Although southeast Asia may be facing fiscal uncertainty, China is left examining exactly how it will meet its vast paper demand in the future

by Xiang-Ju Zhong

Challenges and opportunities in China

The tides of the recent financial turmoil in southeast Asia have swept across the seas making a tremendous impact on the international financial world. But measures taken by the Chinese government to safeguard itself from these financial tidal waves have so far proved quite effective. China managed to achieve another fruitful year in 1997, regardless of the unavoidable disturbances coming from the outside world.
According to the latest figures released by the National Bureau of Statistics, China's GDP in 1997 was RMB 7,477.2 billion (approximately $933,000 million), representing an increase of 8.8% over 1996. Even though grain crops were down 2.4% in 1997, the harvested total of 492.5 million tons was still the second highest in history. In the industrial sector, growth rates have been moving at a steadier pace. In 1997, imports accounted for $142,400 million (2.5% up on 1996) and exports stood at $182,700 million (up 20.9%). Foreign exchange reserves were $139,900 million at the end of 1997, representing an increase of $34,900 million over the previous year.
The standard of living for the average person has benefited fairly well from a low inflation rate of just 2.8% in 1997. Most people are generally content, even though the country is still a relatively low-paid society. In 1997, the average annual net income for city dwellers was reported to be RMB 5,160 ($622), and RMB 2,090 ($252) for those living in rural areas. Evidently, living standards in the country await further upgrading.
The average annual growth of the Chinese national economy looks like remaining at around 8% in the coming years until the new millennium, while inflation will be kept at a level of 3% or less.

Making a change

Reforms at all levels of government administration are being undertaken to pave the way for economic growth in the years to come. At the same time, major changes in the financial system are already underway. Eventually, this should mean that government agencies will primarily take care of administration on a macro-scale and will no longer be involved in the operational details of any enterprise or business concern as was the case previously. All banks will function as commercial units, with the exception of the Central Bank, which will be the sole administrative body in the financial field.
In the short term though, the industrial sector appears set to undergo immediate changes as the dominant position of state-owned enterprises is scaled down to diversify the country's economic system. A number of unprofitable state-owned enterprises will have to undergo major reforms within the next couple of years. Many of these enterprises are poorly managed and unable to adapt themselves to the new socialist market economy.
Added to that, many of these organizations are overstaffed, so it follows that any reorganization will involve laying off a portion of the present workforce. This could lead to more than 10 million newly unemployed people nationwide and the task of repositioning and retraining them will have to be tackled immediately. The recently elected premier, Zhu Rong-ji, and his cabinet are determined to solve the problems outlined above before the turn of the century.
Another cause for concern in the industrial sector is the question of environmental pollution. This, of course, is going to be a long term issue, but it is not one that is going to be neglected. The National Environmental Protection Agency (NEPA) is authorized by the State Council to enforce environmental regulations. NEPA has been actively engaged in tackling environmental problems in the country and will continue to do so.
There are going to be some hard days ahead for China as the country aims to meet its growth target up to and beyond 2000. Of the many challenges that lie ahead for the national economy, the greatest one comes from southeast Asia's financial turmoil. China must withstand whatever impact the crisis brings and the country is determined to overcome any further damage, even if it means cutting foreign exchange reserves and losing import and export business.
The Chinese government realizes that keeping any major financial crisis at bay is an important factor in maintaining healthy and steady growth in the national economy. Top ranking officials have stressed time and again that the Chinese currency will not be depreciated - not only for the good of the Chinese economy alone, but also to avoid creating any further financial problems in Asia. At present, there are signs indicating that the financial tidal waves in southeast Asia are subsiding, even though they are still far from dying away completely.

The paper sector

Total paper and paperboard production in 1997 is estimated to be around 27.6 million tons, a growth rate of 4.4% over the previous year. Total pulp production in 1997 (virgin fiber only) is estimated to be around 11 million tons (Table 1).

Table 1 - Total Pulp and P&B Production, 1980-1997(1,000 tons)

The big three

Strategically speaking, there are three major issues that call for immediate attention for the healthy growth of the Chinese pulp and paper industry. First of all, the share of woodpulp used in the country's papermaking furnish has to be increased if producers are going to manufacture quality products and meet the requirements of faster PM speeds. At present, woodpulp production accounts for just 9% of the total pulp production in the country. Taking imported market pulp into account, woodpulp still totals a mere 14% of China's papermaking furnish. But plans are in place to increase the share of woodpulp in the furnish to 16-18% in 2000 and 22% in 2010. In fact, several market woodpulp projects listed in the country's Eighth Five-Year Plan (1990-1995) have already come on stream in 1996/1997 and there are several more to come (Table 2).

Table 2 - Market Pulp Projects in China

The time has come for small mills to take decisions on their future. They will either have to shut down, switch over to other businesses or merge into larger capacity operations for the incorporation of chemical recovery systems to be feasible and the mills to become competitive in the domestic market. Since most of these small mills are straw-based, the technological development of an effective processing method for straw black liquor recovery is urgently needed.

Capacity boost

It has been assumed that China's total paper and paperboard consumption in 2000 will be 34 million tons, giving an annual per capita consumption of 26 kg. The corresponding figures for the year 2010 are 50-60 million tons and 36-43 kg, respectively. Growth rates anticipated for the Chinese pulp and paper industry show that total paper and paperboard production in 2000 is expected to be 30 million tons and the average annual growth will be around 4.6%. A decade later, 40-45 million tons of P&B will be made in 2010, assuming an average annual growth of 3-4.1%.
In order to match such levels of demand, a number of greenfield mills and expansion projects will have to be completed over this period and a number of these projects have already been entered in China's Ninth Five-Year Plan, which runs until 2000. Other projects are also on the drawing board targeted for the year 2010.
As Table 3 shows,
Table 3 - Planned Paper & Paperboard Projects in China

Getting there

To hit the country's production target of 40-45 million tons of paper and paperboard production in 2010, an additional 13-18 million tons of capacity will have to materialize. It is known that around 20 major projects are currently being built or on the verge of beginning construction. The completion of these projects should deliver an additional capacity of 1.15 million tons/yr of market pulp and 4.9 million tons/yr of paper and paperboard.
In addition to this, 40 different rebuild programs are also underway or scheduled to get started shortly. These will aim to deliver another capacity boost of around 2.65 million tons of P&B, leaving 6-11 million tons to be met by further projects, some of which are listed in Table 3. It is estimated that a capital investment of $9,000-16,000 million will be needed to provide this extra capacity.
Doubtless Chinese papermakers will have to rally most of the capital investment required at home. But overseas support will also be needed, whether it be governmental or foreign bank loans and/or overseas direct investments (including funds from investors among our Hong Kong and Taiwanese compatriots).
Since the early 1980s when market reforms were initiated, a total of some $1,600 million of overseas financial resources have been used in the Chinese pulp and paper industry. Of this total, $620 million (31%) came from overseas government and bank loans. The balance of $980 million (69%) was made up of direct foreign investments, including contributions from investors based in Hong Kong and Taiwan. Foreign loans supported more than 30 greenfield mills and expansion projects, leading to the introduction of 400,000 tons/yr of market pulp and 650,000 tons/yr of paper and paperboard capacity. It is said that more than 80 Chinese paper mills were involved in joint ventures and/or cooperative partnerships with overseas investors in more than 100 programs, resulting in 1.2 million tons of P&B being produced.
Needless to say, China will welcome any kind of overseas financial support for the future growth of the country's pulp and paper industry, and joint ventures look particularly favorable.

The Chinese authorities are offering favorable terms to attract direct overseas investment. For example, importing innovative process equipment not available in China for projects involving foreign investment will benefit from duty free customs processing and an exemption from VAT (value added tax). Most important of all, though, is that income tax will be waived for the first and second year that the operation starts to make profits, followed by a 50% income tax deduction in the subsequent three years. If the project involves the injection of advanced technology and/or the opportunity to export the end-products, the 50% income tax deduction may be prolonged even further. And where overseas investors decide to reinvest their profits in the same project, income tax will be refunded to the enterprise concerned. Not only that, but if the project is located in a Special Economic Zone and/or Economic and Development Zone, additional privileges will be offered.
Chinese papermakers are well aware what overseas financial resources can do for them. Employing such funds helps to speed up the growth of the industry as well as injecting advanced technology and new process equipment into the industry. The Chinese are determined to create a mutually beneficial investment environment for parties interested in this market sector.
Indonesian, Thai, Malaysian and South Korean groups have been actively involved in major projects in the Chinese pulp and paper industry and the country's papermakers hope that they will make a speedy financial revival. Some of the projects which investors from these countries are involved in may have to be postponed, but hopefully not for too long.

The paper trade

Paper and paperboard production in China has always lagged behind consumption. Over the last three years, total consumption has been increasing at an average annual rate of over 10%, whereas the average annual growth in production was 6-8%. In the past, paper and paperboard imports have always been necessary for the country, not only to fill the gap between production and consumption, but also to satisfy domestic demand in certain paper grades. This includes high quality packaging, coated grades and business papers such as NCR (no carbon required), facsimile and computer paper.
In 1997, P&B imports totaled 5.52 million tons - an increase of 22.9% over 1996 (Table 4).
Table 4 - Market Pulp and Paper and Paperboard Imports, 1990-1997 (1,000 tons)

The Russians have been launching market pulp sales campaigns in the Chinese market and have been comparatively successful on the softwood side. It is clear that international market pulp dealers are going to find themselves operating in an increasingly competitive Chinese market. It is also quite possible that the share of hardwood-based market pulp imports will increase significantly in the coming years.
Recovered paper plays a major role in meeting China's fiber supply needs. The current recycling rate in China stands at around 30%. This means that some 7-8 million tons of wastepaper are being collected and re-used every year. Secondary fiber imports did not actually begin until the mid-1990s, but by 1997 wastepaper imports were reported to be 1.62 million tons. OCC (old corrugated containers) and ONP (old newspapers) currently lead the list of imported materials and it is expected that more wastepaper will have to be imported in the coming years, particularly ONP.

Import/export

Looking more closely at Tables 2 & 3, it is clear that many of the planned projects have capacities over 100,000 tons/yr. This would imply the need for much larger process equipment (eg digesters, chemical recovery units, deinking systems and paper machines) and China will have to rely on imports to meet these requirements. The adoption of advanced technology will almost certainly involve a greater employment of paper chemicals. So it is likely that there will be many opportunities for overseas suppliers to exploit their sales in China through heavy-duty hardware and auxiliary goods such as paper machine clothing.
The Chinese pulp and paper industry has never been much of an exporter. For a number of years, just 200,000-230,000 tons/yr of paper and paperboard have been exported, mainly to Hong Kong and other areas in southeast Asia. It is interesting to note that out of the 200,000 tons of handmade paper produced annually, over 25% is exported. It would appear Chinese producers are more concerned with the domestic market. Pulp exports are negligible.
On the other hand, a number of Chinese pulp and paper machinery builders are apparently interested in exploring the international market, especially in southeast Asia. Some Chinese machine builders have already found their way into other Asian countries, in one case supplying a recovery boiler for a 1,000 ton/day pulp mill in Indonesia. Other types of process equipment are available for medium-sized pulp and paper mills as well, including horizontal tube digesters, evaporators, causticizers, single rotating disc refiners (500 mm & 750 mm diameter) and fourdrinier machines (1,760 mm, 2,640 mm & 3,150 mm).
Overall though, it is pretty much one-way traffic as far as China's paper trade and related businesses are concerned and this situation is likely to persist for many years to come.

The market is there

Chinese papermakers are well aware of the responsibility they have in satisfying the needs of a population of more than 1,200 million. It is not going to be any easy job and international support will be needed and highly appreciated to secure the healthy growth of the industry.

The growing gap between demand and production also looks set to provide a potentially busy market for the world's paper traders. Indeed, imports of paper and paperboard started increasing several years ago and this will continue to be a feature of the industry for the next few years at least.

Obviously, a large amount of capital investment will be needed for the projects under consideration. And although the coming years are going to see some hard times for China's pulp and paper industry in an increasingly global market, Chinese papermakers are confident that they will be able to find a way to secure a prosperous future in the sector.
It is clear then, that the Chinese paper market has great potential for the turn of the century and well beyond and there is a blossoming market to be serviced by the international community. n

Xiang-Ju Zhong is a senior advisor to the international liaison department of the China Technical Association of the Paper Industry (CTAPI). He is based in Beijing in the People's Republic of China