China's top ten indigenous advertising agencies (chart) AD BOOM UNSETTLES CHINA OFFICIALS HOPE FOR SLOWDOWN

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BEIJING-China's ad industry is overheating for the second consecutive year. And that's causing shock, and ambivalence, among the very officials who have the power to regulate it.

On the one hand, Chinese leaders like to play up industry expansion in an effort to project a positive image. On the other, ad spending is skyrocketing, along with ad rates, and that is interfering with government attempts to cool the economy.

(Keeping the economy under control is important because an inflation spiral could trigger social unrest, the dreaded nemesis of any totalitarian regime.)

Last month the State Administration for Industry & Commerce, the government agency regulating advertising and approving all ad rate changes, reported a 73% first-half increase in ad revenues, to $860 million, over the same period in 1993.

The report flies in the face of government hopes that efforts to slow economic growth of 13% last year by allowing hefty ad rates of 30% earlier this year would cool the torrid pace of advertising, one of China's fastest-growing industries.

"This year we expected 20% growth [in advertising]," said Liu Baofu, director and senior economist of the State Administration's Advertising Department. "We hope it won't go as high as the 98% growth we saw in 1992. But it's difficult to say how high it will go."

The rate for 30 seconds of prime time just after the nightly news at 7 p.m. on China Central Television was hiked again in July, another 5% on top of the earlier 30%, to $4,713.

Mr. Liu said whether rates will rise more depends on China's campaign to rejoin the General Agreement on Tariffs & Trade. Beijing has said it will unify its two-tiered rate system if its application to re-enter GATT, which China left in 1950, is approved.

Under the current system, foreign companies pay 50% more than their Chinese counterparts for ads, although the government has been urging a gradual increase for local companies to lessen the impact on them later.

In other bad news for the government, Mr. Liu also reported that the number of ad agencies in China was climbing despite efforts to curb expansion. The government says there are more than 11,000 agencies offering only ad services, and at the end of June, the State Administration estimated there were 36,900 businesses nationwide engaged in advertising as part of their business, up 16.2% from a year earlier. This proliferation of advertising enterprises is a setback for the government's effort to raise professional standards while keeping the number of shops under its watch to a manageable number.

Toward this end, the government is expanding a pilot program that requires advertisers to place ads only through licensed agencies. The program began in Guangzhou, Beijing, Xiamen and Shenzhen last year and is being expanded this year.

"We will gradually add more cities into the pilot program and eventually this system will be in effect all over China," Mr. Liu said. "Of course, there are fly-by-night agencies. But this new agency system will help address this problem."

The State Administration also prepared a controversial ranking of agencies. Based on 1992 figures provided by the agencies, it ranked by size of business and "comprehensive strength."

In size of business, Dongfang Advertising Co. was No. 1 with $11.3 million in gross income in 1992, the latest year figures were available. Great Wall International Movie & Television Advertising Co. was No. 2 and China Advertising Co., No. 3.

The "comprehensive strength" ranking includes factors such as market share, technology, personnel, creative planning and production, media purchasing and number of clients. Shanghai Advertising Co., Guangdong Advertising Co. and China United Advertising Co., were the top three, respectively. Seven of the agencies appeared on both lists.

But the rankings have stirred controversy. "This survey is an assessment based on connections," one agency owner said.

"If you have money and you frequently sponsor activities of the [government-run] China Advertising Association, then you can become one of the top agencies," said another Chinese agency executive.

Some ad executives say the government is trying to perpetuate concentration of work among large firms, generally those linked to state-run enterprises.

"[Government control] is still here," said the owner of a medium-size agency. "The government agency running the subways has an agency that monopolizes all the ads in the subway stations. The ad agency of the public transport monopolizes all the ads on the buses. This has to stop."

But Mr. Liu said the survey "should not be seen as being anti-competitive ... [but] to provide customers with a broader choice among advertising companies."

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