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URBANISATIONThe Cost of Managing Waste

PUBLIC DEBTHow in Debt is the Dragon?

TELECOMMUNICATIONSMaking the Connection

URBANISATIONRetrofitting for the Future

THE EXECUTIVE INTERVIEW

Mats HarbornScania China Strategic Center

www.europeanchamber.com.cnMay/June 2012

Energy in China:Powering the

Future

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BUSINESS FEATURES

24BCS 2012

Responses from over 550 membercompanies.

26PRIVATE EQUITYPutting the spotlight on the role of

this type of investment.

28HUMAN RESOURCESLooking at issues facing companies inChina.

30INDUSTRY FOCUSEnergy consumption in China.

32GOVERNMENT DEBTChinas rising public spending.

35AVIATIONLufthansa goes further into China.

36TELECOMSUnexpected conclusions from thetelecommunications industry.

40URBANISATIONHow city dwellers handle energy

efficiency.

COVER STORY

14ENERGY IN CHINA:POWERING THEFUTURE

While in the early days of thePeoples Republic feeding Chinaslarge population was once its mostmomentous issue, now poweringthe countrys continued growth hasbecome a primary concern.

18NATURAL GAS INCHINA: CLEANER,MORE PLENTIFUL ANDINCREASINGLY POPULAR

A relatively plentiful supply of natu-

ral gas offers hope that a move awayfrom petroleum could reduce costsand carbon emissions.

20100 BEST PRACTICESIN ENERGYEFFICIENCY

Besides being a central goal o thecurrent th Five-Year Plan, industrialenergy saving was promoted stronglyto solve the situation, and it actuallycan make a great contribution.

TABLE OF CONTENTS

14 3917

42IPROpportunities and threats in textiles.

46AGMPresident Davide Cucino is re-elected.

48GALA BALLShanghai celebrates its biggest night.

50EUROPE DAY

Nanjing invites talents to developtheir European career.

58THE EXECUTIVEINTERVIEWMats Harborn, Executive Director

Scania China Strategic Center

REGULARS

07PRESIDENTSFOREWORD

08EUROPEAN CHAMBERLOBBYING REPORT45CALENDAR

52EVENTS GALLERY

54CHAMBER BOARD

56ADVISORY COUNCIL

On the coverWind power still playsa very small role inChina's overall energymix, with coal still thedominant choice forpower generation. See"Powering the Future",pg. 14.

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The Executive Interview EURObiz

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EURObiz is published bimonthly by

the European Union Chamber of

Commerce in China, and is distrib-

uted free to all Chamber members.

All material is copyright2011 by

the European Union Chamber of

Commerce in China. No part of

this publication may be reproduced

without the publishers prior

permission. While every effort has

been made to ensure accuracy, the

publisher is not responsible for any

errors. Views expressed are not

necessarily those of the European

Union Chamber of Commerce in

China.

Chief EditorSteven Schwankert

Publications ManagerVicky Dong

For European ChamberMembership and

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JOIN THE EUROPEANBUSINESS CONVERSATION

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European Chamber Chapters:

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At our annual general meeting in Beijing on th April, you, our members, elected aPresident, three Vice Presidents, and a reasurer to serve on the Executive Committee(ExCo). I am very pleased to have been reelected and begin my second year as thePresident o the European Union Chamber o Commerce in China.

Being one o the ounders o the European Chamber, I believe a strong and honestEuropean business community is able to bring to China the experience and the expertisethat can help this country to grow and become as open as we are in the European Union.o reach this objective the European Union Chamber o Commerce in China, being abottom-up independent organisation, has the unique task to support European Industryoperating in China.

Leading such an organisation means commitment, availability and accountability.

For this coming year, I have an ambition, a goal and a dream: my ambition is tocontinuing contributing to ill the gap between Europe and China in the businessenvironment, building a bridge o dialogue and trust, while maintaining a rank andconstructive approach toward Chinese officials as well as EU and Member States policymakers. My goal is to reinorce the visibility and credibility o the European Chamberwith the Chinese Ministries and Agencies as well as advising EU legislators on how tostrengthen their relation with China. My dream: getting the attention o all MemberStates and hearing their political leaders speaking with a single voice and acting united!

Tis coordinated approach is critical as we tackle the important issues acing Europeanindustry in China. For example, we expect that Chinas investment in the EuropeanUnion will increase. Te European Union continues to offer opportunities or investment

and cooperation between the two sides. However, the trend o European investment inEurope to China is being negatively affected, not only because o the European crisis butalso because o a number o barriers that appear inconsistent with statements o opennessmade by Chinese leaders. Tereore there is a need to develop policies to guarantee equaltreatment or all investment in China, no matter whether it is domestic or made romoverseas. A competitive market will enable China to achieve th Five-Year Plan goalsand to move towards consumption, high-technology and a green economy. Only unityon this and other priority matters can move us closer to our goals o more open and aireraccess markets in China or European companies.

I would like to thank all the members o our outgoing Executive Committee or a veryproductive and enjoyable year. It has been a pleasure working with you, and I hope thatwe will continue to remain engaged via the Chambers Working Groups.

I welcome our new ExCo and remind our incoming officers to be committed, flexible andaccountable, to handle the many demands that our important work or the Chamber willmake on our time.

Mr. Davide CucinoPresident of The European UnionChamber of Commerce in China

May/June 2012 EURObiz 7

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Dinner with the EUCommissioner of Healthand Consumers,John Dalli

Letter to the ChineseMinister of Industry andInformation Technology,Miao Wei

Presentation to Republicof Ireland Taoiseach,Enda Kelly

Meeting with the DanishMinister for Tradeand Investment,Pia Olsen Dyhr

Prior to Commissioner Dallis meetings with hisChinese ministerial counterparts, representatives othe European Chamber were invited to a dinner with theCommissioner at the residence o the Ambassador o theEU to China, Markus Ederer. Led by European ChamberPresident Davide Cucino, Secretary General Dirk Moensand ianjin Chapter Board Member Eric Bouteiller, theChairs o the Healthcare Equipment, Cosmetics andPharmaceuticals Working Groups brieed CommissionerDalli and the Director General o DG SANCO, Paolaestori Coggi on recent developments and issues o concernto European businesses in their respective industries.

On th February, the Ministry o Industry andInormation echnology (MII) published thedrat Catalogue or Choosing Oicial Cars or Party andGovernment Oices (Catalogue). he drat Catalogueincluded neither any cars produced by European jointventure manuacturers nor imp orted European cars.As such, it would thereore serve to exclude Europeancar manuacturers rom a procurement market with apotential o one million cars per year. In response to thedraf publication o the Catalogue, the European Chambersubmitted a ormal letter signed by European ChamberPresident Davide Cucino to MII Minister Miao Wei toexpress concern and raise suggestions. In the letter, theEuropean Chamber called upon the Ministry to revisethe list in the drat Catalogue to include automobiles oany origin provided that they meet the identified cost andengine size limits o the Chinese government, as well as lowpollution emission perormance standards.

Vice President o the European Chamber and Chair othe Banking & Securities Working Group Jens Ruebbertwas invited by Enterprise Ireland to present an overview othe banking sector in China to the Prime Minister o IrelandEnda Kelly during his visit to China. aoiseach Enda Kellygave a welcome speech at the event that was attended by delegates rom Ireland who had accompanied the PrimeMinister to China. he Irish Minister or Jobs, Enterprise

and Innovation Richard Bruton also spoke at the event.

On th February, at a time when Denmark is holdingthe Presidency o the Council o the European Union, adelegation o the European Chamber led by Vice PresidentsMiroslav Kolesar and Jens Ruebbert met with the Danishrade Minister, Pia Olsen Dyhr. During the meeting, theDanish Minister spoke about the EU debt crisis as well asopportunities or cooperation between China and the EUand what they could mean or European business. heEuropean Chamber representatives brieed Minister OlsenDyhr on the EU-China Summit outcomes and the generalbusiness environment in China.

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European Chamber-hostedEvent with the SecretaryGeneral of the Organisation

for Economic Co-operationand Development,Angel Gurra

Event and Dinner with theDirector and Founder ofChina's National Economic

Research Institute,Dr. Fan Gang

Other Lobby Highlights

On th March, the European Chamber had the pleasureto host the Secretary General o the Organisationor Economic Co-operation and Development (OECD)Angel Gurra or an insightul talk on the topic China in

Focus: Lessons and Challenges ollowing the recent OECDpublication o a study o the same name. At the event,European Chamber President Davide Cucino discussedthe Chinese business environment with Mr Gurra andpresented to him the Position Paper /.

he European Chamber was delighted to host one oChinas most esteemed and influential economists, Dr.Fan Gang, or both an event and a dinner with members othe European Chambers Advisory Council on th April.Dr. Fan holds various positions including Proessor at theGraduate School o the Chinese Academy o Social Sciences,Director and Founder o China's first economic think-tankthe National Economic Research Institute (NERI), and ViceChairman o the China Reorm Foundation. At the event,Dr. Fan gave European Chamber participants a speechon the short-term trends and the long-term developmento Chinas economy. At the dinner he spoke rankly andengaged in deep discussions with members o the EuropeanChambers Advisory Council on the economic and businessenvironments in China.

Advocacy eorts developed and led by the EuropeanChambers Working Groups remain the core o theEuropean Chambers activities. In the past couple omonths, there has been a high level o engagement rom

the European Chamber with Chinese and Europeangovernments and stakeholders at the working level.

One o the most important initiatives the EuropeanChamber takes is the publication o various pieces oresearch on issues relating to the business environmentin China. Following the success o a survey in ,the European Chamber - in partnership with Bain &Company - published a second study documenting therole that Private Equity investment plays in the growth oChinese companies and how those investments contributeto China's long-term economic and development goals.his publication was released on March th in ront oapproximately journalists at a press launch. Since then,

the Private Equity and Strategic M&A Working Group othe Chamber has met with the Deputy Director General othe State Administration o Foreign Exchange (SAFE) toboth present the study and the Position Paper /

and to discuss recently issued Circulars affecting the privateequity and insurance industries; and have been invited byMOFCOM to present the indings o the survey, which isentitled Te Social & Economic Impact o Private Equity inChina Survey .

he Renewable Energy Working Group had theopportunity to receive a briefing on current and upcomingChinese policies in the wind, solar and biogas industries asthey welcomed Deputy Director General Liang Zhipengo the National Energy Administration (NEA) to aWorking Group meeting on nd March. On the sameday, the Renewable Energy Working Group also hosteda representative o the newly ormed Chinese National

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Renewable Energy Centre to learn more about the Centreand to discuss potential cooperation. European ChamberSecretary General Dirk Moens represented the views othe Renewable Energy Working Group when he spoke atthe plenary session o the China Clean Energy Expo inlate February alongside the NEA as well as representatives

o the China Electricity Council and the State ElectricityRegulatory Commission on the needs and opportunitiesor energy efficiency and clean energy in China. Mr. Moensalso spoke in late February at an Economic Dialogueorganised by the China Centre or International EconomicExchanges (CCIEE), this time on Chinas role in the EUdebt crisis, on a panel which included the Secretary Generalo CCIEE and the Head o the Economic Section o the EUEmbassy.

New DeskIn January o , the European Chamber established

a new desk in its Beijing oice to host the Low VoltageInitiative. In March, the Chambers Business Manager o theLow Voltage Initiative met with the President o the ChinaElectric Design and Research Institute and the SecretaryGeneral o Chinas echnical Committee to introducethe European Chamber and the Low Voltage Initiative. TePaediatric Nutrition Desk o the European Chamber alsoheld a number o meetings in the last couple o months,including a teleconerence with the Director o Maternaland China Health at Chinas Ministry o Health, a meetingwith the Director o the Supervision and AdministrationDivision o the State Administration or Industry andCommerces Department o Advertising Regulation, and ameeting with the German Embassy.

Lobby Lettershe European Chamber also submitted a number o

lobby letters to the Chinese central government in recentmonths. Tese included a letter rom the Chambers recentlyestablished Quality and Saety Services Sub-Working Groupto Chinas Certiication and Accreditation Administrationon the Administration draf Decree on the ManagementMeasures or Qualiication Cognizance o Laboratoriesand esting Institutions. he Healthcare EquipmentWorking Group, together with COCIR and Eucomed, theChambers two medical devices desks, wrote to the StateFood and Drug Administration (SFDA) to help correct an

important inaccuracy in the SFDA Notice on Investigatingand Handling the Unlawul Behaviour o Using MedicalDevices with Invalid Registration Licenses which couldhave led to serious negative impacts or medical devicemanuacturers in China i not addressed. he HealthcareEquipment Working Group together with Eucomed alsosubmitted another two lobby letters in March to the Sichuanand Zhejiang provincial authorities on the issues o medicalconsumables tendering and price restrictions duringcentralised procurement, respectively.

PRD Activitieshe PRD Chapter o the European Chamber also

carried out a number o activities with provincial-levelgovernment officials. Tese included a meeting in Februarywhen a European Chamber delegation led by the two Legaland axation Working Group co-Chairs met with theGuangdong ax Bureau to discuss regulatory changes andissues concerning tax as well as the implementation o the

VA pilot program in Guangdong province. In March, thePRD Chapter also met with the Intellectual Property Officeo Guangdong Province.

he European Chamber organised a large number ohigh quality events over March and April, inviting a hosto high-level and esteemed external speakers to presentto our members. hese included speakers rom respectedthink-tanks to speak at Shanghais third Tink-ank Sessionon th April, as well top-level economists to speak atthe twelth edition o the European Chambers lagshipmacroeconomic quarterly seminar Insight China in lateMarch on Chinas debt, just one week ater the inaugural

Capital Beat seminar the Chambers new Quarterly ChinaPublic Affairs Seminar on the results and takeaways orEuropean business o the recently held National PeoplesCongress in China.

o continue our push to try to ensure that Europespeaks with one strong voice to the Chinese authorities onbusiness issues affecting European companies in China, theEuropean Chamber also held a number o important andhigh-level meetings with European officials. Tese includedPosition Paper presentation meetings with His ExcellencyAmbassador Carlo Krieger o the Embassy o Luxembourgand with the Deputy Head o Mission o the SwedishEmbassy; meaning that the Chamber has now presented

the Position Paper to o the European Member StateEmbassies in Beijing since its publication in September.

Director-Level Meetingshe Chamber met with three Director-level oicials

o the European Commission in late March prior totheir respective meetings with their Chinese governmentcounterparts. hese included two meetings with SigneRatso, Director o rade Strategy and Analysis at DG rade.Secretary General Dirk Moens led a meeting with DirectorRatso in the morning o th March to brie her about thegeneral business environment or oreign companies in

China and to discuss the unctioning o the Market Accesseams in China which all under her purview, beore theChairs o the IC and Inormation Security WorkingGroups met Director Ratso in the aternoon o the sameday to discuss market access issues in their sectors priorto her meetings with relevant Chinese regulators. womeetings were also held with the Director o WO Matters,Legal Affairs and rade in Goods at DG rade, Ditte Juul-Joergensen. Te first o two meetings on March th withDirector Juul-Joergensen was held with members o theEuropean Chambers Banking & Securities Working Groupprior to a meeting with Secretary General Dirk Moens onthe general business environment.

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ONE VOICE

Beijing: +86 (10) 6462 2066 Chengdu: +86 (28) 8529 3447 Guangzhou: +86 (20) 3801 0269

Nanjing: +86 (25) 8362 7330 Shanghai: +86 (21) 6385 2023 Shenyang: +86 (24) 2334 2428

Shenzhen: +86 (755) 8632 9042 Tianjin: +86 (22) 2374 1122

CONTACT US NOW TO BECOME A MEMBER!

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Poweringthe Future

When it comes to energy consumption,China is no less superlative than in somany other categories. Tat the worldsmost populous nation surpassed theUnited States in total consumption in, which at the time International

Energy Agency Chie Economist FatihBirol called "a new age in the history oenergy. Te IEA estimated that Chinaburned the equivalent o . billiontons o oil in , although Chinadisputes that igure. he IEA alsopredicts that Chinas energy needs willgrow by by .

Tat level o consumption also makesChina the worlds largest emitter ogreenhouse gasses in total volume,an assertion to which the countryadmitted in late , but oicialsstated that per capita emissionswere a more eective and importantmeasurement. At the same time, as o, China is the largest builder onew nuclear and wind energy acilitiesin the world, as the country seeks todiversiy.

Regardless o overall rank, thereis no doubt that Chinas energyconsumption is already significant andthat even in a best-case scenario, it willcontinue to grow rapidly in all sectors.

China is already a net importer o coal,

oil and natural gas, despite havingbeen an exporter in some o thosecategories as recently as . ZhangGuobao, now the Vice-Chairmano the National Development andReorm Commission (NDRC) and

ormer head o Chinas NationalEnergy Administration, announced inlate that China would seek tocap consumption at the equivalent o billion tons o coal by , havingused approximately the equivalento . billion tons in . In orderor China to keep pace with currentenergy demands, it must add Gigawatts (Gw) a gigawatt beingapproximately equal to the powerneeds o million households or ayear o installed capacity per year, afigure that represents about two-thirdso the U.K.s installed power base.

King Coal

China was the irst country to beginusing coal or heat, and it has beendoing so ever since. he burning ocoal provides the majority o Chinasenergy, as it did in the industrialdevelopment o many Westernnations. More than three-quarters oChinas energy . -- comes romcoal, which, despite China having the

second-largest coal reserves ater the

United States, totaling billion tons,is also the worlds largest importer,some o which is imported romoreign countries including Mongoliaand Australia. China currentlyrepresents about hal o the worlds

consumption.

Coal mining in China takes placein numerous locations, with Shanxiprovince and the Inner MongoliaAutonomous Region primary amongthem. China imports both coking coal,used or industrial purposes and inrelatively short domestic supply, andsteam coal, used primarily or powergeneration and heating. Both representdifferent qualities o coal and thereorehave different unctions.

Coal is good news and bad news orChina. Overall, it remains plentiuland inexpensive relative to otherenergy sources. A net importer, Chinastill mines the majority o its coal itsel,although the industry has a notorioussaety record. Estimates o how longChinas coal resources will last rangerom years to a century or more,depending on use, increases in energydemand, shits to other sources, anddiscovery o new resources.

However, while Chinas government

While in the early days of the Peoples Republic feeding Chinas large population wasonce its most momentous issue, now powering the countrys continued growth has be-

come a primary concern. Clean and renewable energy are both an important part ofChinas 12th Five-Year Plan, but even by optimistic estimates, they will satisfy no morethan 15% of the nations energy demand by 2020, and Chinas dependence on coal andimported oil remains high. In this EURObiz Industry Focus, Steven Schwankertlooks atChina and one of its biggest future challenges: energy.

EURObiz Cover Story

Energy in China:


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plans to reduce dependence oncoal, even optimistic scenarios see itremaining above o the countrystotal energy mix as late as .While coal will decline by percentageas a source o uel, actual absolute

consumption will double over thenext years. By comparison, powergeneration in the U.S. is only . ototal supply. Regardless, overall coalremains a plentiul and inexpensivechoice or China, one or which it doesnot need to rely on oreign suppliers,and or which adequate acquisitionand t ransportation inrastructurehas already existed or decades andcontinues to expand and improve.

However, as a net importer, and giventhe greenhouse gas implications o

burning coal, increased use may causenegative reaction towards China,including rom nearby countriessuch as Japan and Korea. It may alsoace opposition rom the EuropeanUnion and the United States; someAmerican legislators have alreadyattempted to block coal exports toChina by imposing U.S. environmentalstandards on the product. Regardless,coal is here to stay as the primary uelor Chinas energy needs.

Black GoldChanging Relationships

Unlike coal, Chinas production o oilrom sources in both the northeast andnorthwest has remained essentiallylat since the early s, a situationthat is not expected to change, despiteincreasing domestic oil consumption.As such, Chinas dependence onoreign oil will continue to rise, andspeciically, Middle East oil, althoughater Saudi Arabia, Angola is the topexporter to China.

Oil accounts or about o thenations energy needs. O that, Chinaconsumed . million barrels in ,a rise over , with importsaccounting or more than hal o thatdemand. Chinas participation inworld oil markets and its expected o predicted demand growth rom to has and will continue toimpact prices, according to the U.S.Energy Inormation Administration(EIA)

he domestic market is dominatedby two giants, who are now alsosignificant international players: ChinaNational Petroleum Corp. (CNPC)and China Petroleum and ChemicalCorp. (Sinopec). Oshore, China

sees another player, China NationalOshore Oil Corp. (CNOOC),although it is oshore that Chinaallows greater oreign participation,with oreign companies includingotal, British Petroleum, and Shell.Still, about o Chinas currentresources are located onshore, the EIAestimated.

Demand or imported oil is expectedto increase, rom current levels over to or more by . hatdemand has led to greater ties or

China with some neighbouringcountries, including urkmenistan,Kazakhstan and Russia, and nations a r t h e r a i e ld , n a m e ly B ra z i l ,Venezuela and Oman. New pipelinesrom bordering countries, includingKazakhstan and Myanmar, are in theworks.

Natural Gas: Future Fuel

As a cleaner alternative to coal and oilin terms o carbon emissions, along

with a relatively plentiul supply inboth its compressed and liqueiedorms, natural gas represents anopportunity or China to move awayrom more polluting energy sources(see 'Natural Gas in China' on pg. ).

Natural gas, in its various orms,represented just over o Chinastotal energy consumption in ,and despite some pilot programmesduring the Beijing Olympics, andpublic busses in some major Chinesecities, natural gas in its two primary

orms has yet to become a signiicantportion o Chinas energy mix. Severalareas wit hin China are emerging asgas production centers, most notablythe arim Basin in the XinjiangAutonomous Region, which produced billion cubic eet (bc) in ,according to the EIA.

hat said, its potential beneits as arelatively clean source are giving itmore attention in terms o Chinasenergy purchases and energy policy.he government has set a goal o

overall national natural gas useby . Industrial users accountor the bulk o gas consumptionat present, according to the EIA,but consumer use or heating andautomotive use could eventually

rise. Chinas enthusiasm or naturalgas exploration and exploitation hasallowed some players to make moreavorable investment arrangements,although afer recuperation o originalinvestment and a reasonable margin,CNOOC has the right to acquire a stake, the EIA wrote.

Other Sources

he March earthquake andtsunami in Japan, and resulting nuclearaccident in Fukushima, sparked a

review o nuclear policy in China,and as such has delayed new projects,despite the Chinese governmentsinterest in and seeming enthusiasm ornuclear energy.

China is the worlds largest generatoro hydroelectric power, which accountsor about o Chinas total, andwhile clean, the environmental impacto large dams, along with the massiverelocation o up- and downstreamresidents, is cause or debate. he

Tree Gorges Dam project, the largestin the world, will finally be completedthis year, and will still account or lessthan o Chinas planned GWby .

Chinas seeming ocus on alternativeenergies, especially those generallyconsidered clean and renewable,continues, and the country is a leaderin many o those sectors, includingin terms o installed capacity andactual generation. Wind energy isemerging in China, now the worlds

fifh-largest wind power producer, andsteadily moving up the rankings, withChinas installed base already numbertwo globally. Chinas production osolar panels is now also the largest inthe world, so much so that the U.S.recently iled a dumping complaintagainst its rival producer. However,solar, deployed most widely in QinghaiProvince and the Xizang AutonomousRegion (ibet), accounts or arless than o Chinas total energyproduction.

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Greater utilisation o these alternativeenergies aces two problems: theirexpense in generating power, at leastin the short-term; and simple powertransmission inrastructure. As or thelatter problem, as noted in a May article in Forbes, about one-quarter oChinas wind power resources are notconnected to the nations grid. Chinastotal installed base o wind powerexceeds that o the United States, butstill lags in total generation due to itsdisconnect, given the remoteness othe sites rom population and powergeneration centres.

China and Energy Security

Chinas demand or energy and itscurrent heavy reliance on importedoil to meet its needs aects not

only energy policy, but clearly alsoinfluences other policy areas. Althoughrecent riction in the South China Searelates primarily to territorial disputes,the potential energy resources inthe area also play a role, with China,Malaysia, the Philippines and Vietnamall keen to exploit oil in the area.Malaysia is currently the leadingproducer o oil in the area. Chinasdemand has also created tensionover its relationship with some otheroil-producing nations, such as Iranand Sudan, despite United Nations

sanctions against both, including anEU and U.S. ban on oil purchases romIran.

While energy demands may havesoured Chinas relationship withsome o its neighbours, it has growncloser to others as a result. Forexample, despite Chinas extensive coalresources, its status as a net importerhas led it to turn to nearby Mongolia,which has rich coal mines and verymodest energy demands. Mongoliancoal sales to China doubled rom to , and the landlocked nationis now Chinas leading supplier ocoal. However, Chinese interest inMongolian coal and other resourceshas been so high that the Mongoliangovernment is enacting new lawscapping investment in strategic

industries, including coal production,to limit the participation o Chinesestate-owned enterprises and otheroreign investors.

Along similar lines, China has soughta treaty to acquire some o Russiasvo luminous natura l gas rese rves.While the relationship between thetwo sides has grown steadily closer,the ailure to complete a treatyso ar has been a sticking point.With negotiations spanning manyyears, back in , NDRCs Zhang

expressed his rustration and wasquoted as saying, oday is cloudywith a chance or sun, while tomorrowis sunny with a chance or clouds. Onemoment Russia is saying they havemade a decision, the next saying thatno decision has been made. Five yearslater, there is still no treaty, despiteRussian hopes that a gas deal withChina would raise both interest andprices or similar sales in Europe.

Chinas energy security issues are nowthe worlds issues also. Dr. George J.Gilboy and Eric Heginbotham, in theirbook Chinese and Indian StrategicBehavior: Growing Power and Alarm,suggested that Te volatility in worldenergy demand and energy prices towhich China and India contribute bydint o their own cycles o domestic

reorm, investment and growth is amore important issue or global energysecurity than the illusionary threat thateither country will disrupt markets bylocking up resources.

Energy and the Environment

Chinas th Five-Year Plan seeksto strike a delicate balance betweencontinued and sustainable growth andenvironmental protection. For its part,the Chinese government has createdenergy savings targets both on national

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and provincial levels, although notall plans are yet published, includingthe th Five-Year Plan or energy,due in part to the Japan earthquaketriggering a review o national nuclearenergy policy. Additionally, the largest

, companies operating in Chinahave been required to submit energyreduction and carbon emissionsreduction plans.

Te stakes or a move away rom coaland towards other, lower-emissionsenergy sources are high.

I C h i n a c a n n o t r e d u c e i t sdependency on coal, it will struggleto clean up the air o its cities whichwill have a malign, long-term andexpensive impact on public health. Itwill also be increasingly responsibleor and vulnerable to global warming.Although China can currently arguethat in historical, per-capita terms, it isless culpable than other nations or thecarbon dioxide in the atmosphere, thismoral high ground will be lost overthe next decade. hat will seriouslydamage China's image, particularly asthe consequences o global warmingbecome more apparent, said JonathanWatts, author o When A Billion

Chinese Jump.

As or a large-scale transition to cleanand/or renewable energy, he said, It isscientifically easible, but economicallyexpensive and politically diicult.

More important still, though, is to lookat energy consumption and eiciencyrather than simply adjusting andexpanding supply.

China has been more successulin committing massive resources( in ve s t m e n t a n d l a n d) t o t h eexpansion o renewable energy,particularly wind and hydro. his iswhat you might expect rom a largenation that is run by a leadership whoavour top-down, engineered, supply-side solutions. hey can also movemore quickly because individuals andNGOs have weaker blocking rights tohold up dams or appropriation o landor wind and solar, Watts said.

Coal is not the only uel source that isa cause or environmental concern. Aslast summers incident in the Bohai Seademonstrated, the effects o large-scaleoil use, both in terms o the potentialor spills and greenhouse emissions,remains a risk. he June incident,

actually a series o spills that occurredin the offshore Penglai oil field, Chinaslargest. Te spills covered , squarekilometers, about six times the sizeo Singapore, Chinese state mediareported at the time. ConocoPhilips,

which has a stake in the oil field,was ined million, and ChinaNational Oshore Oil Corp., whichowns o the ield, was ined

million. Fish kills have been observedin Shandong province on the southernshore o the Sea, and both North andSouth Korea expressed concern overthe possible impact on their ownfisheries and maritime activities.

Demand or all orms o energy will

only continue to growth throughoutcoming decades, and thereore Chinasgreatest challenge is in the acquisition,dis tr ibut ion and managemento energy sources, along with adetermined eort to increase energyefficiency and reduce overall demand.Te results or consequences o thispolicy and management will aectnot only China and its uture growthand development, but also the resto the world and its eorts to reducegreenhouse gasses and limit climatechange.

If China cannot reduce its dependency on coal, it will struggle to clean up theair of its cities which will have a malign, long-term and expensive impact onpublic health. Jonathan Watts, author o When A Billion Chinese Jump.

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With the price o gasoline climbingand the potential cost o carbonemissions, users o petroleum arelooking elsewhere or uel sources,including orms o natural gas. Forexample, U.S. television networkCNBCs Rick Santelli is making it hispersonal mission to demonstrate to theworld that cars can easily be converted

to run on natural gas. I Santelli isright about natural gas, he may startan even more powerul trend. Naturalgas is in many places including theUnited States and Russia, and the U.S.is the worlds lowest-cost producer.Lured by the promise o ueling theirvehicles at a raction o the cost ousing gasoline, Santelli is sure to havea lot o ollowers.

he price o gasoline is set by thegovernment in China, and priceswere last raised in March to more

NATURAL GAS IN CHINA:

Cleaner, MorePlentiful andIncreasingly

PopularEnergy prices are climbing, driven by de-mand and dwindling resources. However,a relatively plentiful supply of natural gasoffers hope that a move away from petro-leum could reduce costs and carbon emis-sions. Founder of JFP Holdings and authorof Managing The Dragon, Jack Perkowskilooks at the opportunity for a new kind ofautomotive fuel.

than seven yuan per liter high ora country with a much lower averageper capita income that is quickly

developing a car culture. With Santellismission in mind, I thought it would beuseul to see where China is in termso using natural gas as a uel.

Compressed natural gas (CNG),liquefied natural gas (LNG) and liquidpropane gas (LPG) are all ossil uel

substitutes or gasoline and diesel

that can be used to uel cars, trucksand buses. In addition to its lowcost, natural gas uel combustionproduces signiicantly less harmulemissions than gasoline. Gas enginesemit less carbon dioxide and less hydrocarbons. he principaldisadvantages to using natural gasare that there are presently ar ewer

reueling stations and that the uprontcost o a vehicle that can run onnatural gas is about , higher thanone that uses gasoline.

In December, , Chinas NationalScience and echnology Ministryand State Environmental ProtectionAdministration set as a targetor clean vehicles as a portion o theoverall vehicle population, and set atarget o to or taxis and buses.Additionally, the policy called or thelaunch o clean vehicle model zones in

Natural gas producesfewer harmful emis-sions than gasoline. Gas

engines emit lesscarbon dioxide and fewer hydrocarbons.

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cities, including Beijing, Shanghai,ianjin, and Chongqing. A ew naturalgas-powered taxis appeared duringthe Beijing Olympics but were takenout o service shortly afer the Gamesconcluded.

A s p a r t o t h i s p ro g ra m , c i t yg o v e r n m e n t s i n C h i n a h a v eimplemented policies to encourage theindustrialization o CNG passengercars, LNG heavy-duty trucks andengines, LPG engines, and direct-injection LNG engines. Measuresthat have been used include oeringpreerential gas price policies andconstructing refill stations. At the endo , more than cities acrossChina had gas reilling acilitiesand the number o CNG/LNG reill

stations totaled more than ,.During the course o Chinas thFive-Year Plan, it is projected that anadditional , reill stations willbe constructed. Finally, municipalgovernments have been working withautomobile companies and industryresearch institutions to accelerate thedevelopment o new technologies.

Are these measures working? CNG/LNG vehicles have already beenincorporated into bus and taxi leetsin cities across the country. InChongqing, o taxis and percent o buses are using an LNG

engine. In Shanghai, Chengdu, Xian,Xinjiang and Hebei, these percentagesare above . Despite a decline inthe commercial truck market in ,trucks using natural gas uel increasedby ..

Since the central government beganto implement natural gas policies inpilot cities across the country, Chinahas developed a domestic industryor natural gas products. In ,more than natural gas vehiclemanuacturers produced over ,

natural gas vehicles, and approximately engine manuacturers had capacityto produce million natural gasengines annually. Within the passengercar market, taxis are the target segmentor natural gas engines because o thepotential or operational cost savings.he total nationwide taxi volume inChina is more than . million units,

with an estimated having adoptedgas engines. China is already amongthe top seven gas vehicle markets inthe world, and with stricter emissionregulations providing an impetus orcleaner vehicles, natural gas vehicles

will likely increase in demand.According to the countrys nationalplan, Chinas natural gas vehicleownership will be . million in ,. million in and . million in.

hats a good start, but there is stilla long way to go when taking intoaccount that China produces over million vehicles annually and has avehicle population that already totals million. As in the United States,high and rising gasoline prices may

provide a strong stimulus or growth.

Read more of Jacks insights on hisblog Managing The Dragon, www.managingthedragon.com. Follow Jackon Twitter, @managingdragon.

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BestPractices in EnergyEfciencyThe Energy Working Group comprises more than 225 mem-ber companies with a combined total investment in 2011of around 25 billion Euros, and a collective employment ofmore than 150,000 people in China. The largest European

energy and equipment manufacturing companies alsothe industrial energy consumers are active members. ItsShanghai chair, Dr. Martin Wilderer, suggests easy ways tosave energy at work.

In , China experienced some o itsworstever summer power shortages.Mainly due to rising coal costs andixed electricity prices, generationo coal-based electricity was notproitable anymore, driving a lot opower producers in the hot monthsto shut down their operations. On top

o that hydropower output was verylow in , and the extensive, newly-established green power is not yet ullyconnected to the grid.

Chinese oicials have undertakenimmense eorts to eiciently managepower shortages during the hotsummer months, enhancing clearprioritisation, peak load managementand distribution, as well as increasingp o w e r p r i c e s o r i n d u s t r i a l ,c o m m e r c i a l a n d a g r i c u l t u r a lproducers. Manuacturers have beenordered by local oicials to limitelectricity usage, thus having to cutproduction, and tens o thousands obusinesses, mainly actories and otherindustrial plants, were aced withmandatory power cuts.

Besides being a central goal o thecurrent th Five-Year Plan, industrialenergy saving was promoted stronglyto solve the situation, and it actuallycan make a great contribution.However, awareness is still low and

companies oten do not consider

energy saving initiatives.

Joint Roundtable

In September , the EuropeanUnion Chamber o Commerce inChina and the Delegations o GermanIndustry & Commerce together

ounded a working group promotingenergy eiciency in production. heidea was to collect best practices inenergy saving among the membersand compile it in a booklet.

he initiative is not only an eortto share and enhance knowledgedevelopment on energy eiciencyin production, but also to oer acontribution to power challenges thatChina is aced with today. he aim isnot only to share the knowledge amongthe members, but also to use collectthis joint knowledge or disseminationamong the acility departments aswell as other interested companies toraise awareness via practical examplesestablished in China.

Joint meetings are organized aroundspecific energy saving topic, eaturingpresentations rom ex-perts in therelated ield. Some recent highlightswere the presentation o KenanHauz Hasan, Festo, on pressurisedair as well as the invitation rom

Schneider Electric Suzhou Production

Plant to view their installed EnergyManagement System.

Ways to Save EnergyEnergy eiciency can serve as anessential tool to balance energysupply as well as to avoid CO emis-

sions. As examples show, already withsimple measures companies can saveup to o energy with hardly anyinvestment. his creates signiicantinancial savings so that the eortsalso make economic sense. Variousexamples in the field o air distributionsystems, lighting, insulation, control-ling systems, thermodynamics andenergy saving awareness o workorcehave already been collect-ed by theparticipating companies such asBayer, MAN, Beko, Linpac, SchneiderElectric and Festo. Putting theexamples together already had somepositive eect on the participatingmembers inspir-ing to carry theirefforts urther. Tus, the booklet is notonly good or external demonstrationo our commitment but also has somepractical internal use. Companiesinterested to join the initiative arewelcome to participate. On the acingpage, we have included two exampleso the many suggestions offered to saveenergy at the workplace and promoteawareness o this important issue.

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AWARENESS BUILDINGENERGY SAVINGAWARENESSPROGRAMME

Background Te success o an energy

efficiency initiative depends onthe cooperation, acceptance andinvolvement o every employee

Raise awareness orenergy conservation

Encourage and motivateemployees to adopt energysaving practices at workplace

Savings Potential

Comprehensive awarenessprograms can support andreinorce objectives o anenergy efficiency initiative

Increase understanding obenefits or energy efficiency

Link actions and behaviorby individuals with energy saving

Motivate employeesto modiy behavior

Increase productivity andboost morale by working togetherto achieve common goals

Contributes to ahealthier environment

Enhance reputationo company as a leader inenvironmental stewardship

Savings Calculations

Case: Implement the concept o an

Earth Hour

Engage and encourageemployees to turn off lightsand other equipments suchas computer screens in

their area when they go or lunch.

Suggested Action

How to inorm employees: energy saving training regular staff and departmentalmeetings newsletters and communiqus bulletin boards posters and e-mails intranet pay cheque notices personal contact

ENERGY SAVINGAT WORKPLACE

Background

Office equipment is the astestgrowing energy user in the businessworld, consuming o the totalelectricity used in offices. Tis isexpected to rise to by .

Heating can account or asmuch as o a total energy bill,

yet a large proportion o the energyconsumed by heating is likely to bewasted due to incorrect control. Inact, it is possible to cut heating costsby up to by implementing somesimple energy saving measures.

Savings Potential

Substantial savings can bemade by adjusting heating accordingto the recommended temperatures.Lowering heating temperatures by justC can save on uel consumption.

Many areas in the building areoverheated due to lack o control.

urning office equipment offduring non working hours can save o electricity consumption.

Enabling standby eatureson all office equipment can savearound o costs associatedwith PC and monitor use.

Savings Calculations

Estimation o Energy CostIndex (ECI) is used to benchmarkthe existing perormance o theoffice in terms o energy efficiency.Depending on (a) building type (b)treated floor area (c) annual gas / oiland electricity cost, value o ECI canbe calculated. Tis value is comparedwith existing benchmarks whichenables energy efficiency assessment.

Suggested Actions

urn off electricalequipment whenever possible

Reduce heatingtemperature to C.

The booklet may be obtained bycontacting Bettina Buck, EuropeanChamber [email protected] or Carolin Markus, GermanChamber [email protected].

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BCS 2012:Strategic Importance,Investment UncertaintyNow in its ninth year, the European Union Chamber of CommercesEuropean Business in China Confidence Survey 2012,with re-

sponses from over 550 European Chamber member companies,represents a comprehensive cross-section of perceptions of thecurrent business climate in China.

R e le c t in g C h in a s e co n o m icimportance as the largest contributorto current global growth, the resultso the European Business in ChinaConidence Survey show thatChinas strategic importance orEuropean companies has increased

EuropeanBusinessin

ChinaBusinessConfidenceSurvey

2012

to unparalleled levels as Europeancompanies continue to see increasedrevenues and profits. Tis appears tocoincide with a general maturationo Chinas increasingly costly andcompetitive business environment,with indications that large numberso companies are looking to increase

efficiency and productivity in order tomaintain proit growth even amidsthigh revenue orecasts. Followingyears o stalled reorm, the maturityo the regulatory environment stilllags behind. As companies takemeasures to respond to apparent

constrictions in the marketplace,there is a sense o growing rustrationthat the reorms o the th Five-Year Plan are not being carried outand that the regulatory environmentwi l l co n t in u e t o d i s cr im in a t eagainst oreign companies. As manycompanies also perceive signiicant

missed opportunities due to this, theBusiness Conidence Survey revealsthat nearly a quarter o membercompanies are considering shitinginvestments away rom China.

W h i l e t h e g l o b a l e c o n o m y

continued to struggle over thepast months, Chinas economicperormance remained strong andit contributed the most in real termsto global economic growth or thesixth consecutive year. Europeancompanies have beneited rom thisgrowth, with increased revenuesand higher average proit marginsin China compared to companyperormances being reported globally.With optimism about continuedgrowth, Chinas strategic importancehas correspondingly increased ormost European companies, as hasthe strategic intention to serve thedomestic market through their Chinaoperations. his is relected in theplans o many companies to makeurther investments, increase thenumber o permanent sta positionsand develop marketing and salesactivities as companies increasinglysee boosting domestic consumptionas important to Chinas growth.

Evidence rom the survey suggests

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a general maturation o the Chinesemarketplace to which Europeancompanies are trying to adjust. PrivateChinese companies are becomingmore competitive in traditionalbusiness aspects , s ta te ownedcompanies are deemed to be yetstill improving in their governmentrelations, and rapidly rising labourcosts are impacting business plans. Asindicators suggest that some marketareas are becoming constricted oreven saturated, the upshot is thatcompanies optimism or revenuegrowth is not echoed in their proitprojections. European companiesare increasingly turning to reducingcosts to stave o pricing pressures

and, although companies increasinglywant greater access to more sectors,investment plans indicate that mucheort is being exerted to maintaincurrent market share.

Unortunately, the development o theregulatory environment is not in stepwith the development o the market.Despite high-level pronouncementsregarding the importance o oreigninvestment and equal treatmentor all companies registered in

China, the regulatory environmentor oreign enterprises converselyappears to have worsened. Europeancompanies state that reorm o theregulatory environment will be themost important driver o utureChinese growth. Yet although theth Five-Year Plan is still generallyregarded as positive, the act thatit is increasingly viewed as havinglittle impact on companies businessprospects is relective o a lack ooptimism regarding reorm. heimportance o increased competitionin spurring innovation and in movingtowards a more value-added andbalanced economic growth modelhas been widely recognised in China,

yet the perception that the regulatorye n v iro n m e n t wi l l co n t in u e t odeteriorate or European enterprisessuggests that companies remainpessimistic that vested interests inChina willstymie reorm.

As a direct result o market accessand regulatory barriers, Europeancompanies report missing out onconsiderable business opportunitiesworth a signiicant share o theirr e v e n u e i n C h i n a . E u r o p e a n

companies hope to compete innew areas and contribute to thedeve lopment o a knowledge-based and green economy in China.However, as companies becomeincreasingly aware o asymmetriesand unairness caused by the stalledregulatory reorm in China, coupledwith the increasing maturity o themarketplace, a significant proportiono European companies state thatcurrent trends are causing them toconsider shiting investments romChina to other markets.

Chinas ever increasingstrategic importance forEuropean companies

he importance o the Chinesemarket or European companies iscontinually underlined by the answersgiven in this survey. Europeancompanies are looking to increaseinvestments, create jobs and betterserve the domestic market:

China revenue comprises morethan o worldwide revenue orhal o the respondent companies,representing an increase o since

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Stalling regulatory reorm

he regulatory environment is notdeveloping in accordance with

the needs o the market and long-standing issues in this area remain osignificant concern:

40% report that Chinese governmentpolicies towards oreign enterprisesare less air than they were two yearsago

The discretionary enforcement ofregulations by government is seen asthe most significant obstacle to doingbusiness in China

e development of the rule of lawand more transparent policy makingand implementation is rated as themost important driver or utureChinese economic growth

Barriers resulting in signifi-cant missed opportunities

European companies state theycontinue to miss out on businessopportunities in China because

o market access and regulatorybarriers. he value o these out-o-bounds opportunities is signiicantand underlines that this is the mostsigniicant issue being aced byEuropean companies in China today:

Half of companies report missedopportunities due to market accessbarriers, with two-thirds o theseestimating the value o these missedopportunities at - o revenues

Nearly a quarter of respondentcompanies are considering movingexisting investments out o China.

The European Business in China Con-fidence Survey 2012 will be present-ed in Beijing and Shanghai on 29thMay, with presentations in other partsof China to follow in June. Please visitwww.europeanchamber.com.cn forthe events schedule or to downloadyour free copy of the Survey.

Three-quarters regard China as atop three destination globally and itcontinues to increase in importance

New investments in China are

planned by o respondents,withmore than hal looking atentering new provinces

61% increased the number ofpermanent sta positions in and nearly three-quarters plan to hiremore people in the next two years

labour costs impacting strategy:

Chinese private enterprises areincreasingly competitive in terms opricing, branding and sales

Chinese state-owned companies

are seen as improving, particularly interms o governmental relations

Cost reduction is becoming amore requently used strategy byEuropean companies to maintaintheir competitiveness and the topthree areas or uture investment are

branding, marketing and sales, and

HR, indicating that more Europeancompanies are having to ight tomaintain their current marketposition

Rising labour costs are regardedas a signiicant concern by orespondents

A maturing market

Various indicators suggest that themarket in China is becoming morecompetitive with private and state-owned Chinese enterprises, oeringdis t inct cha l lenges and r is ing

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his second survey on the socialand economic impact o PE inChina documents the role that PEinvestments play in the growth oChinese companies and how thoseinvestments contribute to Chinas long-term economic and development goals.Since our groundbreaking surveyin , PE irms have continuedto transer management know-howto their portolio businesses, buildglobally competitive companies,

improve corporate governance,develop an innovative private sector,support development inland and osterdomestic consumption. he surveysgoal is to chronicle the growing impacto PE investments on China based onobjective acts and figures.

PE, still a relatively new phenomenonin China, continues to developrapidly, establishing the country asone o the worlds top destinationsor PE investments. With USbillion invested in , PE in China

represents more than o the valueo global private equity investment,a signiicant increase rom just morethan . in . As with manyast-growing industries, the societalchanges set in motion by new capitalflows raise questions about whether PEenriches Chinese social and economicdevelopment as a whole.

o help answer those questions, thePrivate Equity and Strategic M&A

Working Group o the EuropeanUnion Chamber o Commerce inChina and its survey partner, Bain& Company, examined PEs socialand economic impact in China. heresulting report chronicles evolvingtrends, compares current indingswith indings rom the past surveyand presents data on important socialindicators, including job creationand improved salaries, research anddevelopment (R&D) spending, greeneconomy and investments into inlandprovinces. It evaluates key measures

o economic perormance, includingrevenue and profit growth, support tosmall and mid-sized enterprises, taxpayments and corporate governance.Te study also serves as a major sourceo quantitative inormation aboutPE in China and contributes to aconstructive debate about its currentrole and uture development.

his second survey covers dealsannounced during the period rom

to . It includes inormationrom a panel o companies thatrepresented o the total valueo PE deals valued at more thanUS million during that period.(All compound annual growth ratecomparisons are based on this groupo survey participants.) he majorityo the companies surveyed are small tomid-sized, with revenues o less than billion RMB. We excluded dealscompleted afer in order to trackpost-investment perormance or aperiod o at least two years. Te report

The Social and Economic Impactof Private Equity in ChinaThe European Union Chamber of Commerce in Chinas 2012 survey, The Social andEconomic Impact of Private Equity in China, puts the spotlight on the role of this type ofinvestment and updates the European Chambers earlier study in 2009. Produced in part-nership with Bain & Company, it demonstrates the effect of private equity in a country thatis now one of the leading destinations for this kind of capital.

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reveals PEs social and economiccontributions based on quantitativeanalysis o portolio companies and in-depth interviews with PE-backedcompany executives.

Tis study uses three key comparisonsto gauge perormance along social andeconomic dimensions: perormanceo PE-backed irms compared withpublicly listed irms over a two-yearperiod, post-PE investment; survey indings with surveyresults; and change in portoliocompanies perormance during thetwo-year period ollowing the initialinvestment with the next two-yearperiod.

Key findings:

PE has a significant socialimpact on China, demon-strated by improved job op-portunities and innovation

PE-backed irms pay higher salarieseven as global economic uncertaintycontinues. PE-inanced companiesgenerated ull-time jobs at an annualrate o , on a par with the marketover the period o our studybut at aslower pace than in the survey,

when job growth at PE portoliocompanies increased by . Evenso, wages are continuing to risethe salary growth rate is higherat PE portolio companies than atlisted companies, contributing toan improved standard o living oremployees and spurring consumption.

PE-backed firms have in-creased R&D investments toincubate innovative growth

Measured as a percentage o revenue,

PE-backed companies now spendalmost twice as much on R&D thantheir publicly-listed counterparts,demonstrating a sustained emphasison innovation. PE investors workwith portolio companies to helpthem understand the pivotal role thatinnovation plays in powering growth.As Chinese companies build value,they help the nation achieve one o itspublic policy goals: establishing Chinaas an innovative society.

Environmental protec-

tion grows slowly for bothlisted and PE-backed firms.

When it comes to environmentalinitiatives, however, both PE-backedand publicly traded companies have

opportunities to do more. For bothgroups, corporate commitmentto environmental protection is inthe early stages. Only about o the companies we surveyed hadreleased an environmental protectionreport detailing spending and greeninitiatives; even ewer disclosedtheir expenses or environmentalprotection.

Go West

PE irms continue to support Chinas

Go West policies that spur growthby encouraging investments in Chinasunderdeveloped inland provinces,primarily in western and centralChina, as well as ier- cities.

Ater a decline in , investorinterest rebounded. Since , morethan hal o all PE investments havebeen in companies headquartered inthe western region, surpassing backingor businesses located in the morealuent coastal provinces. From

to , deals in ier- cities also grewdramatically rom US. billion toUS. billion.

PEs economic impact is nota-ble, especially whencomparing companiesfinancial performance

PE builds inancial perormers thatgenerate higher proits and growth.PE-backed companies in Chinaoutperormed the market in revenuegrowth, rising an average o

an impressive gain rom just inthe survey. hey also posted higher proit growth than theirpublicly traded counterparts, achievinga compound annual growth rate o versus at listed companies.

PE investors provide criticalsupport for smaller companies

PE irms provide critical support orthis business segment, now a powerulengine o growth. Investors helpedsmaller companies outgrow listed

competitors. he survey results showthat smaller PE-unded irms tripledthe revenue growth rate o comparablelisted companies.

Valued PE advisers improve

governance, generate highertax payments and spur growth

he majority o executives o PEportolio companies value theguidance provided by PE irms. heybeneited rom the role their PEpartners play as management andfinancial advisers on a range o issues:strengthening corporate governance,creating more open and transparentdecision-making processes andreallocating working capital to supportexpansion. Relecting their stronger

inancial perormance, PE-backedcompanies yielded tax payments thatgrew at an annual rate o slightlylower than the posted in the survey but still higher than theirbenchmarked peers. Te result impliesthat PE shareholders continue to bringimproved corporate governance withrespect to the disclosure o taxableincome. hey also use their networksto provide access to customers,suppliers and distribution channels.

But PE irms received mixed reviewsrom some survey participants whowelcome more hands-on supportand increased industry operationalknowledge rom their investors, evenafer taking the company public.

PE-financed firms continueto support the expansion ofChinas domestic consumergoods and retail industry

Attention o PE irms continues toshif to the consumer goods and retail

sector. In , deals in these twosectors represented o total PEdeal value, a significant increase roma mere in . Retailers backedby PE investors booked sales growtho , compared with just orpublicly listed retail companies consistent with what we observed inthe survey.

Please visit www.europeanchamber.com.cn to obtain your free copy of TheSocial and Economic Impact of Pri-vate Equity in China.

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EURObiz Human Resources

With the global inancial crisis andChinas own growth slowing down,many multinational cor porations(MNCs) are acing increasing pressurein urther developing their Chinabusiness. Whereas in the past Chinawas viewed as a strategic market, todayit has become a bottom-line market, abattlefield where an MNC cannot missdue to stagnant or shrinking marginsat home.

With headquarters demanding greaterinvestment return, the China markethas become an even bumpier road tosuccess. he market is seeing slowerGDP growth, rom . to .,and the worlds largest automotivemarket is expected to cool down.Labour costs have risen due to annualsalary increases o -. Chinesecompetitors are buying talents withraises o to . Some MNCsRecruitment unctions have beenacing the embarrassment o no or ewcandidates or some positions.

Many common recruitment issues ace

most MNCs in China.

Due to growth pressures, MNCs arepoaching rom each other to replaceexisting unctions. By constantlyishing in the same pool, qualitycandidates have become scarce andprices have been gone up because othe mismatch o supply and demand.

Due to the scale andincreased complexityof enterprises in China,there are agrowing number ofhighly-specialised ornewly-createdsenior positions.

Most such new positions are first-timehires, and there is a lack o clarity ontheir roles and responsibilities.

Interviews or such unctions are ofenmade based on the travel schedule

o interviewers rom headquartersto China, which makes the hiringlead time particularly long comparedto existing roles. Each round ointerviews will oten have a three-month break in between..

here are no or very ew local talentsavailable or highly-specialisedroles, especially in research anddevelopment. However, when suchtalents are inally sourced on theglobal market, Chinas existing Chinareward system is lagging in oeringcompetitive compensation packagesdue to the existing compensation andbenefit structure. For instance, China-hired talents are subject to a muchhigher individual income tax (can beup to ) compared to those hiredin Hong Kong (.) and Singapore().

Local business HR oten lacksresources due to global headcountcontrol, while local unctional HRare overwhelmed with fire-fighting in

delivering operational service.

In the first edition of a new regular feature on human resources (HR), Dan Zhu, chairof the European Chambers HR Working Group in Shanghai, looks at issues facingcompanies operating in China and how to maximise their hiring decisions.

Riding the Wave of Recruitment


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Most MNCs have a sort o centralisedrecruitment center o excellence (CoE)dealing with vendors in talent supply.Recruitment inormation oten getstwisted in the transmission process

rom hiring managers to business HR,then to unctional HR, and then toexternal vendors, and vice-versa.

here is a general lack o strategicviews in business HR or historicalreasons, which makes it diicultor them to link business needs toimmediate task-ocused actions. Mosto the HR start their career rom junioradministrative roles right afer collegegraduation, most o them never haveany previous line unction experiences.Oten HR business partners tend

to ocus on existing process andprocedure instead o uture capacityand scalability planning and enabling.

In terms o their employer valueproposit ion , most MNCs s t i l lremain at the stage o showing andtelling the usual Fortune story,without putting too much eort onChina market segmentation abouttheir own niche and positioning inthe highly-competitive employerbranding market. Teir unique selling

points rom the home market are nolonger unique selling points againsthighly aggressive and creative localcompetitors.

When beeing up recruitment CoEs,most MNCs tend to put junior staff insuch unctions. However, those juniorsoten lack in-depth understanding othe industrys needs and insight aboutcandidates. Such capability is otenbuilt on rigorous methodology andyears o practice.

When talking about recruitment,most hiring managers tend to thinkthe starting point is a candidates CV.hereore, without much thoughtabout the roles individual andorganisational expectations, mostinterviewers start candidates in roundsand rounds o interviews. Such anapproach must come to an end.

Stil l remember quality controlor quality assurance? It has beentransormed into total qualitym a n a g e m e n t , wh e re s t ra t e g ic

measures and methodology have takenplace. he same has now reachedrecruitment.

For those who want to ride the wave orecruitment, instead o just saying how

strategic HR is, here comes the call ora systematic but commonsense-drivenapproach.

With the growing complexity andscale o enterprises in China, themarket needs seasoned and strategicChina HR who can actively lobbyand engage with global headquartersto get resources such as headcount,job grading and compensat ion andbenefits, and flexibility.

Instead o ishing in the same talent

pool with the clichs o Fortune company experience, English luency,op school graduates plus MBApreerred, HR and hiring managersshould ocus on enlarging the existingpool. his calls or risk-taking andjudgment on the part o interviewers.Playing it sae cannot always guaranteesaety, let alone creativity.

Current lead time has to be shorteneddue to a talent shortage. Insteado asking candidates or rounds o

standalone interviews, HR couldcoordinate all or most interviewersor a packed interview day, whereeiciency could be improved anddecisions could be made shortly whenmemories o the applicants are stillresh.

Al l interviewers need to s tarttheir interviews rom competencyr e q u i r e m e n t s . O t e n p e o p l eknow there is something called acompetence model somewhere remotein the HR world. However, most

hiring managers are not clear aboutsuch competencies real applicationin candidate screening. his calls ortraining on such methodology or allhiring managers and HR unctions, soas to make sure all parties are on thesame page. opics could range romcompetence application and examples,CV screening, probing techniques andanswer evaluation.

When in doubt about a candidatescapability, get a second opinionrom an independent third party.

Such parties are preerably a long-term trusted partner, instead o just acandidate vending machine.

Get creative in campus recruitment.oo many big names are waiting in

line to get the campus talk at endo each year, the audience cannotdierentiate much between Europeancompany A and American companyB. What they really care about arethe top three questions: Can I learnsomething new?; What is your Chinagrowth roadmap?; and Who is mycareer role model in this company?Generalities wont woo people anymore.

Instead o training all reshly graduatedemployees upon arrival, training can

be customised at a much early stagein cooperation with local vocationalschools and universities. Such anapproach could provide trainingrecipients more time in learning andpracticing, and hiring companies extraopportunities in getting to know thestudents or proper selection.

Riding the wave o recruitment callsor more than thoughts and guts romdecision makers. Like suring in highocean waves, we cannot blame the

ocean but balance ourselves to makethe right move. For those in HR roles,regardless business HR or unctionalHR, the time people ocus on the circleo concern is gone now, its time weget our act together and ocus on ourcircle o control, the control that lies inour own hands and steers the growthdrive.

About Shanghai HR WG:

The HR Forum has been changed intoa Working Group due to the growing

importance of HR for all members.From now on, each year the HR WGwill concentrate on three majorlobbying actions to related regulatorsand agencies. The newly electedShanghai Chairs focus on activitiesin building the HR community andpromoting professionalism, includingbreakfast presentations, on-site visitsfor sharing of best practices, and anannual one-day HR conference. Formore information, please contact DanZhu at [email protected].

Human Resources EURObiz


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ENERGY CONSUMPTION IN CHINA:

Surging Demand vs. Limited

Production Capacity Chinas Increasing Reliance on Imported Energy ProductsIn 2011, the global economy experienced slower growth of around 3%, compared with 4.2%in 2010, according to World Bank. Despite low global economic growth, oil prices fluctuatedthroughout the year and show an overall upward trend due to increasing energy consump-tion. In addition, factors including geopolitics, exchange rates and financial markets alsoinfluenced the price movements. According to the U.S. Energy Information Administration,the annual average price of crude oil in 2011 hit its highest level in history. The averageprice for Brent crude oil for the year reached $111 per barrel, 40% higher than 2010, and$14 higher compared with 2008.

In , China consumed about . milliontons o crude oil, showing an average growth o. since . Crude oil consumption in Chinain is expected to increase by . comparedwith the previous year, amounting to milliontons. In addition, natural gas consumption inthe country grew even aster, at an average rateo . per annum, totaling . billion cubicmeters. In , China will consume billioncubic meters o natural gas, up . rom .

However, acing rising consumption, output showedmuch slower growth, which has resulted in Chinasincreasing reliance on imported crude oil and naturalgas. From to , crude oil output in China grewat an annualised rate o ., much lower compared with. growth in consumption. Chinas degree o relianceon imported crude oil has increased rom . in to . in , and is expected to continue increasingto about in . Similarly, the countrys relianceon imported natural gas has risen rom . in to in , due to the average consumption growth o. and output growth o . in the same period. In, imported natural gas will account or around o Chinas natural gas consumption.

By Rachel Wang,Industry Analysis Department, ACMR

World Liquid Fuels Consumption Growth, World GDP Growth, and WTI Crude Oil Prices, 2007 Q1.2012USD per barrel (in real 2010 dollars)

Crude Oil Consumption, Natural Gas Consumption and GDP Growths in China, 2009-2012

Source: National Bureau of Statistics, ACMR

Note: 2012 data are ACMR estimates

EURObiz Industry Focus

0

20

40

60

80

100

120

-6%

-4%

-2%

0%

2%

4%

6%

2009.Q1 Q2 Q3 Q4 2010.Q1 Q2 Q3 Q4 2011.Q1 Q2 Q3 Q4 2012.Q1

W or ld liq uid fu els co nsu mptio n gr owth W or ld GDP gr owth W TI cr ude oil pr ic e

0%

5%

10%

15%

20%

25%

2009 2010 2011 2012*

C rude oi l Natur al gas GDP


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According to Chinas th Five-Year Plan, China will construct morerefining bases to increase oil supply capacity during the period rom to. Meanwhile, the country will also accelerate the development o non-petrochemical energy, which accounted or only o energy consumptionin China in . By , non-petrochemical energy will contribute .to total energy consumption according to the th Five-Year Plan.

Rapidly rising global oil prices and Chinas increasing reliance on importedenergy products have pushed Chinas energy prices up signiicantly.For example, during the period rom to April , the National

Development and Reorm Commission has adjusted the oil price in China times, upwards or times and downwards our. he most recentadjustment o oil prices in China happened in March , a .increase per ton or gasoline and diesel oil, respectively, and also the biggestrise since .

Top 10 Imported Sources of Crude Oil in China, 2011 Top 10 Imported Sources of Natural Gas in China, 2011

Consumption, Output, and Reliance on Imports of Crude Oil and Natural Gas in China, 2009-2012

Oil Price Adjustment in China, 2009-2012 (in per ton)

Crude Oil (Million tons) Natural Gas (Billion Cubic meters)

Source: National Bureau of Statistics, ACMR Note: 2012 data are ACMR estimates

Source: China Customs, ACMR

Industry Focus EURObiz

50%

52%

54%

56%

58%

0

150

300

450

600

2009 2010 2011 2012*

C on su mption O utp ut Rel ian ce o n imp or ts

0%

10%

20%

30%

40%

0

50

100

150

200

2009 2010 2011 2012*

Co nsu mp tion O utp ut Rel ian ce o n imp or ts

Saudi Arabia

20%

Angola

13%

Iran

11%Russia

8%

Oman

7%

Iraq

5%

Sudan

5%

Kazakhstan

5%

Kuwait

4%

Venezuela

4%

Other

19%

Turkmenistan

45%

Qatar

20%

Malaysia

7%

Australia

6%

Nigeria

5%

Yemen

5%

Indonesia

4%

Trinidad

and Tobago

2%

Russia

2%

Egypt

1%

Other

3%

Date Gasoline Diesel Oil

20 Mar. 2012 +66.7 +66.7

8 Feb. 2012 +33.3 +33.3

9 Oct. 2011 -33.3 -33.3

7 Apr. 2011 +55.6 +44.4

20 Feb. 2011 +38.9 +38.9

22 Dec. 2010 +34.4 +33.3

26 Oct. 2010 +25.5 +24.4

1 Jun. 2010 -25.5 -24.4

14 Apr. 2010 +35.5 +35.5

9 Sep. 2009 +50.4 +50.4

1 Sep. 2009 +31.5 +31.5

28 Jul. 2009 -23.1 -23.1

30 Jun. 2009 +63.0 +63.0

1 Jun. 2009 +42.0 +42.0

25 Mar. 2009 +30.5 +18.9

14 Jan. 2009 -14.7 -16.8


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How in Debt is

the Dragon?While sovereign debt has captured headlines for effect on the governments of Europe, Chi-na, which was seen as weathering the global economic crisis, now faces its own rising lev-els of public spending. Fueled by local borrowing for infrastructure projects, debt may nowbe as high as 40% of GDP. Two prominent economists, Prof. Victor Shih and Prof. PatrickChovanec, gave EURObizs Steven Schwankerttheir views on the problems and the solu-tions.

Local governments have not beenpermitted to issue bonds or theirpublic spending without State Councilapproval since . hereore, themost common method or inancingnew projects is or a local governmentto create a commercial or businessentity that it owns entirely. Tat entitythen seeks inancing, usually roma bank, with the local governmentguaranteeing the loan, occasionallyusing uture revenues or publicproperties as collateral. hese arecalled Local Government Financing

Vehicles (LGFVs).

While this may appear to be areasonable alternative method opublic debt inancing, the results arenot in line with normal expectations.Within China, mayors typically shitto a new city or post afer two or threeyears, and as such, a new mayor isusually keen to make his own mark,rather than use budget to pay off theirpredecessors projects. According toPro. Victor Shih o NorthwesternUniversity, new municipal oicials

want to ocus on new and biggerprojects, as it is these projects, ratherthan local GDP growth, that seemsto lead to career advancement ingovernment. Tis creates difficulties inrepayment o the loans used or theseinitiatives.

Also, at a more basic level, whereasbonds generally offer avorable interestrates and a longer term o repayment,where as a bank loans rates are usuallyhigher, and the length o the loan arshorter, putting greater pressure on the

local entity. Tis model has apparentlybeen repeated in numerous locations,and with many o the projectsbuilt in this way namely, publicinrastructure projects such as roadsand bridges generating insuicientlevels o revenue to und repayment, asa result public debt continues to grow.

Calculating Chinas current level opublic debt also depends on which seto statistics one chooses to believe, thespeakers indicated.

In the past, local banks, as part othe loan, have provided a cushion tolocal governments in order to givethem cash to repay the interest, saidPro. Victor Shih o NorthwesternUniversity.

Crunching the Numbers

Shih said that in , institutionaldebt stood at . trillion yuan,according to oicial estimates, andthat those unds were used mostlyor programmes like new schools,

hospitals and road projects. However,Shih questioned the number.

I that's possible, then why is thereonly that much debt? Shih, bothin his presentation and a June guest post or he Financial imes,said that while what China considersto be public debt totals . trillionyuan, what is owed by LGFVs andother central and local government-backed entities must also be countedto present a more comprehensiveaccounting o Chinas public debt

situation. As such, probably a moreaccurate number is trillion yuan,about o GDP, a figure arrived atby adding the debt estimates presentedby the National Audit Office, the ChinaBanking Regulatory Commission andPeoples Bank o China.

he debt is also not being handleddierently rom that o similar loansto private businesses. For example, oneLGFV wanted to deault, Shih said, butthe government would not allow it.Eventually, the debt was purchased by

a cash-generating SOE, which couldrepay it while getting the debt o theLGFVs books.

Shih indicated that awareness o theproblem has escalated recently notjust because o the amount o debt,but because cash low o all entitieshas declined, "which I think is prettyalarming", he said. He also indicatedthat land sales were really the onlyasset that most local governments hadto effectively repay debt.

Although public projects, includingOlympic coverage, were large sourceso public spending, up until ,it didn't really matter, the issue olocal government debt didnt seemas serious, in part because o hugeamounts o money flowing into China,which also had a trade surplus o -o GDP. Approximately trillion yuanworth o new bank deposits per monthat that point.

However, as Chinas economy slowsrelatively, the situation has changed.

EURObiz Banking & Finance


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For example, PBOC had to destabilisebonds it issued previously, rom at totalo trillion yuan down to trillion lastyear. On top o that, . trillion yuanin new loans or public projects weremade last year. Even that number isdeceptive, Shih said, explaining thata large part o new financing was justrolled over non-perorming assets thatwere already on bank balance sheets,and that this will likely happen againto the tune o trillion yuan, this year.

In terms o government measuresthat can begin to rectiy the situation,beyond extending loans or otherwises we e p in g t h e de b t u n de r t h eaccounting carpet, involves the kindo structural change that is called orin the th Five-Year Plan, includingboosting consumption. PBOC stillhas a huge amount o liquidity lockedup Shih said, adding that the centralbank must be active in reducingthe reserve requirement ratio andaddressing pockets o liquidity going

orward to that areas dont blow up.

It is the Central Bank's job to controlthis so that there aren't greater issuesdown the line, Shih said.

Stimulus and Slowdown

I China calculated its debt in thesame way as other countries, thegovernment would be on the hookor debt banks and state-ownedenterprises (SOEs), according toPatrick Chovanec, Associate Proessor

o Practice at singhua University's

School o Economics and Manag

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