China on a hot streak with larger scale, new mills.

The world's largest nation is doing great things. China joined the World Trade Organization (WTO) in late 2001. It has dramatically changed its economic and political systems over the past 15 years. Today, China's main goal is to continue developing its economy while maintaining social cohesion.

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Investment in China grew at the phenomenal rate of 24% in 2003, with industrial production rising 17%-18%. Foreign direct investment in 2003 was US$ 53 billion, unchanged from 2002 largely because of the SARS epidemic. China's gross domestic product (GDP) growth was 9.1% in 2003. The trade surplus was US$ 20 billion, down 35% from 2002 even though the volume of foreign trade increased 35%. Imports increased by 39% (to US$ 410 billion) while exports surged 32% to US$ 430 billion. However, an increasing inflation rate (3% in October) signals that the Chinese economy could be overheating. The Chinese economy is expected be at high cycle for several years, probably until 2007-2008.

Membership in the WTO has been positive for the Chinese economy, boosting growth as expected. If SARS had not emerged, China's 2003 economic performance would have been even stronger. Even so, the disease opened a window on China to the world, showing the many faces of China. The country is, in reality, a foundry of different Chinese provinces, each bigger than many of the world's countries, each with different civilizations and income levels.

What most foreign visitors to China see are the magnificent airports and marble-plated hotels in the capitals of the largest provinces, the newly built cities and auto roads in the coastal areas of the east and south and, the fast-growing banks and opulent public buildings. Many private homes have been built in high-income areas around the country and the construction cranes for offices and other buildings are moving deeper and deeper into the peripheral areas. Still, vast areas of China are not part of the new prosperity. Most Chinese people still live in poor, overcrowded conditions where disease and other problems are common, breeding social unrest.

Per capita income in China has reached US$ 1000, but that income is actually worth more. The average Chinese citizen can buy goods and services worth US$ 4000-5000 with an annual income of Yuan 8300. A professor's monthly salary, Yuan 2000, has an approximate purchasing value of US$ 1000-1100. Another aspect of the money value equation is that in the western parts of China, the Yuan is more powerful than on the eastern coast.

Now that the growth cycle has begun, Chinese consumers are focusing on houses, autos, communication equipment, and media, as well as education. One thing is clear in China--the economy is driving the whole country. The political and economic spheres in China are closely related. The government must ensure that living standards are raised to levels that compare with other developed countries. Chinese administrative bodies have accepted a new principle, private property is protected by the constitution, and seeking economic benefit is officially acceptable. The ruling Communist Party of China now allows capitalists to be party members. Every important decision-making group has the same general target--to improve the well being of the Chinese people.

Chinese production of paper and paperboard was about 40 million metric tons in 2003 and demand reached 45 million metric tons. Five-year average production growth (1998-2003) was 5.5%, which is "low" because of poor years between 1996-2000. Paper and board demand grew 9.2% a year during the 1990s and is expected to average 6.0%-6.5% this decade. In 2003, the Chinese paper industry grew by 50 new paper and board machines, bringing 4.1 million metric tons of new capacity on line. The list of 2004 investment projects will generate 4.6 million metric tons of additional capacity, with an additional 5.6 million metric tons in 2005. The vast majority of current growth in the global paper and board industry is taking place in China.

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Chinese printers now use new presses that employ computer-aided systems. Beijing University, together with Xinhua News Agency, developed a computer-aided laser photosetting system in the early 1980s that uses traditional Chinese characters. Newspapers typically use about 3000-4000 characters, while works of literature will use up to 40,000. The characters are transferred from computer database directly to the printing plates. All major printing houses use computer-aided printing and are able to transfer printing jobs to satellite print shops.

The massive investment in new papermaking capacity has met the needs of the Chinese printing industry. Printers need more good quality paper for their new printing presses, which are more often heat-set roll offset presses. The new high-speed printing machines also need better and denser paper surfaces for better images and to save on ink. Small quantities of fine paper, art paper and LWC are even exported to neighbor countries, Japan, and the United States. In the future, Chinese paper will be exported to Europe, where several Chinese companies have sales offices.

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Investment activity is so strong in China that its current import level of 5 million metric tons will shrink to 1 or 2 million metric tons by 2006 if most planned projects are realized and closures of old capacity continues. At that point, outside companies will need to have papermaking capacity in China.

Wood plantations are a key part of the Chinese paper industry's fiber supply. Chinese companies are trying to reduce their dependence on imports by developing additional sources of domestic chemical and mechanical pulp. Our visit to one of the largest Chinese pulp and paper companies. Chenming Group, confirms this change in business strategy (see story on page 26).

BRIGHT FUTURE?

China has taken center stage in the paper industry today. About 90% of the new capacity in the global paper industry is being built in China. If its economic, political, and banking systems can handle the frenetic activity, China appears to be on its way to funding continued economic growth throughout the current decade and beyond. As more people move to urban areas, growth in paper consumption will continue and China will be the paper industry's top story for many years.

Mill                   Site               PM   Start   Supplier
                                               Up

Gold East Paper        Dagang. Jg          1   1999    Voith Paper
(Sinar Mas China)
Gold East Paper        Dagang. Jg          2   1999    Voith Paper
(Sinar Mas China)
Dong Guang Nine        Dong Guang. Gd      4   2003    Metso Paper
Dragons Paper Mill
Dong Guang Nine        Dong Guang. Gd      3   2002    Metso Paper
Dragons Paper Mill
Dong Guang Nine        Dong Guang. Gd      2   2000    Metso Paper
Dragons Paper Mill
Lee & Man Paper        Gd                  4   2002    Voith Paper
April, Changshu Fine   Changshu,           1   1999    Metso Paper
Paper Mill             Jiangsu, Jg                     Voith Paper
Behui Paper            Zibo, Magiao, Sd   18   2003    MHI
Gold Huesheng Paper    Suzhou, Jg          1   1999
(Sinar Mas China)
Dongying Huatal        Sd                 10   2003    Voith Paper
Paper, Bing Zhou Mill

Mill                   Wire    Speed     Capacity   Grade
                       Width   (m/min)   (1000
                       (mm)              metric
                                         tons/y)

Gold East Paper        10500    1700     500        Coat WF
(Sinar Mas China)
Gold East Paper        10500    1700     500        Coat WF
(Sinar Mas China)
Dong Guang Nine         5650    1100     450        Cartonboard
Dragons Paper Mill
Dong Guang Nine         5950    1100     400        Linerboard
Dragons Paper Mill
Dong Guang Nine         5950    1000     400        Linerboard
Dragons Paper Mill
Lee & Man Paper         6000    1250     330        Liner, Fluting
April, Changshu Fine    9350    1500     330        Unc WF
Paper Mill
Behui Paper             6230     600     300        Coated Board, WLC
Gold Huesheng Paper     8000    1700     280        Unc WF
(Sinar Mas China)
Dongying Huatal         7100    1800     220        Newsprint
Paper, Bing Zhou Mill

Table 1. Largest paper machines operating in China, end of 2003

Mill                       Site              PM   Start   Supplier
                                                  Up

Ning Shing Development     Ningbo, Zh         3   2004    Metso Paper
(Ningbo Zhonghua,
affiliated to Sinar
Mas China)
Gold East Paper            Dagang, Jg         3   2005    Voith Paper
(Sinar Mas China)
Dong Guang Nine Dragons    Taicang, Jg        5   2004    MHI
Paper Mill
Lee & Man Paper            Guangdong          6   2004    Voith Paper
Jiangxi Chenming Paper     Nanchang, Jx       1   2004    Metso Paper
Zhonglong Paper            Pudong, Shangha    1   2004    Voith Paper
(Cheng Loong)
April Xinhui Fine          Xinhui, Ga         1   2005    Voith Paper
Paper Mill
Guangzhou Paper            Guangdong          9   2005    Voith Paper
PanAsia Long-Teng Paper    Hebei              1   2005    Metso Paper
Chenming Paper             Shouguang, Sd     12   2005    Shanghai
Ningxia Meili              Ningxia                2005    Changhua

Mill                      Wire    Speed     Capacity   Grade
                          Width   (m/min)   (1000
                          (mm)              metric
                                            tons/y)

Ning Shing Development     8800    800      700        Folding Boxboar
(Ningbo Zhonghua,
affiliated to Sinar
Mas China)
Gold East Paper           11200   2000      600        Coat WF
(Sinar Mas China)
Dong Guang Nine Dragons    7200   1000      450        Linerboard
Paper Mill
Lee & Man Paper            6000   1400      400        Liner, Fluting
Jiangxi Chenming Paper     8600   2000      380        LWC
Zhonglong Paper            6300   1200      360        Liner, Fluting
(Cheng Loong)
April Xinhui Fine          9850   2000      450        Unc WF
Paper Mill
Guangzhou Paper            8800   1800      360        Newsprint
PanAsia Long-Teng Paper    8450   2000      330        Newsprint
Chenming Paper             6100    800      300        Cartonboard
Ningxia Meili              4880    600      300        Coated Board

Table 2. Largest ongoing projects

GLOBALLY LARGEST 2003

                            Mill, mton    % of the globe

1. Stora Enso                  15.6            4.8
2. International Paper         15.2            4.6
3. UPM-Kymmene                 11.8            3.6
4. Weyerhaeuser                10.1            3.1
5. Georgia-Pacific              8.7            2.6
6. Nippon Unipack               8.6            2.6
7. Oji Paper                    8.6            2.6
8. Smurfit-Stone Cont.          8.3            2.5
9. Abitibi-Consolidated         7.5            2.3
10. Norske Skog                 6.7            2.0
11. MeadWestvaco                6.6            2.0
12. M-real                      6.1            1.8
13. Sinar Mas (APP)             5.6            1.7
Total top 13, Global#         120#            36.3#

LARGEST IN CHINA 2003

                            Mill, mton    % of China

1. Sinar Mas (Dagang,          2.2             5.2
   Ningbo, Suzhou) (FIE)
2. Chenming Group (CH)         1.3             3.1
3. Nine Dragons (FIE)          1               2.4
4. Lee & Man (HK FIE)          0.85            2.0
5. Zhonzhu Group (Ch)          0.7             1.7
6. Huatai (Ch)                 0.6             1.4
7. Yueyang Holding (Ch)        0.3             0.7
8. Sun Paper (Ch)              0.4             1.0
9. Guangzhou Paper (Ch)        0.4             1.0
10. UPM-Kymmene (FIE)          0.4             1.0
11. Nanping Paper (Ch)         0.3             0.7
12. Shuailun Paper (Ch)        0.3             0.7
13. Black Dragon (Ch)          0.3             0.7
Total top 13, China            9.1#           21.5#

Table 3. Largest companies in the world and in China, by paper and board
making capacities.

IN THIS ARTICLE, YOU WILL LEARN:

* Why China's economy is growing fast and attracting vast investment.

* Details behind the largest existing mills and those on the drawing board.

* Future growth prospects.

ADDITIONAL RESDURCES:

* See article on China's tissue industry in this issue.

* "China's paper industry: Entering the WTO era," by Hannu Oinonen, Solutions! March 2003.

RELATED ARTICLE: CHENMING GROUP: BUILDING NEW MILLS, DEVELOPING NEW MARKETS, IMPROVING PAPER QUALITY

We approached the Chenming mills by taxi. Our driver, a 30-year-old woman with slightly brown-tinted hair, can speak some English. Her old car was 8 years old, but this car is an almost new Passat with leather seats. We had a sightseeing tour around the three Chenming paper mills located in Shouguang town, which has some 80,000 inhabitants. Our driver knows Chenming well and tells about its history. The Chenming Group was expanded by Mr. Chen, the father of the current company chairman, Chen Honguo. The father experienced serious health problems three years ago and had to retire, but still comes to the mills from time to time, with two assistants helping him walk.

In mill No. 2, there are straw and wood chip piles in the raw materials yard. Trucks bring in baled straw. Fang Hui, Chenming's chief engineer, told us later that wheat straw is brought from as far as Hunan by trucks, and reed from Heilongjiang by train--2000-3000 km away. Mill No. 2 is 5 years old. The first of the Chenming Shouguang mills is more than 30 years old. The most recent art paper mill is only 2 years old and houses the company's head offices.

Wang Bao Liang, vice general manager of Chenming Group, describes how the company has grown over the past 30 years. Total paper and board capacity at Chenming is 1.4 million metric tons, and 420,000 metric tons of pulp is produced. Sales were Yuan 4.6 billion in 2002 (US$ 555.7 million) with a profit of Yuan 620 million/380 million (gross/net). In January-September 2003, sales were Yuan 4 billion, and profit was Yuan 710 million/500 million. Chenming is the most profitable paper company in China, according to Wang. Its shares are traded on the Shenzhen stock exchange. The Chinese government still holds 31.4% of the shares.

Ongoing investments include Jiangxi Chenming's 380,000 metric ton/year green-field LWC mill in Nanchang, and a 300,000 metric tons/year coated board machine for Shouguang mill No 3. Both mills will start up in 2004.

Chenming Group invested Yuan 1.7 billion (more than US$ 205 million) in 2001-2002, about 30% of sales. The company expects a 6-7 year payback cycle for its investments. Chenming mills in Shouguang, Wuhan, Qihe, and Jiangxi have a target to reach 1 million metrics tons of capacity each.

Pulp is becoming a more important cost factor, according to Wang Bao Liang. Nonwood pulp has traditionally been the company's most important raw material. Shouguang operates a 300,000 metric tons/year nonwood pulp mill that uses half reed and half wheat straw. Nonwood pulp is typically 30% cheaper than wood pulp.

Today, the raw material situation is changing because of demanding new grades and faster machines. Pulp for fine papers is mostly imported wood pulp. Chenming has begun 80,000-ha plantation projects in both Shandong and Jiangxi. The plantations are primarily poplar but also include pine. The company plans to use the plantations to produce pulp and reduce its reliance on costly pulp imports.

According to Fang Hui, the company's lower quality printing and writing paper contains 35% market pulp, 35% nonwood pulp and 30% wood pulp--primarily BCTMP. The nonwood and wood pulps are produced by Chenming. Offset paper furnish can include up to 50-70% non-wood pulp. About 10% of LWC furnish is APMP. Nonwood pulp is not included in the production of lightweight coated grades.

Export is an important development area for Chenming. For this reason, the company has established sales offices in the United States (Los Angeles, California), Europe (London, England), Korea, Africa, and Japan.

Chenming Group faced negative publicity in the summer 2003. The State Environmental Protection Administration (SEPA) closed the Wuhan Chenming Hanyang Paper Industry facility until emissions were reduced to regulated standards. The chairman of the board and general manager were immediately demoted and dismissed, and the mill remained shut down for one month.

Chenming holds a majority portion in Shanghai Paper Machinery (SPM), the largest Chinese-owned paper machinery supplier. When SPM faced financial troubles and restructuring challenges two years ago, Chenming purchased its stake in the company. According to Fang Hui, SPM will be an important domestic technology supplier. Today, SPM manufactures 3.2-6.0 meter wide, 450-1000 m/min machinery. The company's target is to develop 10 meter wide and 1300 m/min printing and writing machines and similar board machines.

CHENMING GROUP

Paper Mill           Site                     Capacity

Shouguang Chenming,  Shouguang, Shandong      560,000 mtpy+300,000 mtpy*
  mills 1-3
Wuhan Chenming       Hanyang, Wuhan           330,000 mtpy
Chibi Chenming       Hubei                    65,000 mtpy
Qihe Chenming        Qihe, Shandong           320,000 mtpy
Jilin Chenming       Jilin                    100,000 mtpy
Xiang Fang Chenming  Hubei                     20,000 mtpy
Hailaer Chenming     Jianshe, Inner Mongolia   30,000 mtpy
Jiangxi Chenming     Nanchang, Jiangxi        380,000 mtpy
Total papermaking capacity 1,4 million metric tons at the end of 2003

OTHER CHENMING COMPANIES

Chenming Panels      Shouguang, Shandong      Panelboard
  Company
Chenming Thermal     Shouguang, Shandong      174 GW/hour of power.
  Power Co                                    11 mill, m tons of steam
Shanghai Chenming    Shanghai                 Paper machines and board
  Paper Machinery                             machines up to 6 m and
                                              1000 m/mm.

CHENMING GROUP

Paper Mill             Products

Shouguang Chenming,    Fine papers, art paper, chemical pulp.
  mills 1-3
Wuhan Chenming         Fine papers, newsprint.
Chibi Chenming         Offset, writing, copy.
Qihe Chenming          Containerboard, packing papers.
Jilin Chenming         Chemical pulp.
Xiang Fang Chenming    Coated papers.
Hailaer Chenming       Writing, letterpress papers,
Jiangxi Chenming       chemical pulp LWC.**

OTHER CHENMING COMPANIES

Chenming Panels        Strong wood board, parquet.
  Company
Chenming Thermal       In 2003, added two 220-ton boilers
  Power Co             and a 50 MW generator,
Shanghai Chenming
  Paper Machinery

* 300,000 mtpy (metric tons/year) cartonboard machine in 2004;
** Jiangxi Chenming greenfield mill is under construction.

ABOUT THE AUTHORS:

Hannu Oinonen is an economist, engineer, and independent market and technology researcher based in Finland. He has carried out extensive research in Asia and is the co-author of several reports on the Asian paper industry. He can be reached at [e-mail].

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Nie Xiaorong, Ph.D. is a professor at Nan Chang Science and Technology University in Jiangxi province. She completed her post-graduate degree at the University of Helsinki, Finland.