The fall in China’s tax rates may be “old hat news” by the time you read this column, however, at the time of writing ~10 June 2005 it was relatively new with a phone around revealing that some Australian exposed resource companies had recently heard it, while others were totally unaware of it – and naturally welcomed the news.

The tax comment was made in a presentation on tax as an update of one of the slides, basically from 1 January 2007, company tax in China is expected to fall from 30% + 3% to 21% + 3%. For foreign companies with introductory tax breaks, such as 2 years at 0% followed by perhaps 3 to 5 years at 50% of 33% (or 16.5%), their arrangements are to be extended to 2011. The presenter thought that this meant the half tax rate becomes 12% instead of 16.5%, although some Australian exposed companies were not so sure. Also apparently from 2011, there are expected to be no further half-tax breaks, with foreign companies starting projects after 2007 treated the same as local companies.

Amongst the presentations was one on the banking system and a very detailed coverage of logistics, infrastructure and transport by the China Supply Chain Council, with many statistics that I have often wondered about but never seen – and have hence included them in this column. There were a few opening presentations along the lines of China trying to secure uranium supplies from Australia to meet their energy needs such as building 25 nuclear reactors in the next 3 to 5 years to increase nuclear’s contribution from 2% to 4% of the current demand levels of >2000 terawatt hours of electrical power (it was 1900 Twh in 2003).

The current population of about 1.3bn has 26% <15, 6% >65 and ~40% urban, of which adult literacy is ~86%. There are 357m households, 300m TVs, 200 TV stations, >2000 TV channels, ~2,100 newspapers, 90m internet users and ~5m graduates per year.

Apart from the slightly lower GDP growth rate of 9.4% y-o-y in 1Q05, with y-o-y comparisons relative to 1Q04 of exports up 35%, imports up 12%, fixed asset investment slower at 23% (compared to the 28% rate in 1Q04), the banking statistics and finance statistics were as at 2004. Fixed direct investment was up 42.7% in 1H04 to US$72.7bn, while bank assets were only US$3.3trn (compared to Australia’s US$1.1trn) and have been steadily growing at a CAGR (compound annual growth rate) of 18%pa.

Amongst the banks, the Bank of China has the highest credit rating and has a 17% to 18% market share (the same as ICBC – Industrial and Commercial Bank). These two banks along with China Construction and the Agricultural Bank of China comprise the 61% share that the SOCB (state owned commercial banks) have, followed by the JSCB (joint stock commercial – means quasi-Govt) group at 17%, and RCC (Rural credit co-ops) at 11%, UCB (urban commercial) at 6%, finance companies at 2%, foreign banks at 2% and lastly UCC (urban credit co-ops) at 1%.

Non-performing loans have apparently dropped to about 12% of assets but were regarded as a problem area as some of them cannot be enforced otherwise the businesses/ventures would be liquidated and employees become unemployed. Apparently loans are still undertaken on this basis – knowing that they are likely to become non-performing and unlikely to be paid, but are perceived to be of benefit to the (or a) community. Having said that, nearly 4000 industrial park and development zones are under construction involving a planned area of 36,000 sqkm.

Construction in China was expected to continue rising overall from an average of 19.5%pa from 1994 to 2004 to 21%pa in 04/07e, with residential decreasing its pace from 18.6%pa in 1997 to 2004 to 12.5%pa from 2004 to 2007 for about 2m houses pa in 2007. Other buildings are slower, but at a higher base being an expected 2.6m in 2007 rising at 3.3% to 4.3%pa. China now has 22 cities with populations >2m and a further 345m people are expected to move to the cities by 2020.

As for infrastructure, transportation of goods is mainly by water (53.3% at an average of 1855km), then rail (32.2%, average 768km), road (14.8%, 58km), and lastly air (0.1%, 2482km).

Starting with air, as shown in Figure 1, there are currently 143 civil airports with plans for another 110 by 2015. The Shanghai Pudong airport handles 500 flights per day on Runway 1, with the 4km long x 60m wide Runway 2 having been opened in April 2005 to handle A380 Super Jumbos. Airbus in fact expects to sell 50% of the 100 new A350’s to China this year. Shanghai Pudong handles the largest domestic airfreight at 1.19mt in 2004 (up 83% since last year). Beijing is China’s second largest at 55% of Shanghai Pudong. China’s domestic airfreight is the second largest in the world after the US having grown at 20%pa since 1991, and is expected to gradually slow to average ~10.3%pa to 2021.

From 1996 to 2000, the road network increased by 18% or 216,900km to 1.4Mkm whilst traffic increased by 20%. A further 200,000km is planned to connect 93% of the villages across the country. The 15-year MOFCOM plan to 2020 is to have 3Mkm of highways and 85,000km of super highways linking cities and countryside villages.

By 2006 the road network should have 5 verticals and 7 horizontals – this terminology occurs regularly in describing transport targets where vertical relates to a road passing from the north to the south, and horizontal for west to east apparently often >2000km long, as illustrated by the 2000km long Shanghai-Chengdu link and 2,500km long Beijing-Zhuhai expressway (e.g. in Australia, Perth to Sydney would be one horizontal, Adelaide to Darwin and Melbourne to Cairns would be verticals). Western China’s motorway network is expected to have increased from 2,700km in 2000 to 15,000km in 2006, with SW China expected to construct >42,000km of roads by 2011. There are expected to be >35,000km of tolled motorways by 2015 compared to 120,000km in the US.

At 75,000km, China has the third largest railway network in the world (after the US at 230,000km and Russia at 85,000km). First priority is given to passengers, then secondly to bulk goods in the order of grain, oil and then ore, and lastly to general cargo. US$42bn is being invested into 6000km of new lines and 3000km of double-tracks, with the US$3.3bn link with Tibet due for completion in 2007. By 2010, China expects to have a 90,000km railway network of 8 horizontals and 8 verticals of which 40% is electrified and 40% is double-tracked.

Transport by water covers the ports and the rivers. China’s 14,500km long coastline contains 200 sea ports handling >1.7bntpa of cargo. The new Yangshan deep-water port being built at Shanghai expects to have a 10km long deep-water shoreline and 50 deep-water berths. In 2004, Chinese ports handled 48m containers being 25% of global transport. Of the cargo ports, the largest tonnage handled in 2004 was Singapore at 388mt, with Shanghai a close second at 379mt.

China’s inland waterways are dominated by the 6,300km long Yangtze river which expected to move 300mt in 2010 (up from 186mt in 1999), and accounts for ~33% of all inland container shipping with 12 container ports between Shanghai and Chongqing. The YRD or Yangtze River Delta is expected to have 4,200km of navigation channels by 2020, linked by 300,000km of roads.

It can be seen that Shanghai is gradually taking over Hong Kong and expects to host the world’s core of international shipping and container transportation. Even its new skyscrapers are to have another addition with a new 110 storey high building being built next to the Jin Mao tower. Shanghai once only had 20 buildings >20 storeys high, now it apparently has more than 3000 buildings >20 storeys high, and construction reputedly currently accounts for 50% of China’s steel demand.

It has been stated that from a theoretical economics viewpoint, China has to slow down – yet little signs are being seen of it, and the plans are definitely still for expansion given the above targets in this column, with demand for commodities apparently likely to last for a few more years. And companies that mine them in China are about to get a 9% tax break too….

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is an Authorised Representative with Taylor Collison Ltd, and with his associates, holds interests in some of the stocks mentioned in this article. The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.

Figure 1. Current Air network in China (source : China Supply Chain Council : www. supplychain .cn)