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China Think Tank Urges Oil Market Deregulation Before WTO Deadline

An energy think tank has urged the Chinese government to open the country's oil retail market to more domestic players ahead of a 2004 deadline to fully open the sector to foreign investors, a government official said.

A study by China's Macro-Economy Research Institute says the country should introduce more domestic participants into its oil retail market before opening to foreign investors by the 2004 deadline set by the World Trade Organization, said the official, who is familiar with the study. The institute is a unit of China's top economic planning body, the State Development Planning Commission.

The government, however, in an apparent move to control the oil market, has been encouraging China Petroleum & Chemical Corp, or Sinopec, and PetroChina to expand their share of the retail oil market by allowing them to buy small oil companies or set up franchises.

A recent government mandate, which gave both firms more leverage in the oil retail market, has designated Sinopec and PetroChina the only two companies permitted to build new gasoline stations.

According to the study, opening the oil market to domestic players is a key part of China's oil market deregulation. Monopoly methods, such as limiting the number of market players, will only hurt the competitiveness of Sinopec and PetroChina, it added. The study says oil companies shouldn't rely on the government for their survival.

China's oil market deregulation falls far behind its market economic development because it limits the market entry of smaller participants due to China's rigid control of oil and natural gas prices, he said.

Turning to the upstream oil and gas industry, the study suggests China's oil exploration and development is stagnant due to the absence of efficient and flexible policies as well as inadequate technology and capital input, the official said.

The study urges the government to remove geographic barriers in oil and gas exploration and development, and encourage competition among oil and gas producers.

Currently, China's oil and gas exploration and production largely rests with PetroChina, Sinopec, and China National Offshore Oil Corp. Under a government plan, PetroChina's E&P is limited to northwest and northeast basins, Sinopec's to onshore basins in the east and south, while CNOOC is restricted to offshore operations.

Beijing-based industry officials say these geographic divisions not only restrict private investors from embarking on E&P, but also tarnish the competitive edges of these companies.

Foreign Banks Can Offer RMB Business in 5 More Cities

Accredited foreign financial institutions will be allowed to offer limited RMB-denominated banking services in five more Chinese cities starting December 1, a notice issued by the People's Bank of China said.

The cities are Guangzhou and Zhuhai in southern Guangdong province, Qingdao in northeastern Shandong province, Nanjing in eastern Jiangsu province, and Wuhan in central Hubei province.

Zhuhai wasn't in the original list of cities to be opened up to limited foreign competition within one year after China entered the World Trade Organization. China joined the world trade body on December 11 last year. Zhuhai was supposed to be opened up within three years.

Foreign financial institutions operating in these cities still need to apply for their RMB operating licenses before they can take corporate deposits in RMB and extend corporate and commercial loans in local currency, the notice said. At present, 45 out of 181 foreign banks in China are allowed to conduct limited RMB-denominated banking transactions with their foreign clients in Shenzhen, Shanghai, Tianjin, and Dalian.

As of end-September, their RMB assets have reached RMB47.8 billion (US$1=RMB8.28), with loans reaching RMB38.5 billion. Foreign banks, due to various restrictions, still play a small role in China's banking system. The expansion in the number of Chinese cities which foreign banks can conduct limited RMB-denominated banking services is part of China's WTO commitments.

In an announcement made last year, the central bank said it would start granting licenses in the secondary cities of Jinan, Fuzhou, Chengdu and Chongqing before December 2003.

The cities of Kunming, Beijing, and Xiamen would be opened before December 2004, while Shantou, Ningbo, Shenyang, and Xi'an cities would be opened before December 2005. All banking restrictions will be lifted before December 2006.

Olympics Environment Investment to Reach RMB45 Billion Beijing's municipal government will spend RMB45 billion on environmental protection projects in preparation for the 2008 Olympic Games, the China Daily reported. The report says the city will direct the funds to projects including sewage treatment, solid waste recycling, and air pollution prevention from 2003-2007.

The city wants to attract additional funding for environmental projects from both domestic and foreign investors, the report says, citing a director with the Energy Saving and Environmental Protection Office of the Beijing Economic Committee, Huang Qian.

The municipal government will also offer tax cuts or exemptions to both environmental protection enterprises and manufacturers, the report says.

China Mulls Transfer of Bad Loans

China is considering providing another "free lunch" for its state banks, shifting a large number of bad loans off their books and parking them in asset management companies where they may be bought by foreign and domestic institutions, the Financial Times reported.

Wang Weiwei, a deputy director-general at the economic restructuring office of the state council, said that the amount of non-performing loans that may be shifted from the books of the "big four" state banks would "not be more than the 1.3 trillion yuan" that was moved into the asset management companies, or AMCs, in 1999, the FT reported. Wang said the government hadn't made a final decision on whether to launch the second transfer of non-performing loans into the AMCs connected to the state banks.

"There is still some disagreement among people over the inherent moral hazard in this system," Wang said. "If we do it once again, then the banks may grow to rely on the system," he added. Dai Xianglong, governor of the People's Bank of China, the central bank, said after the first transfer of non-performing loans to the AMCs in 1999 that there would be no more "free lunches" for the state banks, meaning that the onus would be on the banks themselves to reduce their non-performing loans through better management and corporate governance.

But concern has grown among policymakers that leaving banks to whittle down their bad loan ratios by themselves could significantly delay their restructuring to well beyond the time that foreign banks are allowed to compete with them on a more equal footing in 2007, the FT said. Without having dealt with most of the bad loans on their books, the "big four" state banks will be hampered in their plans to list on the domestic stock markets, increasing the urgency of shifting non-performing loans into the AMCs.

The "big four" are Bank of China, Industrial and Commercial Bank of China, China Construction Bank, and Agriculture Bank.

China Aims to Double GDP by 2010 to US$2 Trillion

China is aiming to double its gross domestic product by 2010 to US$2 trillion using 2000 as a base year, said Finance Minister Xiang Huaicheng. "(Despite the strong growth), our average per capita national income is only US$840 ... we have just moved up to the ranks of lower middle-income countries," Xiang said at a forum of the 16th World Congress of Accountants in Hong Kong.

"Our objective is that by 2010 we will double China's GDP of 2000, reaching about US$2 trillion, achieve a noticeable improve-ment in our economic structure, and modest affluence of the people," Xiang added. Through adopting an expansionary fiscal policy to stimulate domestic demand, China achieved GDP growth of between 7 and 8 percent from 1998 to 2001 despite the backdrop of the Asian financial crisis and the global economic slowdown, Xiang said.

Xiang expects full-year GDP growth this year to come in at the high-end of the government's expected 7 to 8 percent range. The economy grew 7.9 percent in the first three quarters, Xiang said.

As a result of strong growth in trade and foreign direct investment, China's foreign exchange reserves also continue to increase, Xiang said. Xiang expects foreign exchange reserves to increase by between US$60 billion and $70 billion this year. China's foreign exchange reserves stood at US$258.6 billion at the end of September.