SARS to finally hit investment in China

SARS to finally hit investment in China

Owen Brown, Dow Jones, Beijing

As health authorities Tuesday continued to upgrade the extent
of the spread of a potentially fatal respiratory virus, a key
concern for China's economy remains the possible downside for
foreign investment.

So far analysts expect China's tourism and hospitality
industries to be the hardest hit by public health concerns
arising from severe acute respiratory syndrome, or SARS.

Postponed travel plans by foreign business travelers have been
compounded by a government decision to shorten a seven-day Golden
Week for the May Day holiday to three days to prevent the virus
reaching beyond already hard-hit cities such as Beijing.

But as the numbers of SARS infected cases continues to rise,
partly due to the government's appeal for local health
authorities to come clean on the actual numbers, the impact could
expand beyond the tourism sector.

Japan's third largest automaker, Nissan Motor Co. Ltd admitted
Tuesday the China launch of its Sunny model could be delayed due
to a travel ban discouraging foreign experts visiting the
company's Guangzhou plant.

But a recent UBS Warburg survey of listed companies with
manufacturing operations in Guangdong, the province hardest hit
by the SARS epidemic, found the disease had minimal effect on
their production.

A CLSA survey of Taiwan technology companies with mainland
operations also found SARS hasn't yet caused any disruptions to
business.

One analyst told Dow Jones Newswires that indications so far
suggest that foreign businesses have been able to keep their
China units operating effectively through e-mail and
teleconferencing, despite the cutback in travel.

But if the epidemic were to drag on, that might affect the
ability of foreign business executives to travel to China to sign
investment contracts.

While postponed travel only delays signing, investor
confidence might also be a potential SARS victim and that would
have far greater consequences for China's economy.

Foreign direct investment, along with trade-related industrial
production and state spending, has been one of the key drivers of
economic growth with hit a seven-year high of 9.9 percent year on
year in first quarter 2003.

Donald H. Straszheim, head of California-based Straszheim
Global Advisers, said a regular misgiving about doing business in
China has been the lack of trust in the government.

"To date, from a western perspective, China has flunked the
veracity test on SARS," Straszheim said.

He pointed out that actual foreign direct investment in China
grew by more than 56 percent year-on-year in the first quarter of
2003. "Now a real question is whether SARS fears will slow
foreign direct investment in the future," Straszheim said.

DBS Bank economist Chris Leung said indirect economic losses
could be large, especially if FDI inflow into China were to
decelerate sharply. "The negative impact of SARS on the economy
shouldn't be underestimated in the second quarter," Leung said.

Guangzhou Trade Fair, held this year despite a World Health
Organization advisory against travel to Guangdong province,
reported transactions worth US$730 million were signed in the
first three days of the annual expo, China Business Weekly
reported Tuesday. That's well down from the $16.8 billion in
orders signed during the 2002 trade fair.

And some of this year's deals were made using an online
platform to connect with more than 300 foreign business partners,
rather than by visitors to Guangzhou.

Despite concerns about the effect on foreign direct
investment, China's tourism industry continues to bear the brunt
of public health concerns prompted by the spread of SARS.

China National Tourism Administration has instructed local
travel agencies to limit its promotion of packages to rural areas
to curb the spread of the infection.

China CYTS Tours Holdings Co. Ltd, one of the country's major
travel agencies, said the cancellation of the week-long Labor Day
holiday to curb the spread of the SARS virus will have a "major
impact" on its business.

Along with hotels catering for business travelers, local
airlines passenger loads have been savaged by the cutback on
business travel to the region prompted by the WHO travel
advisory.

China Eastern Airlines, which lists part of its assets in New
York, Hong Kong and Shanghai as China Eastern Airlines Co. Ltd
(CEA), last week reported a significant reduction in passenger
traffic on international flights, including those SARS-afflicted
Hong Kong. The airline didn't provide specific figures.