CORRECTED - CORRECTED-SARS arousing alarm among foreign firms in China


In April 24 Shanghai item "UPDATE 1-SARS arousing alarm among foreign firms in China", please read in paragraph 19...

"Honda Motor Co has advised families of expatriate staff members with children in Hong Kong, Guangdong and Beijing to return to Japan as a precautionary measure."

(Making clear staff have not been ordered to leave)

A corrected repeat follows.

By Edwin Chan

SHANGHAI, April 24 (Reuters) - Foreign investors, a crucial element behind China's enviable economic growth, are becoming increasingly nervous as the alarm bells ring out over the deadly flu-like SARS virus which threatens to erupt across the country.

Economists are scrambling to revise forecasts for the world's sixth largest economy and worry about potential fallout if foreign firms -- which contribute about half of exports and almost a third of economic activity -- rethink their strategies.

Those fears were fanned by reports Japan's biggest car maker Toyota was recalling its staff from Beijing during an outbreak of Severe Acute Respiratory Syndrome (SARS).

The company denied any recall and said it was merely trying to help Japanese staff and families wishing to go home for May Day holidays.

Others such as General Electric Co are either making it easier for expatriate staff or family members to go home or recalling staff from China, industry sources have said.

"Investors start to think whether it's a good idea to invest all the money in China," said Yiping Huang, a Salomon Smith Barney economist. "I'm not sure if China would be able to make up all of what's being lost."

Actual foreign direct investment hit $13.09 billion in the first quarter, up 56.7 percent from a year earlier. A flood of $52 billion in foreign investment last year helped China post growth of eight percent, the strongest of any major country.

But Huang said China could see foreign investment dive 30 percent year on year in the second quarter and 15 percent in the next.

Foreign firms such as Volkswagen AG , which commands 40 percent of the fast-growing car market in the country, account for nearly 30 percent of Gross Domestic Product (GDP), analysts said.

SARS infections have soared in Beijing this week, sparking mounting fears among its 14 million people and prompting the government to step up efforts to contain the disease by implementing a tough quarantine policy.

Nationwide, cases have swelled and there have been 2,422 infections and 110 deaths reported.


A drop-off in fresh foreign investment could also deal a heavy blow.

"We're going to see some production delays," said Dong Tao, a senior economist with Credit Suisse First Boston.

"This won't affect companies that have been in China for many years, but it will affect the decision-making process of newcomers who have no knowledge of China."

At best, SARS will go away in a few months and stalled investment projects would accelerate or get back on track. At worst, investors could shift projects to other markets, leary of putting all their eggs in one basket.

"The market is now questioning if China could sustain its FDI level in the long term. It is argued that the SARS crisis demonstrates the need for multinational corporations to diversify their supply sources," Andy Xie, an economist with Morgan Stanley in Hong Kong, wrote in a recent report.

Toyota, Japan's top automaker, is in the midst of setting up a massive new plant in northern China to crank out 50,000 cars a year initially by 2005.

Spokeswoman Sun Tuoya said employees could stay home up to the end of May Day holidays on May 5. "What happens next, we haven't made a decision yet," Sun said.

Honda Motor Co has advised families of expatriate staff members with children in Hong Kong, Guangdong and Beijing to return to Japan as a precautionary measure.

Severe Acute Respiratory Syndrome (SARS) first appeared in Guangdong in November.

In the short term, an exodus of foreign expertise could hit product quality. Long term, it could dampen industrial output and thus overall economic expansion.

"Once this is over, economic activity should resume. Longer term, however, there is an increase in the perceived risk premium in relation to all China investment,2 Huang said. "That might have a longer-term negative impact on investment."



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