China Buying Boeing Jets; Deal Could Total $4 Billion

TIMES STAFF WRITER

China ordered 36 Boeing commercial jets and took options on 36 more Thursday in a transaction worth up to $4 billion. The purchase is believed to be the largest international deal in China's history.

The agreement, which ranks as Boeing Co.'s largest sale this year, was announced just a week after the Bush Administration extended most-favored-nation trade benefits to China--despite substantial congressional opposition growing out of the Tian An Men Square massacre a year ago.

"Clearly, this deal has a political message to it," said Richard Baum, a China expert at UCLA. "The Chinese are trying to win friends and influence people in Washington and the business community. And it is a pretty good way of doing it."

Boeing executives were outspoken in their advocacy of most-favored-nation trade status for China during the period when the company was negotiating the sales deal.

"We have been a strong supporter of the favored-nation clause for China and, obviously, you could say it was because of this order, but it isn't really so," James F. Chorlton, a Boeing vice president for international sales in the Asia region, said in a telephone interview Thursday. "This is absolutely necessary for continued good relations between our side and their side."

But Chorlton added later: "This sale is a very meaningful measure of why favored-nation status is a necessary thing between our two countries."

Baum termed the sale a "carrot" that China is dangling before U.S. business interests and said that the timing of the deal, just several days after President Bush announced his decision on most-favored-nation status, is a matter of "politics and diplomacy." It was left unclear whether the Boeing sale was an issue in the negotiations over the favored-nation status.

The aircraft deal will substantially reduce the trade deficit that the United States has been running with China. Last year, China exported $12-billion worth of goods to the United States but imported just $6-billion worth of U.S. merchandise.

Boeing executives refused to discuss the delivery dates for the aircraft or the financing terms, although a spokesman said that the company seldom agrees to non-cash barter arrangements.

Baum, along with banking experts interviewed Thursday, said that the $4-billion order should not represent a financial problem for China. He noted that the country has between $12 billion and $16 billion in international hard currency reserves and that the $4 billion would not have to be paid to Boeing all in one year.

The banking experts added that China has relatively low debt ratios relative to its overall economy and that austerity measures imposed in recent years are being relaxed.

Despite China's large currency reserves, Chorlton said, "I am sure it will be a struggle. They have an awful lot of demands on their foreign currency."

China's largest deal prior to the Boeing sale involved a $3.5-billion agreement between Baoshan Iron & Steel Works and Japanese and West German steel makers in 1978. That deal, for the construction of a steel mill, fell apart when China encountered financial problems, but it was resurrected after several years of delay.

A delegation of Chinese airline and political figures signed the formal purchase agreement with Boeing Thursday at a private ceremony in Seattle. The sale was made to the Civil Aviation Administration of China (CAAC), the government agency that buys aircraft for the nation's airlines.

The jetliners will be used by Air China, Guangzhou CAAC, China Southwest Airlines and other airlines.

Boeing executives said that China has purchased 101 Boeing aircraft since 1972.

"Boeing was the first U.S. company to sell to China in l972," Dean Thornton, president of Boeing Commercial Airplane Group, said in a statement. "Ten 707s valued at about $125 million were ordered then, and deliveries began the next year."

The deal Thursday includes 36 firm orders and 36 options covering all four of Boeing's principal aircraft types. The firm orders include six 747s, four 767s, 13 757s and 13 737s. Three of the 757s had been announced previously, Boeing said. Ten of the 36 aircraft covered by firm orders will be powered by Pratt & Whitney jet engines and the balance by Rolls-Royce engines.

The Boeing aircraft will expand China's current fleet of only 124 passenger jet craft by 50%. With 20% of the world's population, China owns just 1% of the world's jet aircraft.

Although the 72-aircraft order is large, it may be just the first in a series of large orders, Boeing executives believe.

Chorlton estimated that China will need hundreds of new aircraft in coming years for expansion and replacement of old Soviet-made aircraft. The nation currently operates more than a dozen aged Tupolev jetliners, which Chorlton said are a "thrill to ride."

China has elected to improve its air transportation system, Chorlton said, because the costs of building large freeway and railroad systems are too high. With a land mass the size of the continental United States, China lacks adequate roads throughout most of its interior.

"They can't afford the land for freeways," Chorlton said. "They can't afford railroads. So, (an air transport system) is very, very important."

But Baum questioned that logic, saying, "The people there cannot afford bus tickets. I don't know how they are going to afford to travel on airplanes."

Boeing has more than 75% of the China market, dwarfing the shares held by the European consortium Airbus Industrie and McDonnell Douglas Corp.

The sale seemed like a certain blow to McDonnell Douglas, which since 1985 has been nurturing a relationship with China through co-production of MD-80 jetliners. The firm's Long Beach operation has sold 50 MD-80 jetliners and aircraft parts kits to China. In addition, China ordered five MD-11 jetliners earlier this year, worth an estimated $500 million.

"We were not actively campaigning for the aircraft sold to China today, but we are always interested in selling aircraft to that country," McDonnell spokesman John Thom said Thursday.

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