Little wonder that most bins in Chinese cities are scoured for waste paper-China faces a serious shortage of paper and recycling newspapers and cardboard boxes has become a handy cash business.

China has suddenly become the world's second-largest paper consuming nation, after the United States, currently accounting for more than 14 per cent of global paper consumption, according to a May 2004 issue of trade journal China Packaging News.

Imports of both wood pulp and waste paper have shot up to feed China's appetite for text books, newsprint and office paper. China does not have the forests to support such massive paper usage so it has become the world's number one importer. Spending on imports of pulp and paper now amount to up to US$7 billion each year.

Timber imports are also soaring according to Customs statistics for the first quarter of 2004 which show imports of 1.79 million tons of wood pulp valued at US$833 million, a year-on-year increase of 22.5 percent in volume and 41.2 percent in value. During the same period China also imported 3.1 million tons of waste paper valued at US$421 million, an increase of 34 percent in volume and 44 percent in value over figures for the same period last year.

Waste paper is an attractive option for local paper makers because of its low price and high quality. "The domestic demand for waste paper imports will continue to rise," said a spokesperson for Xiamen Zhongkejian Import And Export Trading Co., Ltd, one of several Chinese companies which regularly advertises in paper industry publications worldwide seeking large quantities of waste paper.

Local shortages and recent jumps in waste paper price, however, could make it easier for foreign firms to sell high-grade paper in China. "Raw material supply seems to be a growing concern," says Graeme Rodden, editor of trade magazine Pulp & Paper International. “Pulp produced in local mills is still years away from meeting demand because of the slow development of plantations to feed the pulp mills. Papermaking growth will be based on imported pulp for another decade."Heavier tariffs placed on paper imports into China in the 1990s encouraged foreign firms to build paper mills and plant trees locally. Investment has centered on the more fertile south. From Europe, Scandinavian countries have been particularly active in the business.

Finland's Stora Enso Oyj, one of the world's leading paper manufacturers, has invested US$150 million in a 150,000-hectare plantation in Guangxi. Well-known Singaporean paper firm Golden Eagle recently invested US$500 million in forests in Jiangsu Province while Asia Pulp & Paper, one of the world's top four paper producers, has been planting trees in China since 1995. The firm now manages forests in Guangxi, Guangdong and Hainan provinces.

Expansion in China remains a long-term ambition for Finnish paper giant M-real, which looks in particular to opportunities in packaging. “Paper consumption in China, which has grown approximately 7-8 percent per annum-in the past nine years, will continue to grow at a faster pace than in Europe or in the US," M-real's chief executive Jouko M Jaakkola told Paper Loop, an industry journal. "We don't have to necessarily talk about building new machines ourselves, because there are already existing machines in the country-it could be an acquisition, a joint venture, or some other form of cooperation." M-real has been in the Chinese market for 70 years, with large sales in cardboard.

Companies importing waste paper into China have also been reporting expansion plans. US waste paper and plastic dealer JC Horizon Ltd started exporting European waste paper products to China in 2001. The company sells wood pulp as well as new and recycled paper from the USA and Canada to China. With offices in Shanghai, Qingdao, and Fuzhou, JC Horizons has concentrated on sales of recycled paper for its local earnings. Waste paper picked up from industry and consumers have made the company the 3rd largest supplier to China according to JC Horizon's president Judy Lee, who helped pioneer large-scale imports of waste paper into China in the 1980s with her former employer, V&C Company. JC Horizon also serves as an agent for several other large paper companies selling waste product to China.

One of the companies which JC Horizon has co-operated with one of Ireland's largest industrial firms Jefferson Smurfit, also one of the world's largest producers of paper, paperboard and packaging. The company recently took a 25 percent stake in the Hong Kong-listed company, Leefung-Asco, but has been reticent about its plans to capitalize on China's paper needs.

A spokesperson said the group is examining its options. "This is a very cyclical business. Prices for paper rise and fall quickly. There's no point going into China just for the sake of being there."More sophisticated local competition may await Jefferson Smurfit if and when it does decide to expand in China. Logging bans have curbed the harvesting of local forests for paper processing but some local firms have become increasingly professional in growing and processing forests in China.

State-owned Yueyang Forest & Paper Group is set to become China's largest papermaker. The company, based in Yueyang city in Hunan province, has invested huge sums in high-tech machinery and training brought in from Finland.

With a subsidiary listed on the Shanghai stock exchange, Yueyang services customers through 20 sales offices scattered across China but the company is also looking at selling paper in Japan and Singapore, both net importers of paper to China. Markets in Africa, Asia and North America are on the company's long-term horizon according to President Wang Xiang, who says the company can produce almost 20 different grades of paper that are fit for foreign markets. "We want to be an international player," says Wang. For now, the firm is improving its equipment while meeting raw material shortfalls with imports from Canada.

Yueyang Forest & Paper is also concentrating on securing long-term supplies of wood, raising vast plantations of mostly poplar trees in a 200km radius. By the end of 2005, the company hopes to have planted 100,000 hectares of forest.

With demand zooming upwards, raw material shortages will continue to be a challenge for Chinese papermakers. Government crackdowns on polluters could also mean closure for many small mills, squeezing supply in the short term but also leaving more room for more efficient operators. Several large paper mills unwisely built in recent years in eastern China could also be forced to close because of lack of suitable timber anywhere nearby, according to a People's Daily report.

As demand jumps, so too does competition. But local firms will continue to have the edge, says Cao Zhenlei, president of the China National Pulp and Paper Research Institute. "The most competitive companies are always domestic companies, because they are familiar with the domestic situation."By 2010, paper demand in China is expected to exceed 60 million tons per year, Cao said, while the country can currently produce only 40 million tons a year. Government financing for big players like Yueyang, meanwhile, has irked some competitors. But the company has also drawn down RMB1billion yuan from bonds and stocks to fuel its expansion. Another state-owned paper maker, Anhui Shanying Paper Industry has raised capital by selling bonds and shares.

Meanwhile, environmentalist and industry analysts point to the possibilities of cheaper local resources for China's papermaking needs. The use of farm waste such as straw chaff and plant stalks to make paper could help solve raw material shortages for paper makers while also helping farmers dispose of waste, says Al Wong of Rethink Paper, a US-headquartered lobby group. In China, according to Wong, a large portion of raw materials for papermaking comes from straw.

"We’re essentially reinforcing the 3 Rs ... reducing the amount of trees cut down and the transportation needed to haul materials. We’re also reusing waste paper and crop residues.