China's IT (information technology) sector will return to fast-track development this year after the slowdown of recent years as the nation prepares to build a massive 3G network, according to the latest report released by domestic leading research firm CCW Research. In this edition of Economic Monitor, we examine the report, paying particular attention to the financial, telecoms and manufacturing sectors.

China's IT spending, which totaled 286.52 billion yuan (US$34.52 billion) in 2004, is expected to reach 330.08 billion yuan (US$39.77 billion) this year, with a year-on-year growth rate of 15.2 percent. Last year's growth was just 13.7 percent.

Enterprises contribute the largest share to the nation's IT spending among various group users -- 56.8 percent. Small and medium-sized businesses are particularly active in IT spending, with their IT spending growing 21.5 percent last year, while their larger counterparts' spending only rose by 16.7 percent.

And the consumer IT market will grow 20.5 percent this year, driven by broadband network applications, digital home consumption, digital TV and related applications.

Government agencies' IT spending will grow by an average of 15.2 percent in the coming five years, with 18.3 percent growth expected this year, taking the figure to 40.8 billion yuan (US$4.92 billion).

Telecom

The impending launch of the 3G network and the maturing of 3G-based applications will spark the Chinese telecom sector's most impressive growth in three years. It will also intensify competition in the sector.

The telecom sector will spend about 39.11 billion yuan (US$4.71 billion) this year on IT products and services, up 14.7 percent year-on-year. The major driving force behind that is telecoms-related fixed-asset investment, which will grow 13 percent this year.

The construction of the 3G network in this year will accelerate the sector's hardware investment along with software spending, which continues to grow rapidly.

A majority of this spending will still go on hardware, estimated at 22.01 billion yuan (US$2.65 billion), up 9.8 percent year-on-year, focusing on network equipment and servers.

Software and services, lagging behind, will this year reach 9.2 billion yuan (US$1.11 billion) and 7.9 billion yuan (US$0.95 billion) respectively, year-on-year growth rates of 21.2 percent and 22.5 percent.

3G licenses are expected to be issued in the middle of this year, and each carrier granted a 3G license will invest about 200 billion yuan (US$24.10 billion) in network construction over the next five years.

As a result, the country's 3G market will emerge near the end of 2005, with high-end users and followers of the latest trends expected to be among the first to take part in. As the market grows from 2007 to 2009, the 3G market is expected to be joined by more medium and low-end users.

By the end of 2006, the IT market in telecoms will have a value of 53.5 billion yuan (US$6.45 billion). The sector is expected to replace government as the largest IT consumer during in 2006 and 2007.

Finance

The nation's financial sector spent 24.89 billion yuan (US$3.00 billion) on IT facilities and services last year, up 5 percent compared with 23.7 billion yuan (US$2.86 billion) in 2003.

While the sector's total IT spending will reach 27 billion yuan (US$3.25 billion) this year, hitting 34.35 billion yuan (US$4.14 billion) in 2008, with a compound annual growth rate slightly exceeding 8.4 percent.

In particular, the banking sector's IT spending will grow 7.7 percent this year, reaching 22.87 billion yuan (US$2.76 billion). The sector injected 21.24 billion yuan (US$2.56 billion) into its IT construction in 2004, up 6.2 percent year-on-year.

IT spending in China's banking sector has recently been enjoying steady rather than rapid growth.

That is mainly because the sector's IT applications are more mature than those in other sectors.

Meanwhile, the concentrated business outlets of the four State-owned banks result in a concentrated data storage, thus making IT spending a better investment with higher efficiency.

In comparison, China's insurance sector commands a small share of the financial sector's total IT spending, reaching an insignificant 1.3 billion yuan (US$156 million).

Meanwhile, the country's sluggish securities market has in recent years prevented securities companies from raising their IT budget. Most securities companies remained thrifty last year, with a total IT spending of 2.27 billion yuan (US$273.4 million), down 5.4 percent year-on-year.

That is the fourth consecutive year in which a downturn has been witnessed in China's securities-related IT market, a unique phenomenon in the nation's IT spending.

However, more IT spending can be expected from the securities sector this year, as domestic securities companies start to recover, thanks to improved market supervision and better corporate management at securities companies.

Moreover, some securities companies had a depressed purchasing potential in the past two years due to their poor business performance, but the situation is expected to be partly remedied this year.

And CCW Research estimates that the securities sector will spend 2.63 billion yuan (US$316.8 million) on IT products and services in 2005, up 15.9 percent year-on-year, finally turning annual growth from negative to positive.

The main drivers of this growth come from the demand for data copy systems in case of emergency, new equipment and new securities trading platforms designed for financial derivatives products.

While the financial sector spent a great deal on buying hardware and software products in the early days of adopting IT systems, it is now paying an increasing amount on software applications and services.

Manufacturing

Chinese manufacturers will embrace another round of IT investment beginning this year, with an annual growth rate of 15 percent between 2005 and 2008.

Although manufacturers have invested heavily in IT facilities since 2001, only 1 percent of them have mature IT applications, while 45.2 percent lack any applications.

The sector's total IT spending will hit 28.13 billion yuan (US$3.39 billion) this year, and by the end of 2008, it will reach 43.7 billion yuan (US$5.26 billion).

Large manufacturers will remain a dominant buyer in the country's IT market this year, spending an expected 13.95 billion yuan (US$1.68 billion), up 14.6 percent year-on-year.

But the IT demand of medium-sized manufacturers will enjoy a spurt this year, estimated at 9.42 billion yuan (US$1.13 billion), posting a growth rate of 15.9 percent, higher than the sector's average.

(Business Weekly January 6, 2005)