) had an NPL ratio of 28% at the end of 2000. The chairman of BOC indicated that the bank cut NPLs by RMB18.5bn in 2000 and plans further cuts of RMB20bn in 2001 and RMB25bn in 2002. Meanwhile, the chairman of CCB pledged in September that the banks NPL ratio would be below 10% in three years. We understand the big four banks aim to bring the NPL ratio to an average 15% by 2005. Meanwhile, the other two banks have taken similar measures to reduce NPLs and Chinas only private national bank, China Minsheng Banking Corp (600016 CH, RMB14.8, not covered), announced its net profit rose almost 90% y-y in 1H01 (we note, though, that the bank uses Chinese accounting standards) while NPLs fell to 4.1% from 6.5% in 2000, and lending increased 35.3% y-y. The NPL problem that has plagued the big four banks is attributable to past lending practices. Lending has traditionally been a function of policy considerations or relationships while banks have lacked a centralised approval process, a proper credit rating system and a risk management system. Now, the era of easy credit for wellconnected borrowers seems to be coming to an end. This year, major state banks unveiled a credit rating system, designed to assess borrowers repayment ability, and introduced other indicators for comprehensive loan appraisal. In addition, branch managers will be expected to monitor credit standing through follow-up supervision. According to Xinhua News Service, both ICBC and CCB have activated such systems. Efforts to improve lending practices have not been limited to hardware and the big four banks have launched investigations into irregularities at branches to bring errant employees to book. Disciplinary action has been taken against 1,240 staff members (out of a workforce of 1.5m). This was in response to investigations of 6.15m badloan cases at 316 bank branches in 1H01.
11 December 2001

NPLs at the big four could drop to 15% by 2005

Policy considerations and personal relationships will make way for commercial considerations

Banks have started to crack down on lending malpractices

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AMCs are making limited progress in disposing and recovering impaired assets

In our view, AMCs are making slow progress in resolving NPLs. According to Xinhua News Service, a total of RMB73.2bn of assets had been disposed of by the four AMCs last year, of which 32.2% had been recovered. By September this year, a total of RMB95.8bn of assets, or 6.86% of the total, had been disposed of by the four AMCs. Some 42% of this sum was recovered in cash. For example, Huarong, one of the biggest AMCs, has recovered more than 30% of the assets it has taken from ICBC. It has assumed around NPLs of RMB407.7bn (US$49.2bn) from the bank since 1999. We understand Cinda, another big AMC, also managed to recover 30-35% of disposed assets. AMCs are allowed to sell shares and debts to overseas investors once NPLs are securitised. AMCs NPL recovery (at September 2001)
AMC NPLs transferred (RMBbn) 267.4 345.8 375.6 407.7 1,396.5 Gross NPLs disposal (RMBbn) 15.4 25.7 36.2 18.2 95.8 Total NPL asset recovery (RMBbn) 6.6 6.7 18.1 8.9 40.3 Cash recovered (RMBbn) 3.2 2.8 11.7 5.6 23.3

Orient Great Wall Cinda Huarong Total

Source: Nomura International (Hong Kong) Limited

AMCs have been selling assets to foreign institutions

Huarong has sold most of the current tranche of RMB16.6bn (at December) in NPLs to a US-Sino consortium in Chinas first such auction. The Morgan Stanley Dean Witter-led (MWD US, US$52.72, Strong buy) consortium has agreed to buy a RMB10.8bn portfolio of NPLs from Huarong. A total of RMB16.6bn in loans, packaged into five pools, were up for auction. The consortium agreed to buy four of the five pools; about 45% of the total is collateralised by property. The deal reflects the governments determination to tackle NPLs. We note international investors are generally interested in the assets but are arguably taking a realistic view of their quality. Huarong expects to recover about 21% of this tranches assets (post consortium/advisory fees), with about 10% in cash. The relative low pricing of this tranche may reflect the sellers intention to open up overseas markets. Overall, we expect the recovery ratio to be around 15%. Other AMCs seem to have adopted similar strategies. Cinda has tied up with US-based mortgage bank Lonestar Capital (unlisted), Deutsche Bank (DBK GY, 77.32, Hold) and Goldman Sachs (GS US, US$93.9, not covered) to sell bad assets to overseas investors. Great Wall, an AMC managing NPLs for the Agricultural Bank of China, is teaming up other foreign banks, such as Deutsche Bank, to auction about RMB15bn of NPLs in the international market. Meanwhile, Orient, an AMC for BOC, plans to auction 1520% of its RMB267bn in NPLs. In future, China will likely sell NPLs to overseas investors via securitisation. We believe a JV model will be adopted to manage these assets, with AMCs contributing assets and overseas buyers contributing funds and assuming management control. While the terms of WTO accession allow for a grace period before foreign competition is permitted, we believe banks will have to address problems as a matter of urgency. In our view, they must use the transition period to restructure, recapitalise and control NPLs. The governments policy approach to banking appears multi-pronged. While it will force state banks to become more competitive and function like commercial banks rather than government agencies, non-state banks will be allowed to compete with state banks and foreign banks will be allowed to make a gradual entry into the market. The PBoC has indicated that Chinas state banks will be allowed to sell shares to foreign investors, thereby raising funds to offset the write-offs and enhance competitiveness after WTO accession. We understand investment negotiations between foreign banks and several small Chinese banks have already started. For example, Bloomberg reports (21 November, 2001) that the International Finance Corp, the World Banks investment arm, will buy 15% of Nanjing Commercial Bank for RMB219m. Bank
11 December 2001

AMCs are seeking alliances with foreign partners to manage assets

State banks will have to use the interim period to restructure, recapitalise and address NPLs

Some foreign banks are negotiating with smaller Chinese banks to assume an equity stake

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of Communications, Chinas fifth-largest bank, said in August it had obtained government approval to sell a 15% stake to foreign investors while Hong Kong-based Bank of East Asia (23 HK, HK$16.35, OUTPERFORM) is believed to be in talks with China Minsheng Banking Corp to acquire a stake. Further down the line, the government will seek to diversify the ownership of state banks. This will involve partial stock market listings and foreign investment. We believe BOCs decision to merge all its Hong Kong subsidiaries bringing total assets to HK$820bn and its application for listing in Hong Kong next year are in line with this strategy. We believe CCB will announce similar moves in the near future.

Competition in the banking sector

Much has been made of the impact of WTO accession on Chinas banks. More often than not the conclusions are dire: Chinese banks will lose professional staff, deposits and clients to foreign banks. Such conclusions, while realistic, are perhaps an oversimplification and ignore the impact of accession on sub-sectors and the dynamic role of government in monitoring and regulating the industry. Of more use is an investigation into the probable impact on the constituent parts of the industry (see also an article by Pu Yonghao, "Chinas banking industry: The winners and losers after WTO entry", in The Banker, May 2000).

Chinese banks may prove to be resilient in retail banking

Retail banking We do not expect foreign banks will mount a significant competitive challenge in the retail banking segment. Much more likely is that competition between domestic banks will intensify. In countries where the banking system is more open, foreign banks have taken a back seat. One example is the UK, arguably one of the most open banking systems anywhere. Yet, the four dominant banks control 68% of personal current accounts and 86% of SME current accounts, according to the Cruickshank report to HM Treasury on banking competitiveness in the UK. This state of affairs seems even more peculiar when one considers that charges at these banks are not competitive compared with other, smaller banks. It appears then that the perceived opportunity cost of changing banks may be higher than meets the eye. We expect Chinese banks will remain dominant in the retail sector, but less so in foreign currency business. Bank branch distribution in major Chinese cities
Shanghai China Agricultural Bank Bank of China China Construction Bank Foreign banks
Source: PBoC, China Financial Yearbook 2000

Beijing 734 400 199 144 19

Tianjin 453 595 234 113 14

Guangzhou Shenzhen 396 15 116 146 116 28

592 421 137 253 60

One aspect worth noting is the development of on-line banking. In theory, foreign banks could use this low-cost vehicle to overcome the weakness of limited branches in China. However, there is still a long way to go before the necessary infrastructure is in place and the major domestic banks are already developing on-line banking networks.

Foreign banks could pose a bigger competitive threat in corporate banking

Corporate banking We reckon corporate banking will become a more intensely fought-over domain. The 80/20 rule applies also to banking in China: 80% of Chinas bank profits come from 20% of clients, which are mainly corporates. Multinationals represent a particularly attractive client base and many foreign banks with a presence in China have courted such clients. The transactions these multinationals conduct money transfers and collections, letters of credit and overseas trade-related settlements generate hefty profits for banks. At present, about 35% of all international settlement business in China is conducted by foreign banks. We expect this figure to rise to around 55% by
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Economic Insight

2006. According to the Nanfang Dushi Daily (14 November), overseas banks assets account for only 2% of total assets in the financial sector, but these banks extend 20% of all foreign currency loans in the country. Current restrictions on foreign banks mean that they necessarily focus on foreign currency business, and foreign funded companies (FFC), mainly in the manufacturing sector, for their business. Moreover, foreign banks can only extend renminbi loans equivalent to less than 35% of their foreign currency liabilities and take renminbi deposits of no more than 40% of their total registered assets.

Domestic banks have advantages too, such as freedom to lend renminbi and foreign currency and a large pool of savings

We expect Chinese banks will make a concerted effort to raise their profile in corporate banking. For one, they will have to protect their Chinese corporate client base and court foreign-funded companies. The advantage Chinese banks have is their large pool of savings and the freedom to engage in both local currency and foreign currency business. We expect domestic banks relationships with corporates to become even stronger as they take ownership in the wake of debt-equity swaps and restructuring. More importantly, the government is unlikely to allow foreign banks to cherry pick and leave loss-making firms to domestic banks. Instead, it will likely ensure a level playing field so that all banks have equal access to potential clients.

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Economic Insight

Capital markets a gradual opening

A number of transitional steps have been taken to open the capital markets
Capital market opening is a reality that China will have to prepare for. The authorities have made a number of proposals to usher in greater liberalisation of the capital markets. In addition to measures such as allowing QFIIs to invest domestically and the introduction of CDRs (for a detailed discussion of these, refer to our Economic Insight: Capital markets Darwinism with Chinese characteristics", published 11 April, 2001), the authorities have proposed a Qualified Domestic Institutional Investors (QDII) scheme. Another significant move is to allow (locally incorporated) FFCs to be listed on Chinese exchanges.

QDII scheme seen to be launched in 2H03

The QDII system will allow domestic investors to invest overseas
The QDII scheme has been proposed to the China Securities Regulatory Commission (CSRC) and has been referred for study for a period of one year. Under the QDII scheme, qualified domestic institutions can invest in overseas-listed mainland shares, subject to approved quotas on the amount of foreign currency to be invested. China had a pool of foreign currency savings of US$135.7bn (US$80.5bn from individuals, and US$46.7bn from corporates) at end-October. We understand Hong Kong-based financial institutions have been lobbying for approval of mainland investment in Hong Kongs security markets. In theory, once the QDII scheme is launched, authorised candidates should be able to construct globally diversified portfolios to minimise risk and enhance returns for mainland investors. Chinese investors can only invest in Chinese A or B shares at present. These markets have performed poorly of late and have been dealt a telling blow since the authorities launched a crackdown on malpractice, fraud and stock manipulation in the securities industry. Yet, even after this setback, PERs of A and B shares remain high by international standards. There are concerns that these are tell-tale signs of a stock market bubble. Managing a deflation of the bubble calls for skilful regulatory management of the market, in our view, since a sudden opening of the securities market could lead to a market crash. The QDII scheme is intended to help in preventing a sudden market collapse by providing alternative investment channels for local investors, thereby easing buying pressure in the domestic market. The last thing the central government wants to see is a drain of foreign currency reserves through the QDII system. Hence, we believe the QDII scheme will be limited to a few open-end funds and possibly social security funds, pension funds, government investment vehicles and corporate funds. There are only 13 asset management companies in China with two open-end funds Huaan Fund Management Co and Nanfang Fund Management Co were launched this year and Huaxia Fund Management Co has been authorised to launch a third while the rest comprise 47 closed-end funds. We expect that the maximum investable amount under the QDII system will be limited to US$1bn and hence the impact on the A- and B-share markets will likely be limited. Moreover, we think the QDII system will be implemented alongside the QFII system to balance capital flows in and out of the country. A number of technical obstacles will also have to be addressed, including clearing and settlement and easing forex restrictions. Hence, we foresee implementation toward the middle of 2002 at the earliest.

QDII is intended to relieve buying pressure in the domestic market

Initially the number of QDII candidates will likely be limited and...

...the impact on the domestic equity market should be muted

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Economic Insight

Allowing FFCs to tap Chinese capital

FFCs will be allowed to apply for a listing on a Chinese exchange
The CSRC has announced detailed guidelines for the listing of FFCs on the domestic Aand B-share markets. The requirements include: l FFCs must meet the criteria set by the state on industry eligibility; l FFCs must retain at least 10% of shares after listing (lowered from the 25% required previously); l a Chinese partner must maintain a portion of shares after listing; and l candidates must meet listing requirements for domestic companies. We believe a number of FFCs in operation have restructured with the intent to list domestically. We understand there are another 14 FFCs in Shanghai which have completed restructuring to meet listing requirements pertaining to the shareholding system, including Kodak (China), Unilever (China), Bright Dairy and Food Industry, Novel Color Tube, Shanghai Midaway Infrastructure and Cimic Ceramic. Moreover, we understand a number of Hong Kong firms are considering listing on mainland exchanges. We believe the CSRC approval process will not be a short one and hence we do not expect any FFCs to be formally listed on the A-share market soon.

FFCs will be allowed to repatriate funds, but we expect the effect will be limited

We believe the listing of FFCs will bring a number of benefits, such as an improvement in the quality of domestically listed companies, new investment opportunities for domestic investors, more efficient allocation of domestic capital, an improvement in corporate governance practices and facilitation of more overseas investment, especially from technology companies. Since the China operations of most overseas companies are small, we think the new rules will have little effect on the overseas parents. FFCs will be allowed to repatriate funds, but we expect the effect will be limited since the portion of shares that must be held by FCCs cannot be traded.

Implementation of the QFII system

The QFII system gives foreign investors access to A shares
As part of the gradual opening of its capital markets, China will allow foreign investors to purchase A shares. To this end the government will institute the QFII system. The main regulations pertaining to the system are: Candidate prerequisites: l Banks will be ranked on the basis of their universal banking activities (such as securities, asset management, insurance). l Asset management firms or institutions (including pension funds, mutual funds, and government investment vehicles) will have to meet a minimum requirement with regard to assets under management (most likely US$1bn) and have an operating track record of three years. l Securities brokers will have to meet minimum requirements with regard to net assets (most likely US$1bn) and have three years of global investment experience. Operational procedures: l Candidates will have to register with the regulator, most likely the CSRC. We expect the initial number of approvals will be between 10 and 20. l All capital flows will be monitored by the State Administration for Foreign Exchange (SAFE). A special subaccount will be created in the BoP to record the flow of funds. l Candidates will be required to open a special local-currency account with a minimum deposit of currency-converted capital. l Shares will be held by appointed custodians so shareholdings/transactions can be checked at any time. l Funds will have to remain in the country for a specified period of time (likely one year) before they can be repatriated with the approval of the regulator. Upon repatriation, the funds will be subject to taxation.

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Economic Insight

Size of quota: l Foreign investment in securities will likely be limited to a 10% equivalent of total domestic market capitalisation (currently RMB4tn) over a period of five years. Moreover, we expect the quota for each year will be around RMB80bn. l All funds will face individual quotas on their total investment; we expect the quotas will be RMB4-8bn. l We think a 10% limit on foreign investment in strategic sector stocks, such as power and telecoms, will be imposed.

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Economic Insight

Securities industry slow consolidation

WTO accession opens the door for foreign capital to the industry
Following accession, Chinas securities industry will be opened to foreign participation. We understand foreign investors will initially be allowed to take a stake of up to 33% in JV securities firms. Within three years of accession, the ceiling on foreign ownership will be increased to 49%, with the proviso that a local partner remains the major shareholder. JV firms will be entitled to underwrite and trade domestically listed securities. In September, Credit Lyonnais (CL FP, 37.15, not covered) and Xiangcai Securities applied for the establishment of the first investment banking JV between a Chinese and a European partner. We understand the companies applied for the competency to offer a full range of investment banking services, including investment advisory and underwriting. Meanwhile, Taiwanese securities are believed to be planning JVs while other foreign companies are establishing representative offices and negotiating with potential partners. Separately, we understand two mainland-funded overseas securities firms Bank of China International and China International Capital (a China Construction Bank/Morgan Stanley JV) have approached the regulator for A-share underwriting licences. We believe underwriting licences will be extended to overseas-registered Chinese securities firms first before JVs are allowed to enter the market. Following Chinas entry to the WTO, minority foreign-owned joint ventures will be permitted to engage in fund management on the same terms as domestic firms. Foreign asset management companies will be allowed to assume up to a 33% stake in jointly managed funds and a 49% stake within three years of WTO membership, again with the proviso that a local partner remains the major shareholder. We understand a number of high-profile foreign fund management companies have entered technical agreements with domestic players in areas such as portfolio management, product development, marketing, customer service, investor relations and training. According to Xinhua News Service, a special preparatory work team has been established by Huaan Fund Management and JPMorgan Chase (JPM US, US$37.22, Hold) to prepare for the establishment of a JV fund once authorities issue the relevant laws and regulations. We understand Penghua Fund Management and a foreign partner have plans for a similar venture. On government figures, China had 101 securities companies with total assets of RMB575.3bn (US$69bn) and net capital of RMB23.6bn (US$2.9bn) at end-2000. These companies recorded total net profit of RMB24bn (US$2.9bn), according to a Xinhua News Service report on 26 February.

Overseas-registered Chinese firms may get licences first

Minority foreign-owned JVs will be allowed to conduct fund management on the same terms as domestic companies

Domestic securities firms have been plagued by losses this year

This year, however, the picture has changed considerably as firms have incurred severe losses. Some domestic brokerages have offered depositors interest rates of 6-15% per year (aka guaranteed returns), as compared with the standard 2.25% deposit rate (one-year fixed) on offer at commercial banks. Having raised deposits mostly from local corporates, it appears some brokerages have used the funds to speculate in the domestic stock and property markets, offering clients under the table guaranteed returns. The CSRC attributes this practice: to 1) a lack of proper fund-raising channels for brokerages; 2) loopholes in the management of client deposits; and 3) poor corporate governance. A case in point is China Southern Securities which was reported by Nanfang Dushi News (9 October) to have run into financial difficulties. The reported loss of RMB3bn is in close proximity to the companys registered capital. Other major securities firms experienced similar problems facing declining trading commission revenue and a failure to meet guaranteed returns on investments made on behalf of clients. To remedy the situation firms have either had to compromise profit to write off losses or pay interest to clients while delaying return of the principal in the hope that the market will stage a recovery.

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Economic Insight

A weaker financial profile among securities firms will likely lead to further mergers...

On the heels of worsening corporate performance, tightening regulatory supervision and an economic slowing, we foresee continued weakness in Chinas equity markets. As a result, we expect weaker equity market conditions will increase the likelihood of consolidation in the industry. Galaxy Securities serves as an example; it emerged from the merger of five securities houses and is now the biggest in China. Other big mergers in recent years include two separate mergers between Shenyin Securities and Wanguo Securities and China Guotai Securities and Junan Securities. We expect consolidation in the industry will continue in the new year, with the protagonists obtaining finance through A-share listings or partnerships with foreign firms. One of the most recent mergers, according to the Hong Kong Economic Journal, is newly formed Guangfa Northern Securities, which emerged from the purchase of a 51% shareholding by Guangfa Securities of a North China-based local broker, Jingzhou Securities. Meanwhile, the regulatory noose is tightening. The CSRC has announced a number of new rules in recent months. One of the more notable rules is a requirement that securities firms separate proprietary capital from clients funds deposited in the firm, aimed at protecting clients in case securities firms suffer severe losses. In addition, we understand that new rules to facilitate bankruptcy procedures for securities firms are in the pipeline. Still, the business culture in the industry will likely remain an obstacle to further consolidation. Most securities firms are state owned or SOE owned and managers have enjoyed significant prestige, strong profit growth and liberal compensation over the past few years. They also have a great deal of influence and will likely baulk at the suggestion of surrendering control. Hence, we foresee consolidation proceeding at a slow pace. Securities market opening
Reform measures JV-type securities firms and fund management firms to be launched (Foreign partner can hold 33% initially) Foreign enterprises allowed to issue and list shares on domestic exchanges Sino-foreign JV funds CDR issuance Sino-foreign JV-type investment banks/securities firms Approval of QFIIs and QDIIs QFII investment in A shares Foreign partner allowed to hold up to 49% of JV-type securities and fund management firms
Source: Nomura International (Hong Kong) Limited

...and accelerating regulatory changes should provide further momentum...

...but resistance remains fierce

Expected implementation 1H02 1H02 1H02 1H02 1H03 1H03 2H03 2H04

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Economic Insight

China: main economic indicators and forecasts

Year average (unless specified) GDP (real, y-y %) Private consumption Public consumption Gross fixed capital formation Exports + services Imports + services Primary production Secondary production Tertiary production GDP (nominal) Local US$bn Income per capita (US$) Population (m) Urban unemployment rate (yr average %) VA industrial production (y-y %) Retail sales (%) CPI inflation (%) (Yr-end) (Yr-average) External accounts Exports Total (US$bn) (y-y %) Imports Total (US$bn) (y-y %) Trade balance (US$bn) Current account US$bn % GDP 1996 9.6 12.1 10.2 7.8 0.0 0.0 5.1 12.1 7.9 6,833.0 823.3 672.6 1,224.0 4.1 12.5 20.1 7 8.3 151.0 1.5 138.8 5.1 12.2 7.2 0.9 1997 8.8 7.6 10.3 7.0 20.7 8.2 3.5 10.5 9.1 7,489.4 902.3 730.0 1,236.0 4.9 11.1 10.2 0.4 2.8 182.8 20.9 142.4 2.5 40.4 29.7 3.3 1998 7.8 8.2 11.0 12.2 0.2 -0.5 3.5 8.9 8.3 7,900.3 951.8 762.7 1,248.0 6.8 8.8 6.8 -1 -0.8 183.8 0.5 140.2 -1.5 43.6 29.3 3.1 1999 7.1 9.2 10.9 9.1 5.3 14.4 2.8 8.1 7.5 8,267.3 996.1 791.2 1,259.0 9.3 8.9 6.8 -1 -1.4 194.9 6.1 165.8 18.2 29.1 15.7 1.6 2000 8.0 9.1 14.0 10.9 27.9 32.1 2.4 9.6 7.8 8,911.3 1,076.2 850.8 1,265.0 11.0 9.9 9.7 1.5 0.4 249.1 27.8 225.2 35.8 24.0 20.5 1.9 2001F 7.3 7.7 7.3 11.0 3.9 7.2 2.5 8.9 7.1 2002F 7.0 7.5 7.5 10.6 3.5 6.5 2.2 8.1 7.7 2003F 7.7 7.2 7.5 11.1 20.3 21.1 1.3 8.1 7.7 11,535.4 1,406.8 1,083.8 1,298.0 15.0 9.8 8.1 2.2 1.8 324.5 21.0 316.4 23.0 8.1 13.6 1.0

9,710.3 10,533.9 1,172.7 1,281.5 917.9 993.1 1,277.7 1,290.4 11.9 9.5 10.0 0.4 1 259.5 4.2 241.7 7.4 17.8 16.3 1.4 13.3 9.6 8.3 1.5 1 268.2 3.3 257.2 6.4 10.9 12.5 1.0

Money, interest and exchange rate M1 (%) 18.9 M2 (%) 25.3 Bank lending 21.0 1-year working capital lending rate (%) 11 (yr-end) 10.1 Treasury bond 2006 (yr-end %) N/A Local: US$1.0 8.3 (yr-end) 8.3 Sovereign risk indicators Foreign debt - US$bn 150.6 - % GDP 18.3 - % Exp G&S 87.7 - Short-term, US$bn 30.7 - % GDP 3.7 - % of FX reserves 29.2 Debt service ratio - % Exp 12.1 Fiscal balance - % of GDP -0.8 Public debt - % of GDP 39.5 Forex reserves - US$bn 105 - Mths imp cover 9.1 Credit rating - Moodys/S&P A3/BBB
Source: Nomura International (Hong Kong) Limited

16.5 17.3 22.5 9.7 8.6 8.7 8.3 8.3 164.3 18.2 79.3 52.0 5.8 37.2 9.5 -0.8 51.4 139.9 11.8 A3/BBB+

11.9 15.3 15.5 7.5 6.4 7.9 8.3 8.3 163.1 17.1 78.6 50.0 5.3 34.5 11.1 -1.2 56.0 145 12.4 A3/BBB+

17.7 14.7 12.5 6.1 5.9 8 8.3 8.3 161.3 16.2 73.8 56.0 5.6 36.2 11.5 -2.1 51.8 154.7 11.2 A3/BBB

16.0 14.0 13.4 5.9 5.9 8.27 8.28 8.3 162.4 15.1 58.1 52.0 4.8 31.4 10.2 -2.8 50.2 165.6 8.8 A3/BBB

15.4 14.0 13.0 5.9 5.4 3 8.28 8.3

15.8 14.5 14.2 5.4 5.4 3.6 8.22 8.2

16.0 15.2 14.8 5.4 5.4 4.4 8.2 8.2

174.2 173.0 176.0 14.9 13.5 12.5 59.9 57.5 48.6 60.0 63.0 68.0 5.1 4.9 4.8 28.8 27.6 27.6 9.9 9.7 8.6 -3.0 -3.0 -3.0 46.8 44.3 41.2 208 228 246 10.3 10.6 9.3 A3/BBB A3/BBB+ A3/BBB+

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