• The first reaction of Chinese government to the global economic downturn is by way of a RMB4-trillion package, comprising 10 measures, as announced in November 2008.

• The core of the package is to increase construction and infrastructure investment. Investment projects with foreign company participation understandably will be considered.

• Some infrastructure and environment protection projects such as highways, energy-efficiency and pollution control may provide business opportunities for Hong Kong companies, which are under CEPA allowed to form wholly-owned units to provide a variety of related services.

• The package is also focussed on industry upgrades, services sector development, and modernisation of the rural sector. Therefore, Hong Kong companies in the design, marketing, exhibition and logistics sectors may also have a role to play.

Boosting Demand amid Weakening External Environment

The financial tsunami triggered by the bankruptcy of Lehman Brothers in September 2008 has touched off a global liquidity crunch with a severe attendant impact on the global economy. With rapid deleveraging and credit contraction, economic slowdown has spread from developed economies to developing economies including Asia's export-oriented economies, such as the Chinese mainland. In reaction to the global economic downturn, Premier Wen Jiabao announced in November 2008 a stimulus package, comprising 10 measures, to boost domestic demand.

This 10-point stimulus package is worth approximately RMB4-trillion of government spending to be disbursed by the end of 2010. With a fiscal stimulus package representing about 15% of China's GDP in 2008, the Chinese government hammered out an unambiguous signal that it is prepared to adopt drastic yet necessary economic measures to prevent GDP growth from rapidly decelerating, with a view to ensuring that GDP growth of the mainland is maintained at 8-9% in 2009. After expanding at 13% in 2007, China's GDP growth eased to 9% in 2008; fourth-quarter GDP growth of 2008 plunged to 6.8% year-on-year, the lowest in seven years.

Going beyond the announced RMB 4-trillion package, Premier Wen also indicated in early January of 2009 that the Chinese government will be rolling be a series of new, industry-specific policies measures to support nine key industrial sectors hard hit by the global economic downturn.

These nine key industries are (1) iron and steel; (2) automobiles; (3) petrochemicals; (4) textiles; (5) shipbuilding; (6) light manufacturing; (7) non-ferrous metal; (8) machinery; and (9) electronics and communications, which collectively are estimated to account for about one-third of the country's GDP. Most of these industry-specific measures will likely be unveiled before March 2009, when the National People's Congress is convened.

To boost domestic consumption while the external environment worsens, China's annual central economic work conference held in December 2008 concluded that rural consumption and spending on housing, cars, services and tourism would be the focus of efforts.

Meanwhile, the Chinese government is drafting another policy package to expedite the investment of RMB 600 billion into six major projects approved in the country's 2006 master plan for scientific and technological development over medium and long terms (planned for completion by 2020).

With the "active" fiscal stimulus measures, alongside the adoption of "moderately loose" monetary policy and other pump-priming measures including tax rebates, it is expected that the Chinese economy will pick up steam anew in the second half of 2009.

The 10-point Stimulus Package

When the mainland government announced the RMB4-trillion stimulus package, four principles of implementation were also unveiled - the package would be implemented (i) quickly; (ii) heavy handedly; (iii) appropriately; and (iv) in a concrete manner.

It should be noted that the stimulus package may not consist entirely of new project disbursements, and there are measures of speeding up construction and infrastructure investment, and lifting of commercial bank loan restrictions. The 10-point package is summarised below, with a table on specifics at Appendix.

1. Accelerate construction of low-rent housing for the poor and low-income groups
2. Accelerate rural infrastructure projects
3. Accelerate major transportation and infrastructure projects
4. Accelerate medical services and cultural development in less developed areas
5. Strengthen environment-related investment
6. Support the technology upgrade of existing industries and development of new and high-tech industries, as well as services industries
7. Accelerate Sichuan's reconstruction projects
8. Increase urban and rural income
9. Reduce tax burden by transforming the VAT system from production-based to consumption-based
10. Strengthening financial support to economic growth

Apart from direct investment by the Chinese government in the RMB4-trillion package, a considerable amount of investment projects over the next couple of years will be carried out by state enterprises and investment arms affiliated with the Central and local governments. Investment carried out by the state enterprises and government affiliates will be financed by the capital market and bank lending. Foreign investment projects may also be included in the package.

Implications for Hong Kong's Services Suppliers

To cope with the negative fallout of the global financial tsunami and economic downturn, the Chinese government is embarking on a series of economic measures that are aimed at not just providing fiscal impetus to an economy and industries hard hit by the global economic downturn, but also enhancing domestic consumption in a focussed fashion and to accelerate industry upgrades along with high-tech and services sector development. As such, the Chinese government is mounting a concerted response that is beyond the RMB4-trillion package.

As far as the core part of the stimulus package is concerned, it is more focussed on construction and infrastructure investment than private consumption. Related measures can be grouped under infrastructure and real estate services (IRES) such as (1) low-rent housing; (2) environmental infrastructure; (3) transportation infrastructure; and (4) utilities infrastructure.

Infrastructure and Real Estate Services (IRES)

Based on the tranche of RMB100 billion announced in December 2008, as outlined below, IRES projects amounted to as much as RMB81 billion, or 81% of the committed funds. Hong Kong's IRES companies can anticipate a role, especially if foreign investment projects are to be included. Under CEPA, HKSS are allowed to set up wholly-owned enterprises on the mainland to provide a variety of construction and related services. HKSS are further allowed to undertake Sino-foreign jointly invested construction projects irrespective of the percentage of foreign equity in those Sino-foreign projects.

For those Hong Kong IRES companies with strong funding, they can seek to become the main project contractor, participating in forms such as Build-Operate-Transfer (BOT), Build-Operate-Own (BOO) and Takeover-Operate-Transfer (TOT). Nonetheless, it should be noted that the majority of the large-scale infrastructure projects on the mainland are won by big Chinese infrastructure companies and their affiliates (e.g. Hong Kong-listed China Communications Construction Company and China Railway Group), Hong Kong companies, especially those that possess the special technical expertise in demand on the mainland, may like to explore opportunities of becoming sub-contractors to winners of infrastructure projects arising from the RMB4-trillion package.

The stimulus package has a strong emphasis on rural development, as well as the less developed central and western regions. As a result, many projects could possibly be low-cost and at the same time, have less demand for technical capability, an area where HKSS excel. An exception in low requirement for technical capability may be investment projects in transportation infrastructure, many of which will likely be invested in the mountainous central and western regions on the mainland.

Many HKSS have been participating in the mainland's transportation infrastructure sector for long, and the stimulus package may offer some prospective projects for HKSS in light of the sheer scale of road infrastructure investment. Unlike transportation projects in comparatively prosperous regions on the mainland (e.g. coastal provinces), where the BOT model thrives, transportation projects in the mountainous central and western regions might be less profitable or difficult to sustain running on a BOT basis. Instead, those projects would likely be undertaken in the form of government-led construction or Public-Private-Partnership (PPP). Hong Kong companies should watch out whether they could be enlisted as investors or services suppliers (i.e. as main or sub-contractor).

As the Chinese government intends the RMB4-trillion package to be spent by the end of 2010, HKSS eyeing infrastructure projects of the stimulus package have to move quickly and brace for geographical markets on the mainland with which they might be less familiar. In such circumstances, they may like to consider teaming up with mainland companies in targeting the infrastructure projects, contributing technical and project management capability to the partnership with mainland counterparts.

Environment-related Services

Strengthening environment-related investment is one of the 10 points in the package, consisting specifically of urban sewage treatment, solid waste treatment, energy-efficiency and emission-reduction projects. Of the RMB100 billion allocated in December 2008, RMB12 billion was committed to environment-related projects. The RMB4-trillion package will create good business opportunities for HKSS in the environmental protection industry that place their focus on areas like waste handling, water and energy conservation, as well as air pollution abatement.

Hong Kong's environmental protection industry has long been maintaining a cordial business relationship with the region and global businesses. The recognised strength of HKSS lies in sales and marketing, yet they are especially good at project management and commercialising different environmental technologies for customised, niche markets applications.

Meanwhile, HKSS are allowed under CEPA to set up wholly-owned enterprises on the mainland to provide environmental protection services. Hong Kong's linguistic advantage and excellent communication infrastructure give HKSS a ready access to global environmental protection information, thus enabling them to apply the latest environmental protection technology to mainland projects arising from the mainland's stimulus package. For those HKSS with stronger funding, they could have greater flexibility in the form of participating in environment projects on the mainland, such as BOT, BOO and TOT.

Design, Marketing and Exhibitions

One of the 10 measures is "encouraging industry upgrade and innovation", to which RMB6 billion has already been committed. In a fashion consistent with raising planned fixed assets investment in the wake of the Chinese government's announcement of the RMB4-trillion package, some local governments have suggested that they would commit funds to industry upgrade, in specific areas such as:

• Upgrading infrastructure such as industrial parks with advanced facilities

• Giving priority to branded products in government purchases

• Providing subsidies and tax incentives on R&D, and

• Facilitating technology commercialisation

Given local governments' growing interest in cultivating outstanding brands in their regions, HKSS in the design and marketing service sectors can pursue opportunities arising from the drive toward brand making, eyeing mainland companies with the aspiration to become leading brands in their provinces and/or the mainland. HKSS can target provinces with strong consumer goods manufacturing, for instance, Guangdong, Jiangsu and Zhejiang.

On the other hand, Hong Kong can be an effective exhibition platform for mainland companies to showcase their products and market their brands internationally. HKSS on the mainland are currently allowed to provide services for organising exhibitions in Hong Kong. For those enterprises set up by HKSS in Guangdong, Shanghai, Beijing, Tianjin, Chongqing and Zhejiang, they are also allowed to organise overseas exhibitions for enterprises registered in such places.

Hong Kong companies can also watch out for industry-specific measures in support of some of the nine industries where they command a comparative advantage in design, such as textiles, electronics, and light goods manufacturing.

Logistics

Modernising rural infrastructure and raising rural income features prominently in the RMB4-trillion package. In one of the State Council meetings in December 2008, enhancing "rural distribution and logistics" was recognised to be a key means of boosting domestic consumption. One of the development measures for the rural areas is to build and reconstruct a batch of "rural commodity distribution centres", the purpose of which is to enhance circulation of agricultural products, thus increasing rural income, as well as reducing logistics costs. HKSS in the logistics sector are renowned for their expertise in logistics and supply chain management, especially in the area of international freight forwarding. To pursue business opportunities more effectively, they may have to adaptively hone their skills to cater to the domestic logistics needs of mainland enterprises, and partnering with local logistics firms on the mainland would be useful.

One of the measures in the stimulus package is to develop services industries. The Hong Kong Science Park has incubated a pool of companies in RFID technology and may find opportunities in modernising the mainland's logistics industry.

Appendix

10-point RMB4-trillion Stimulus Package