The China Compass - Figures, Forecast and Analysis - January 2014

Figures, Forecast and Analysis

January 2014

www.thebeijingaxis.com

The China Compass

International Advisory and

Procurement

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and Procurement

Beijing Singapore Perth Mumbai Johannesburg

Strategy Procurement Commodities Capital

The Beijing Axis is an international advisory and procurement firm. Combining extensive experience and comprehensive capabilities, we collaborate with

clients across their value chain through strategy and management consulting, outsourced procurement services, commodity trading, and capital

advisory in order to raise their performance and profitability

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The Beijing Axis 2

Agenda

1. Foreword

2. What‟s New: China‟s Ongoing Transformation

3. China‟s Economic Indicators

4. International Comparison

5. Conclusions and Implications

6. About The Beijing Axis

The Beijing Axis 3

Foreword

In the same manner that a compass highlights the cardinal points of north, south, east, and west, The China Compass is intended to serve as a navigational instrument for determining China‟s position and direction in the context of the world‟s economic landscape. As such, by closely examining China‟s relevance, importance and progressive integration with the world economy, The China Compass is a knowledge tool from The Beijing Axis for executives with a China agenda.

Although developed economies continue to only slowly recover from the after-effects of the financial crisis five years on, the global economic outlook is more optimistic than it was a year ago. Meanwhile, China‟s fifth generation of leaders must convince an immense bureaucracy to implement an ambitious economic blueprint for the next decade that was released by the Chinese Communist Party following the Third Plenum. Led by President Xi Jinping, the government will have to overcome internal resistance from vested interests to carry out economic and social reforms in order to keep China‟s much more complex and globalised economy on the path of sustainable growth. All this is set against the backdrop of an ever evolving social structure that may not be as conducive for growth as in the past.

In this January 2014 edition, we provide the latest macroeconomic data available for a wide range of indicators, for China as well as for other major world economies, and include a new section, „What‟s New: China‟s Ongoing Transformation‟. This section will cover China‟s changing political, economic and social patterns and the impact of these changes on the country and the rest of the world. We trust that this edition will be useful for those that are in the midst of planning, and that it will shed light on past developments and future prospects of a uniquely Chinese story of human development.

As always, we welcome all feedback.

Kobus van der Wath

Founder and Group Managing Director

The Beijing Axis

[email protected]

The Beijing Axis 4

22,426

20,452

25,771

5,136

3,627

2,450

0%

2%

4%

6%

8%

10%

0% 5% 10% 15% 20% 25% 30% 35%

Emerging economies are outperforming developed economies in terms of global economic growth. By 2015, Asia-Pacific is expected to account for one-third of global GDP

Regional GDP Comparison (2012, 2015F)

Average GDP Growth Rate (2012-2015F)

Africa

Asia-Pacific

North America

Europe

Other Asia

South America

Asia-Pacific is

expected to account for

the largest share of the

world‟s GDP by 2015

Rising real incomes and

high commodity prices

will continue to drive

Africa‟s growth

Developed economies

are expected to

continue to lose share

in the world‟s GDP over

the coming years

A bubble this size represents a GDP of USD 1,000 bn

Forecast world average GDP

growth until 2015: 3.9%

BRICS 2015F GDP (USD bn) 2012 Growth Rate (%) 2012 GDP Per Capita (USD)

China 11,020 7.8% 6,091

Brazil 2,800 0.9% 11,340

Russia 2,544 3.4% 14,037

India 2,308 5.0% 1,489

South Africa 411 2.5% 7,508

Share of

World’s GDP

Note: Translucent bubbles refer to 2012 data. Solid color bubbles refer to forecasted 2015 data.

Source: IMF; The Beijing Axis Analysis

The Beijing Axis 5

As Asia‟s largest and one of the fastest-growing economies, China plays a crucial role in the region‟s ongoing transformation

Comparison of GDP Size, GDP per Capita and GDP Growth across Asian Economies

Source: IMF; World Bank; The Beijing Axis Analysis

0

10,000

20,000

30,000

40,000

50,000

60,000

0 2 4 6 8 10 12

Cambodia

Japan

Hong Kong

China Indonesia

Singapore

Brunei

S. Korea

Taiwan

Malaysia

Timor-Leste

Myanmar

Mongolia India

Vietnam

Sri Lanka

PNG

Laos

Bangladesh

Thailand

Pakistan Nepal

Bhutan

Philippines

Australia

GDP per Capita (USD, 2012)

GDP Growth Rate (2001-2012)

Developed Asia World Average: 3.1%

China is the

largest economy

in the region

GDP per capita: USD 67,035 A bubble this size represents a GDP of USD 200 bn

The Beijing Axis 6

With a GDP of USD 8.2 tn, China now accounts for more than one-tenth of the world‟s economy and represents 30% of developing markets‟ share of the global economy

Note (1): Developed Asia includes Japan, South Korea, Taiwan, Singapore and Hong Kong

Source: IMF; National Bureau of Statistics of China; The Beijing Axis Analysis

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

World GDP in 2012 World GDP in 2012 GDP in DevelopingCountries 2012

China GDP2012

China GDP2012

China GDP2012

China GDP2012

Others

Germany

Russia

Japan

U.K.

US

France

Italy

China

Canada

Brazil

Southwest

Northeast

East

South

North

Northwest

Zhejiang

Hebei

Guangdong

Liaoning

Hunan Hubei

Shandong

Jiangsu

Others

Henan

Primary

Industry

Secondary

Industry

Tertiary

Industry

Sichuan

Other

Developed

Countries

Other

Developing

Countries

China

Other

Developing

Countries

Other

Developing Asia

China

USD 72 tn USD 72 tn USD 27 tn USD 8.2 tn USD 8.2 tn USD 8.2 tn USD 8.2 tn

Private

Consumption

Expenditure

Gross

Capital

Formation

Net Exports

India

Indonesia

Africa

Africa

Africa

Govt.

Consumption

Expenditure

Developed

Asia1

The Beijing Axis 7

Snapshot of China‟s key economic indicators from 2012 through to the third quarter of 2013

Selected Economic Indicators - China (Q1 2012 - Q3 2013)

Note*: These figures are YTD data through the first three quarters of 2013.

Source: National Bureau of Statistics of China; The People‟s Bank of China; China Customs; The Beijing Axis Analysis

Economic

Indicator

2012 Y-o-Y Growth (%) 2013 Y-o-Y Growth (%) 2013 Q3

Q1 Q2 Q3 Q4 Q1 Q2 Q3

GDP 12.1 10.1 8.7 9.9 10.1 8.4 9.8 USD 2,252 bn

Exports 7.6 10.5 4.5 9.4 18.4 3.7 3.9 USD 562 bn

Imports 7.2 6.4 1.6 2.7 8.4 5.0 8.4 USD 501 bn

Retail Sales 13.5 14.0 13.8 14.5 12.4 13.1 13.4 USD 942 bn

Monthly Loans 9.0 24.4 23.6 -17.2 11.8 -3.1 17.7 USD 357 bn

Urban Fixed

Asset Investment 21.3 20.9 21.1 20.4 21.4 19.8 20.4 USD 2,076 bn

Real Estate

Investment 23.5 13.1 13.7 18.5 20.2 20.4 18.9 USD 394 bn

Consumer Price

Inflation 3.8 2.9 1.9 2.1 2.4 2.4 2.8 2.5*

Producer Price

Inflation 0.2 -1.4 -3.3 -2.3 -1.7 -2.7 -2.1 -1.7*

The Beijing Axis 8

Various factors identify China as one of the world‟s most significant and unique countries

Source: Various; The Beijing Axis Analysis

700,000 engineers graduate annually from schools in China

30,000 Chinese MBA students graduated in 2012; the number was 0 within China in 1998

12,000 USD is the average cost of a license plate in Shanghai

363 coal-fired power plants were planned to be built in China as of 2012

240 million vehicles are registered in China; more than half are passenger cars

160 cities in China have populations that exceed 1 million; there are 9 in the US and just 2 in the UK

90 percent of PCs in the global market in 2012 were produced in China

80 percent of the world‟s zippers are produced in the factories of Qiaotou city in Zhejiang Province

79 Chinese companies are among the Fortune Global 500 in 2012; the number was only 13 in 2002

75 percent of the world‟s toys are made in more than 10,000 toy factories across China

70 percent of the world‟s pirated goods come from China

55 new airports will be built over the next five years in China, helping to bring the total number to 244 by 2020

50 percent of the world‟s pork is eaten in China

38 children are born every minute in China; 54,720 are born every day and 19,986,480 are born every year

30 percent of young Chinese adults depend on their parents financially

21 nuclear plants were scheduled for construction as of the end of 2012; 9 are currently under construction

6.8 million students graduated from Chinese universities in 2012; the number in 1977 was 270,000

2 percent of China‟s population consumed 1/3 of global luxury goods in 2012

1.1 bn mobile phones were in circulation in China in 2012

The Beijing Axis 9

Setting the scene

Source: The Beijing Axis Analysis

• Despite a „slowing‟ economy, China remains Asia‟s largest and one of its fastest-growing economies. As the country seeks to maintain stable growth in the long-term, there are ongoing transformations taking place on the political, social and economic horizons that will affect the direction, speed and ultimately the realisation of China‟s long-term ambitions

• On the political front, much is expected of the new leadership led by President Xi Jinping, including the implementation of greater pro-market reforms outlined in an ambitious 60-point reform blueprint released by the Chinese Communist Party following the Third Plenum. The overarching goal is to shift away from an investment-led model of growth to a more stable model driven by domestic consumption, advanced technology and environmental efficiency

• On the economic front, the „old‟ China of low-cost labour, low-value, energy-intensive industries and a coastal-based export economy is fading away

• With the era of double-digit growth over, the Chinese government has been targeting more moderate growth of 7.5% for 2013, with Q3 2013 growth at 7.8%. We expect this sustainable level of growth to continue into the first half of 2014

• On the social front, China is coming to terms with past policies that may impede its continued growth such as the impact of the One Child Policy in the context of an ageing population. Moreover, a rapidly developing middle class with new wealth, social norms, and consumption patterns is making „selling to China‟ a key growth strategy for many multinational companies

• China continues to have a solid long-term growth trajectory ahead of it – the fundamentals are conducive for strong growth over a long period. The only question is whether the ongoing political, social and economic transformations taking place in China will allow it to realise what the new leadership has termed, „The Chinese Dream‟

The Beijing Axis 10

Agenda

1. Foreword

2. What’s New: China’s Ongoing Transformation

- Political Transformation

- Economic Transformation

- Social Transformation





The Beijing Axis 12

Current Composition of the Chinese Government (2013)

Source: PRC government website; US-China Business Council; People‟s Daily Online; The Beijing Axis Analysis

After the once-in-a-decade leadership change, China‟s new government is being led by President Xi Jinping and Premier Li Keqiang

Liu Yandong

Vice Premier

Zhao Gaoli

Vice Premier

Wang Yang

Vice Premier

Ma Kai

Vice Premier

Li Keqiang

Premier

National People’s Congress

Standing Committee

Chairman: Zhang Dejiang

Communist Party of China Central Committee

General Secretary: Xi Jinping

Political Bureau of CPC Central Committee

Members of Standing Committee

Xi Jinping Liu Yunshan

Li Keqiang Wang Qishan

Yu Zhengsheng Zhang Dejiang

Zhang Gaoli

Chinese People’s Political Consultative

Conference (CPPCC)

Chairman: Yu Zhengsheng

President: Xi Jinping

Vice President: Li Yuanchao

Central Military Commission

Chairman: Xi Jinping Supreme

People’s Court

Zhou Qiang

The State

Council

Supreme People’s

Procuratorate

Cao Jianming

State Councillors

25 Ministries and Commissions Under the State Council

Chang Wanquan Yang Jiechi Wang Yong Guo Shengkun Yang Jing*

* Holds the concurrent position of Secretary-General of the State Council

The highest

political body

in China

Vice Premiers

Details on next page

The State Council

is the chief

administrative

authority

The main political

advisory body for

the government

The command

and control of

the Chinese

armed forces

The NPC is the de facto

legislative body, but it also

interprets the law

The Beijing Axis 13

Liu Yunshan

Member of the Standing

Committee of the Political

Bureau of the CPC Central

Committee; First Secretary of

the Secretariat of the CPC

Central Committee

Wang Qishan




Committee; Secretary of

Central Commission for

Discipline Inspection

Note*: CPC - Communist Party of China; NPC - National People's Congress; CPPCC - Chinese People's Political Consultative Conference; CCCPC - Central Committee of the Communist Party of China


China‟s highest political body, the Standing Committee of the Politburo, has been reduced from 9 members to 7 in order to streamline decision making

Xi Jinping General Secretary of the CPC Central

Committee; Chairman of the CPC

Central Military Commission; President

of the People‟s Republic of China

Zhang Dejiang




Committee; Chairman of the

NPC Standing Committee

Yu Zhengsheng




Committee; Chairman of the

CPPCC National Committee

Li Keqiang

Member of the Standing Committee

of the Political Bureau of the CPC

Central Committee; Premier of the

State Council and Secretary of its

Leading Party Members‟ Group

Zhang Gaoli




Committee; Vice Premier of

the State Council

President Premier

NPC Chairman

Secretary of

CCCPC Secretariat Discipline Chief

Executive

Vice Premier CPPCC Chairman

The Beijing Axis 14

At the highest level, China‟s new leadership will continue to implement the 12th Five-Year Plan

Major Pillars of 12th Five-Year Plan (2011-2015F)


Encourage domestic

consumption

Balance social equity/ improve social safety net

Industrial consolidation/

upgrading

Sustainable development and energy efficiency

Sustainable urbanisation/

modernisation of rural

infrastructure and agriculture

Balance regional development

1 2 3 4 5 6

• Change mode of

economic growth from

investment- and export-

driven to consumption-

driven

• Automobiles, household

appliances, consumer

electronics, fast food

sectors will develop

rapidly

• Encourage private

investment

• Increase household

income and reduce

wage inequality

• Improve medical security,

social insurance,

education and housing

security

• Adjust income distribution

• Improve structure of key

industries (equipment

manufacturing, shipping

manufacturing,

automobiles, metallurgy,

building materials, petro-

chemical products)

• Develop emerging

industries (next-generation

IT, high-end

manufacturing, pharma &

biotech, energy efficiency

& environmental

protection, new energy,

new materials, new energy

automotive)

• Develop services

• Promote the marine sector

• Develop a circular

economy

• Control environmental

pollution

• Improve the ecological

environment

• Improve water

conservancy and

disaster prevention

• Shut down lower-end

polluting producers

• Supportive policies for

alternative energy

• Emphasis on work-

related safety

• Promote small cities‟

development

• Transfer the rural

population to urban

areas

• Strengthen infrastructure

construction

(transportation,

communication, power,

heating power, gas,

water supply and

drainage)

• Re-balance regional

development and

support economic

growth

• Revitalise northeast

regions

• Cultivate central region

• Develop western regions

by expanding

infrastructure

construction and

promoting the Chengdu-

Chongqing Economic

Zone as the region‟s key

economic centre

The Beijing Axis 15

• More amenable to slowdown, with GDP

growth of about 7%

• Investment still an important tool of

growth, but desire to reduce reliance

Pursuing a more market-oriented

economy

More emphasis on sustainable

development

• More attention to income disparity

• Attempts to control high property prices

• Shift from double-digit growth

Avoid hard-landing, baseline of

acceptable GDP growth was set at 8%

Investment regarded as the main

approach to stimulate the economy

There are high expectations of the new government as several leaders have hinted at greater economic liberalisation and pro-market policy reforms

Overview of the Changing Policy Agenda Under China’s New Leadership


Maintaining Growth Structural Reforms

Key Focus of Leadership

New

Leadership

(2013-Present)

Previous

Leadership

(2002-2012)

The new leadership is

expected to be more

liberal than the last in

this area

The Beijing Axis 16

The new leadership has already put into place policies aimed at reducing government intervention in the market and reducing bureaucracy


Selected Policy Outputs

from Previous Leadership

Increasing consolidation of

departments and reduction

of regulatory overlaps

Limited consolidation of

gov‟t departments

• Reduction in the number of members in the Standing Committee

• Merger of Ministry of Railways & Ministry of Communications; the State

Electricity Regulatory Commission & National Energy Administration

• China‟s Administration of Press, Broadcasting Stations and Radio was

set up as a merger of two previous ministries

vs.

Long, centralised and

cumbersome approval

processes

Reduction of approval times

and decentralised decision-

making

• Ongoing streamlining and localisation of various administrative

procedures

• By September 2013, 242 administrative approval authorities had been

abolished or decentralised to local authorities

vs.

Increasing role of private

companies in various

sectors

Intensive government

involvement in the

economy

• Banks will be allowed to price loans according to the market

• Various structural tax reforms have been launched

• A pilot Free Trade Zone in Shanghai has been approved with

expectations of greater convertibility of the RMB, liberalised interest

rates etc. inside the zone

• Liberalisation of some previously closed sectors under discussion e.g.

private companies such as Suning and Tencent may be allowed to set

up their own private banks

vs.

Despite greater liberalisation, some

industries such as aviation have

seen a retreat by the private sector

and increased dominance by SOEs

Policy Shift by New Leadership

to Reduce Gov’t Intervention Selected Examples Elements

Gov’t

Departments

Approval

Process

Level of Gov’t

Market

Intervention

1

2

3

The Beijing Axis 17

The new leadership is placing a greater emphasis on China‟s sustainable economic development in the long-term, including a reduced focus on rapid GDP growth and a reduction of overcapacity in some sectors


Selected Policy Outputs

from Previous Leadership

Increase expenditure on

curbing environmental

pollution

Focus on penalties and

restrictions to curb

pollution

• The government is planning to invest USD 275 bn across all levels of

government to reduce atmospheric pollution

• Nearly USD 1 bn incentive scheme announced to fight air pollution in

six of the worst-polluting provinces and municipalities in northern China

• By the end of 2013, China will have launched four carbon emissions

trading platforms covering 1,500 companies

vs.

Focus on penalties

including shutdowns of

companies with

overcapacity

More market-oriented

approach

• Instead of shutting down companies, consolidation is encouraged

• Regional/partial overcapacity will be treated differently by focusing on

removing local protection and encouraging shifts to other provinces

vs.

Less reliant on large capital

investments to spur growth

Focus on investment to

stimulate economy

• No stimulus policy was released after leadership transition

• More focus on policies that increase income distribution and social

welfare, including those aimed at migrant workers in urban areas

vs.

Policy Shift by New Leadership

to Increase Sustainability Selected Examples Elements

Environmental

Protection

Overcapacity

Growth

Stimulation

1

2

3

Local Gov’t

Debt

4 Investigations were

undertaken but limited

action taken

Hints of stricter investigation

procedures and specific

actions are outlined

vs.

• Both the National Audit Office and China Banking Regulatory

Commission are strictly investigating local government debts

• The central government is setting up a warning system to prevent local

government debts from defaulting and causing collateral damage

• Anti-corruption measures are also being implemented to reduce

government waste

The Beijing Axis 18

China‟s blueprint for the next decade includes a 60-point reform agenda outlined in the policy document „Decision on the Comprehensive Deepening of Reform‟ released following the Third Plenum

Overview of the ‘Decision on Certain Major Issues Concerning the Comprehensive Deepening of Reform’ (I)

Source: Xinhua; U.S.-China Economic and Security Review Commission; The Beijing Axis Analysis

Guiding thoughts for reform Reaffirm President‟s Xi Jinping‟s “Chinese Dream” theme

Basic economic system Develop a "mixed ownership" economy by reducing and marketising the public sector; encourage the development of the private sector by ensuring better property rights, reducing market entry barriers and letting private investors take larger stakes in SOEs

Modern market system Unify the urban and rural construction markets; reduce red tape for businesses; carry out price and land reform; further open up the financial system and capital account

Government functions Improve coordination of China's fiscal, monetary, and industrial policy to avoid wasteful investment and guard against cyclical volatility; delegate more power to lower levels of government; minimise government management of business by removing unnecessary administrative approvals; better define the roles of different party, government, and mass organisations; reduce the number of personnel in government agencies; work toward direct provincial administration of counties to simplify local administration procedures

Fiscal and taxation system Improve budget transparency; clarify which types of spending are central and which fall are under local authority; restrict transfer payments to the poorest regions only; increase personal income, real estate, and resource taxes; provide tax incentives to ensure an equitable tax burden

Urban-rural integration Retain collective land ownership system but provide farmers with broader land-use rights beyond farming, including property-style income; let farmers become shareholders in industrial operations; allow more private investment into rural areas; narrow the gap between urban and rural basic public services

Opening up Relax investment access for foreign enterprises, using the Shanghai Free Trade Zone as a pilot; speed up the establishment of free trade zones; expand the opening up of inland regions by expanding trade, investment and shipping routes

Political system Modernise the People's Congress as a supervisory body for examining/supervising fiscal budgets and state-owned assets, and as a ratifying body for any major government decision; encourage more interaction with grassroots organisations

The Beijing Axis 19

China‟s blueprint for the next decade includes a 60-point reform agenda outlined in the policy document „Decision on the Comprehensive Deepening of Reform‟ released following the Third Plenum

Overview of the ‘Decision on Certain Major Issues Concerning the Comprehensive Deepening of Reform’ (II)

Source: Xinhua; U.S.-China Economic and Security Review Commission; The Beijing Axis Analysis

Rule of law Offer more legal advisory services to inform people of their rights; set up judicial courts that are separate from local administrative zones; toughen enforcement of food, drug, and product safety standards, environmental protection measures, and labor and social security laws; reduce the number of crimes for which the death penalty is applicable; prohibit the abuse of torture and corporal punishment

Restraining the use of power

Tackle corruption by reporting cases to higher-level discipline inspection commissions and stationing the Central Discipline Inspection Commission at all central organisations

Cultural system Build up a modern public cultural service system; reform SOEs in the cultural sector

Social services Reform the education system to narrow opportunity gaps through vocational schools and more diverse aptitude testing methods; support business startups, especially ones started by college graduates; loosen the One Child Policy

Social management Encourage the development of more social organisations; separate trade associations from administrative organisations; reform the letters and calls system; improve public safety, especially product safety

Environmental regulation Strengthen natural resource property right systems; make GDP assessment irrelevant for regions with weak ecosystems; implement paid-for resource use systems; develop environmental protection markets

Defense and military Increase integration among military units; promote military-civilian integration, especially with regards to allowing private enterprises to participate in research and innovation programs

Party leadership over reform Establish a Leading Small Group for Comprehensive Deepening of Reform; get Party members in line with the new reform agenda

The Beijing Axis 20

Agenda

1. Foreword









The Beijing Axis 21

The Beijing Axis 22

China‟s economic landscape remains one of the most dynamic in the world. Some of the major economic drivers of the past are becoming less prominent while new drivers are beginning to emerge

Overview of the Ongoing Economic Transformation Under China’s New Leadership


Stable

Drivers

• Ongoing urbanisation / infrastructure development

• Global exports

• Regulatory reform

Fading

Drivers

• Reliance on capital investment for growth

• Low-cost labour

• Prominence of low-value added, energy-intensive industries

• Strong manufacturing in coastal regions

Emerging

Drivers

• Growth via increasing private consumption

• Growing service sector

• Value-added manufacturing and innovation

• Growth in China‟s inland provinces

Stable Drivers

• Elements that are key drivers in China‟s economy in the

past and will retain a prominent role with the new

leadership going forward

Fading Drivers

• Drivers that were key to China‟s economic growth in the

past but due to economic transformation and government

policy, are now less pronounced in the new economy

Emerging Drivers

• Drivers that are increasingly prominent in China‟s current

economy and will become even more important to the

country‟s economy going forward

Details on next slides

The Beijing Axis 23

Current regulatory reforms stem from Deng Xiaoping‟s reforms and the „opening up‟ era. These reforms have been expanded under his successors and will continue to be expanded under the new leadership

Note: SAR - Special Administrative Region; SEZ - Special Economic Zone; FTA - Free Trade Area


1978: Reform

and opening up

initiated by

Deng Xiaoping

Selected Economic and Political Reforms in China (1978-2013)

1986: Started state-

owned enterprise reform

1979: Established

SEZs in Shenzhen,

Zhuhai, Xiamen

and Shantou

1982: China implemented

economic reform in rural

areas

1984: Proposed

planned economy

1992: Deng Xiaoping's

southern tour speech.

Established goals on

socialist market

economic system reform

1987: Raised „one central task,

two basic points‟. Economic

development as the central

task supported by reform and

opening up

1993: Tax-sharing

reform. Raised

goals on financial

reform

1994: Unification of

exchange rates. Started

commercialisation of urban

housing

1996: Achieved

significant

progress in

foreign exchange

management

system reform

1999: Raised western

development strategy

2002: Established the

goal of building a

moderately prosperous

society at 16th Party

Congress

2001:

China joins

the WTO

2004: Abolition

of agricultural

tax regulations

2007: Promulgated

Property Law

2008: China‟s

four trillion

bailout plan

during US

financial crisis

2005: Adoption of a

flexible RMB exchange

rate

2012: Hu Jintao raised points

on deepening economic

reform to accelerate the

transformation of development

mode

2010: „New Ten Terms‟ was

published by State Council -

notice about resolutely

curbing housing prices in

some cities

2013: The State

Council approved the

establishment of the

China (Shanghai) Pilot

Free Trade Zone

2013: Blueprint for

social and

economic change

over the next

decade released

1978 2008 2013 2003 1998 1993 1988 1983

Stable Driver

The Beijing Axis 24

53

60

0

10

20

30

40

50

60

02 03 04 05 06 07 08 09 10 11 12 20F

China’s Urbanisation Rate (%, 2002-2020F)

Source: National Bureau of Statistics of China; The Beijing Axis Analysis

One of Premier Li Keqiang‟s central goals is moving more of China‟s population into cities in order to streamline productivity gains and ultimately raise private consumption

China‟s urbanisation rate

exceeded 50% for the first

time in 2011

Stable Driver

2012 world average urbanisation

rate was estimated at 55%

A 7% increase in urbanisation is expected

to see more than 70 million rural residents

absorbed into cities and boost private

consumption by USD 15.9 bn

The Beijing Axis 25

(500)

0

500

1,000

1,500

2,000

2,500

0 10 20 30 40 50 60 70 80 90

China‟s global importance is illustrated by its position as the world‟s largest exporter. While China will retain this position for the foreseeable future, its dependence on export growth as a main economic driver will continue to diminish

World’s Major Exporters (2012)

Exports (USD bn)

Russia

Malaysia

Netherlands

France

China

South Korea

Bubble Size: GDP = USD 1,000 bn

US Germany

Japan

UK Mexico

Brazil

India

Australia Spain Thailand Switzerland

Export/GDP (%)

China overtook

Germany to become

the world‟s largest

exporter in 2010

A large economy, large exports

and high exports to GDP ratio –

however, the future growth

model will not depend on exports

Canada

Rank 2002 2007 2012 Total Exports

(2012, USD bn)

1 United States Germany China 2,049

2 Germany China United States 1,546

3 Japan United States Germany 1,416

4 China Japan Japan 799

5 France France France 557

6 UK Italy Netherlands 555

7 Italy Netherlands South Korea 548

8 Canada UK Russia 525

9 Netherlands Belgium UK 481

10 Belgium Canada Canada 453 China in 2002

Source: World Bank; IMF; UN Comtrade; The Beijing Axis Analysis

Stable Driver

China in 2007

The Beijing Axis 26

Breakdown of China’s GDP Growth (%, 2002-2012)


Consumption has replaced capital formation as the largest contributor to GDP growth while the growth of net exports has remained low

-4

0

4

8

12

16

02 03 04 05 06 07 08 09 10 11 12

Final Consumption Expenditure Gross Capital Formaton Net Exports of Goods and Services GDP Growth

In 2011, consumption surpassed

investment for the first time in 10 years,

once again becoming the largest

contributor to China's GDP growth

Fading Driver

The Beijing Axis 27

Labour Cost in China (2000 vs. 2012)

Province Hourly Cost

(USD, 2000)

Hourly Cost

(USD, 2012)

Annual Cost* for 1,000

Workers (USD mn, 2000)

Annual Cost* for 1,000

Workers (USD mn, 2012)

Shanghai 1.03 4.74 2.1 9.5

Guangdong 0.75 2.76 1.5 5.5

Henan 0.37 2.32 0.74 4.6

Average Annual Wage of Urban Workers in China (USD, 2002-2012)

Note*: Annual cost is based on a workload of 2,000 hours per year for each worker.


Average Annual Growth Rate of Hourly Manufacturing Wage Across China (2000-2012)

While China is becoming less competitive in terms of labour cost, other competitive advantages such as integrated supplier bases, high product integration capabilities and robust infrastructure remain intact

1,499

7,424

0

2,000

4,000

6,000

8,000

02 03 04 05 06 07 08 09 10 11 12

Fading Driver

10-15% per annum

>17% per annum

15-17% per annum Guangdong

(14%)

Shanghai (18%)

Henan (18%)

The overall impact

on suppliers‟

manufacturing

cost is substantial

X% Represents CAGR for the period 2002-2012

17.4%

The Beijing Axis 28

In the past decade, growth in fixed asset investment outstripped private consumption. The story has now changed with the growth rate of private consumption surpassing investment in 2011

Growth of Private Consumption Expenditure and Gross Fixed Capital Formation (y-o-y %, 2002-2012)

0

5

10

15

20

25

30

02 03 04 05 06 07 08 09 10 11 12

Private Consumption Expenditure Gross Fixed Capital Formation

Capital formation is no longer the largest driver of China‟s economic growth

Note: Data is calculated at current prices.


Fading Driver

The Beijing Axis 29

As wage inflation continues to rise in coastal regions, manufacturers are shifting production to emerging inland industrial clusters

Note: The dots on the map represent key industrial cities in each cluster. The arrows represent the shift towards inland industrial clusters.

Source: The Economist; National Bureau of Statistics of China; The Beijing Axis Analysis

Fading Driver

China’s Manufacturing Clusters (2012)

Bohai Bay Economic Rim Industry Clusters: Automobiles, Aeronautics,

Consumer Electronics, Textiles, Industrial Machinery,

Electrical Equipment, Chemicals

Important Cities: Beijing, Tianjin, Dalian, Shenyang

Total Exports (2012): USD 164 bn South-West Industry Clusters: Automotive, Industrial

Machinery, Pharmaceuticals, Medical Products,

Chemicals

Important Cities: Chongqing, Chengdu

Total Exports (2012): USD 22 bn

Pearl River Delta Industry Clusters: Textiles, Automobiles, Apparel,

Foodstuff, Consumer Electronics, Petrochemicals,

Industrial Equipment, Electrical Equipment

Important Cities: Shenzhen, Zhuhai, Jiangmen, Foshan,

Dongguan, Guangzhou


Yangtze River Delta Industry Clusters: Automobiles, Shipping, Aeronautics,

Consumer Electronics, Textiles, Pharmaceuticals,

Chemicals, Industrial Machinery, Electrical Equipment

Important Cities: Shanghai, Nanjing, Yangzhou, Suzhou,

Hangzhou, Ningbo, Shaoxing, Wenzhou


Central Industry Clusters: Automotive, Industrial

Machinery, Textiles, Electronics, Chemicals

Important Cities: Changsha, Wuhan,

Zhengzhou


The Beijing Axis 30

0

2

4

6

8

10

1982 1987 1992 1997 2002 2007 2012

Coastal and Developed Eastern Provinces

Inland Provinces

Nominal GDP Per Capita (USD ’000, 1982-2012)

0

5

10

15

20

25

30

1982 1987 1992 1997 2002 2007 2012

Coastal and Developed Eastern Provinces

Inland Provinces

Note: Coastal and developed eastern provinces include Beijing, Tianjin, Hebei, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian, Guangdong and Hainan. All other provinces are grouped under inland provinces.


Annual Nominal GDP Growth (%, 1982-2012)

China‟s inland provinces have been growing faster than coastal areas and will continue to be important engines of China‟s growth

Coastal outgrew inland

Inland now outgrowing coastal

40%

gap

Inland provinces are about five

years behind coastal provinces,

meaning there is still plenty of

room to grow

Emerging Driver

The Beijing Axis 31

China’s GDP by Sector (%, 2000-2013E)

Source: National Bureau of Statistics of China; China Statistical Yearbook; The Beijing Axis Analysis

Service sector companies now employ more people in China than manufacturers as the country evolves from a manufacturing to a service-based economy

0%

20%

40%

60%

80%

100%

00 01 02 03 04 05 06 07 08 09 10 11 12 13E

Service sector Industrial sector Agricultural sector

Ten year

CAGR:

1.2%

Emerging Driver

0%

10%

20%

30%

40%

50%

60%

00 01 02 03 04 05 06 07 08 09 10 11 12

Primary Secondary Tertiary

China’s Employment by Sector (%, 2000-2012)

Service sector companies now

employ more people in China than

manufacturers

The Beijing Axis 32

Total Number of Patents Awarded to Selected Economies (’000, 2002 vs. 2012)

Source: World Intellectual Property Organisation; China State Intellectual Property Office; SIPO; MH&M; The Beijing Axis Analysis

Share of Patents Held Globally by China for Selected Items (%, 2012)

The number of patents granted to Chinese firms and inventors has grown exponentially over the last decade, propelling China‟s move towards innovation and high-value sectors

0 50 100 150 200 250

India

Brazil

UK

Germany

Japan

US

China

2002 2012

35

22

CAGR (%)

2

6

1

2

19

0 5 10 15 20

Optics

Pharmaceuticals

Environmental Technology

Computer Technology

Electrical Machinery

Telecom

Digital Communication

% of China’s Total Patents

Chinese government has

set a goal of achieving

200,000 patents per year

by 2015

Chinese inventors filed

18,627 applications

internationally in 2012, just

228 applications fewer than

third-placed Germany, and

behind the US and Japan

Majority of patents

owned by domestic

Chinese parties are

utility model patents and

industrial design patents

26

11

5

5

1

5

2

Emerging Driver

The Beijing Axis 33

Consequently, China‟s manufacturing export structure has shifted from labour-intensive goods to high-value manufactured goods

Composition of China’s Exports* (USD bn, 2001 vs. 2012)

Note*: SITC Classification System

Source: UN Comtrade; EIU; ITC; The Beijing Axis Analysis

China’s Share of Global Exports for Select Products (%, 2002 vs. 2011)

0 10 20 30 40 50

Centrifuges

TransmissionShafts/Cranks

Construction andMining Parts

Silicon Wafers

Optical Fibres

Refrigerators,Freezers

Cruise/CargoShips, Barges

Derricks andCranes

Motorcycles

2002 2011

CAGR (%)

China‟s global exports presence in

mid- and high-value products is

considerably larger today than it

was a decade ago

Emerging Driver

15

22

12

13

15

14

13

22

22

0

500

1,000

1,500

2,000

2001 2012

Machinery and Electrical Equipment

Foodstuffs

Miscellaneous Manufactured Articles

Products Classified by Material

Mineral Items

Chemical Products

Others

Increasing

exports share

23.5%

13.6%

21.0%

20.3%

12.6%

21.5%

9.9%

36%

47%

X% Represents CAGR for the period 2001-2012

CAGR

33%

26%

Textiles and garments exports

grew from 46.1 bn to 246 bn,

representing a CAGR of 16.4%

20.4%

The Beijing Axis 34

Indeed, current government policies are moving China towards becoming a high-tech economy. As a result, more R&D centres and high-tech industrial zones are being established throughout China

Relocation Trends of Regional Economic Structures

Source: BrainNet EAC; The Beijing Axis Analysis

West / Central China

• In the past, five of the seven fastest

growing regions were located in

western/central China

• Shift of governmental investment

from coastal areas to inland regions

• Over 1995-2010, the number of

economic zones in western/central

China increased from 6 to 776

• Industrial focus (only central China)

– Automotive

– Motorcycle production

– Construction

– Furniture industry

– Metal processing / fabrication

North China

Industrial focus:

• Steel

• Automotive

• Ship building

• Chemicals

• Machine building

• Aerospace

East China

Industrial focus:

• Automotive


• Chemicals

• Plastic processing

No. of Econ. Zones:

West China

No. of high-tech industrial zones

R&D/innovation center

No. of Econ. Zones:

Central China

No. of Econ. Zones:

Coastal area

6

9

11

13

15

South China

Industrial focus

• Automotive

• Plastic processing


• Electrical industry

1

158

West China

1995 2010

5

618

Central China

1995 2010 27

808

Coastal Area

1995 2010

By Aug 2013, the number of

Economic Zones at the national

level increased to 192; top 3

provinces are Jiangsu (23),

Zhejiang (17) and Shandong (13)

Emerging Driver

The Beijing Axis 35

Agenda

1. Foreword









The Beijing Axis 37

China‟s changing demographics present a challenge to the economy due to a changing age structure and declining work force. At the same time, they present a large opportunity to shift to a consumption-based economy


Changing Family Structure 1

Declining Working Age Population 2

Urbanisation 3

Other Social Changes 4

Demographic

Dividend

Low Birth Rate and

Low Death Rate

Past

Future

Selected Components Highlighting China’s Social Transformation

Decline in workforce

Large Rural and

Agricultural Population

Increased Urban and

Non-farm Population

Past

Future

Consumption Tertiary Education Internet Usage/

Online Shopping

• The One Child Policy has led to

the „1-2-4‟ phenomenon, with 1

child having to support 2

parents and 4 grandparents

• Cultural preference for sons

will result in a pool of 24 million

unmarried men by 2020

The Beijing Axis 38

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

Faced with declining birth and death rates, China‟s population is rapidly ageing. China recently amended its One Child Policy to help prevent the country from „growing old before getting rich‟

Breakdown of China’s Population by Age (mn, 2013 vs. 2050)

Source: UN Population Division; The Beijing Axis Analysis

Age Age Male Female Male Female

2013 2050

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

60m 50m 40m 30m 20m 10m 0 10m 20m 30m 40m 50m 60m 60m 50m 40m 30m 20m 10m 0 10m 20m 30m 40m 50m 60m

The largest part of

the population will

be between 60 –

64 years old

The number of

youth will drop

significantly by

2050

The Beijing Axis 39

450

550

650

750

850

950

1,050

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015F2020F2025F2030F

Chi

na‟s

Wor

king

-age

Pop

ulat

ion

(mn)

Current Working Population (15-59)

Proposed Working Population (15-62)

The retirement age in China

currently is 60 for men and 55

for female - expected to be

pushed up by at least 3 years

Such a demographic dividend

has kept wage rates low and

saving rates high

China’s Projected Working-age Population (mn, 1970-2030F)

Note*: Data from 2012 onwards is projected. Dependency Ratio is the ratio of people younger than 15 or older than 64 to the working-age population (ages 15-64)

Source: UN; McKinsey Quarterly; The Beijing Axis Analysis

China‟s population is ageing rapidly and the working-age population is expected to peak by 2016 – this will have profound economic and social consequences

29.0 24.4

10.5 7.7 5.9

2.7

-8.7

-16.6 -20.1 -21.0

36

-30

-20

-10

0

10

20

30

40

50

60

70

Indi

a

Mex

ico

Bra

zil

US

Can

ada

UK

Chi

na

Rus

sia

Japa

n

Ger

man

y

Dependency Ratio(2012)*

Projected Working-age Population Growth Across Selected Countries (%, 2013F-2038F)

Dependency ratio is currently

low for China due to a large

working-age population. This

will increase rapidly as the

population ages

Projected decline due to China‟s

One Child Policy – can potentially

be reversed with recent easing of

the One Child Policy

The Beijing Axis 40

39 41 42 43 44 46 47 48 50 51 53

61

68

80

0

20

40

60

80

100

02 03 04 05 06 07 08 09 10* 11 12 20F30F50F

China’s Proportion of Urban Residents at Year-end (%, 2002-2050F)

Note*: In 2010, proportion of urban population was 49.95%.

Source: National Bureau of Statistics of China; Institute for Urban and Environmental Studies Chinese Academy of Social Sciences; The Beijing Axis Analysis

China’s Annual Retail Sales (USD bn, 2000-2012)

China‟s growing urban population will be the fundamental pillar of a consumption-driven economy. A higher proportion of urban residents will also result in a greater concentration of buying power

Ranked 1st with

17% of world‟s

urban population

Urban population was

greater than rural for the

first time

0

500

1,000

1,500

2,000

2,500

3,000

3,500

00 01 02 03 04 05 06 07 08 09 10 11 12

Retail Sales (Urban) Retail Sales (Rural)

China‟s urban population

will exceed 1 bn residents In 2012, urban retail sales

accounted for 87% of

China‟s total

In 2003, urban retail

sales accounted for

74% of China‟s total

The Beijing Axis 41

Breakdown of China’s Urban Households by Economic Class* (%, 2002-2022F)

Note*: Classes are defined by annual disposable income per urban household, in 2010 real terms. For affluent urban households, annual disposable income is > USD 34,000; upper middle class, USD

16,000 to USD 34,000; mass middle class, USD 9,000 to USD 16,000; poor, < USD 9,000.


In urban areas, the middle class has rapidly expanded in the last decade. The upper middle class is now growing faster than the mass middle class - a trend expected to continue for the next decade

Total Households: 165 mn 256 mn 357 mn

90

29

16

7

54

22

2 14

53

1 3 9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2012 2022F

Poor Mass Middle Class Upper Middle Class Affluent

The Beijing Axis 42

Share of Middle Class by Geographical Location (%, 2002 vs. 2022F)

Note*: Cities in China are grouped into 4 tiers based on their economic development and political importance. Tier-1 cities, nominal urban GDP is > USD 138 billion; for Tier-2 cities, USD 18 billion –USD

138 billion; for Tier-3 cities, USD 3 billion – USD 18 billion; for Tier-4 cities, < USD 3 billion.


Share of Middle Class by Type of City* (%, 2002 vs. 2022F)

The expanding middle class will not be limited to big cities. Lower tier cities and cities in inland China will witness the fastest increases

13

39

87

61

0%

20%

40%

60%

80%

100%

2002 2022F

Inland China Coastal China

40

16

42

45

15

31

3 8

0%

20%

40%

60%

80%

100%

2002 2022F

Tier 1 Tier 2 Tier 3 Tier 4

Middle-class growth

rates will be far higher

in China‟s smaller Tier

3 and Tier 4 cities

While the majority of

China‟s middle class

will reside along the

coast, inland areas

will witness the

fastest growth rates

The Beijing Axis 43

2

7

1

6

0

1

2

3

4

5

6

7

8

00 01 02 03 04 05 06 07 08 09 10 11 12

Newly Enrolled Successfully Graduated

Number of Newly Enrolled and Successfully Graduated Students of Higher Education (mn persons, 2000-2012)

128

590

59

486

0

100

200

300

400

500

600

700

00 01 02 03 04 05 06 07 08 09 10 11 12

Newly Enrolled Successfully Graduated


Number of Newly Enrolled and Successfully Graduated Postgraduate Students (’000 persons, 2000-2012)

The large number of university graduates in China is a double-edged sword – new skills add to an increasing high-value added economy, but a shortage of jobs for new graduates also threatens social stability

The Beijing Axis 44

0

100

200

300

400

500

600

02 03 04 05 06 07 08 09 10 11 12

Internet Users Online Shopers

Number of Internet Users and Online Shopers1 (mn persons, 2002-2012)

0 20 40 60 80 100

Online Stock

Group Buying

Travel Reservation

Forum/BBS

Online Banking

Online Payment

E-mail

Online Literature

Online Shopping

Social Networking Sites

Weibo

Online Game

Online Video

Blog/Personal Space

Online Music

Online News

Search Engines

Instant Messaging

2012 2007

Note: (1) Data for online shopping users before 2007 is not available in reports of CNNIC

(2) Some items are new in 2012 statistics compared to 2007

Source: CNNIC; The Beijing Axis Analysis

Utilisation Rates of China’s Internet Users towards Different Network Applications2 (%, 2007 vs. 2012)

China‟s middle class is increasingly using the Internet not only for leisure, but also for shopping. The ability to spend online is also allowing Chinese consumers to spend more on a greater range of products

The Beijing Axis 45

Agenda

1. Foreword


3. China’s Economic Indicators

- Selected Macroeconomic Indicators

- Domestic Consumption and Foreign Trade

- Domestic and Foreign Investment

- Financial Indicators

- Social Indicators




The Beijing Axis 47

0

5

10

15

Q1 Q1 Q1 Q1 Q1

China’s Quarterly Y-o-Y GDP Growth Rate (%, 2009-Q4 2013F)


Contribution to China’s GDP (%, 1998-2012)

China will rely on market-based reforms to unleash fresh growth drivers to support the economy. Long-term trends suggest more moderate and sustainable growth

-40

-20

0

20

40

60

80

100

120

140

98 00 02 04 06 08 10 12

Net Exports of Goods and Services

Gross Capital Formation

Final Consumption Expenditure

2009 2010 2011

3-year (2009-2011)

average: 9.4%

Government stimulus

package (USD 586 bn)

2011 y-o-y GDP:

9.3%

2012

Falling net exports

contribution

Effect from stimulus

package in 2009

Gross capital formation remains

the largest contributor

2013

2012 y-o-y GDP:

7.8%

Policy easing to

provide room for

growth moderation

2013 y-o-y GDP

growth forecast:

7.6%

The Beijing Axis 48

Latest forecasts from the IMF suggest that China‟s annual GDP growth rate in 2013 will be 7.6%, in line with the expectations of China‟s Communist Party

China Real GDP Growth Rate (% y-o-y, 1978-2013F)


0

4

8

12

16

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F

7-10% GDP

growth band

Past periods of

overheating

Soft landing amid

global uncertainty

Overheating

concerns

7-8% GDP

growth band

The Beijing Axis 49

0 250 500 750 1,000

GuangdongJiangsu

ShandongZhejiang

HenanHebei

LiaoningSichuan

HubeiHunan

ShanghaiFujian

BeijingAnhui

Inner MongoliaShaanxi

HeilongjiangGuangxi

JiangxiTianjinShanxi

JilinChongqing

YunnanXinjiangGuizhou

GansuHainanNingxiaQinghai

Tibet

GDP by Province (USD bn, 2012)

Note: Also includes the centrally-administered municipalities of Beijing, Tianjin, Chongqing and Shanghai


Geographical Distribution of China’s GDP (2012)

China‟s GDP is highly concentrated in five coastal provinces, which together account for about 40% of the country‟s total GDP. However, this figure has dropped over the years as other provinces have increased output

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

3

4

2

5

1

Henan

Zhejiang

Shandong

Guangdong

Jiangsu 31

30 29

28

27

Qinghai

Tibet

Gansu

Hainan

Ningxia

Top 5 provinces‟

GDP equate to 39%

of total GDP

Top 5 Provinces by GDP

Bottom 5 Provinces by GDP Highlighted on the map on right

The Beijing Axis 50

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

TianjinBeijing

ShanghaiJiangsu

Inner MongoliaZhejiangLiaoning

GuangdongFujian

ShandongJilin

ChongqingHubei

ShaanxiHebei

NingxiaHeilongjiang

XinjiangShanxiHunan

QinghaiHainanHenan

SichuanJiangxi

AnhuiGuangxi

TibetYunnanGansu

Guizhou

GDP Per Capita by Province (USD, 2012)

Note: Also includes the centrally-administered municipalities of Beijing, Tianjin, Chongqing and Shanghai


Tianjin, Beijing and Shanghai, three of the centrally-administered municipalities, each have a per capita income greater than USD 12,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

4

5

1 2

Shanghai 3

Inner Mongolia

Jiangsu

27

30

29

28

31

Beijing

Tianjin

Tibet

Gansu

Yunnan Guangxi

Provinces With Highest and Lowest GDP Per Capita in China (2012)

Top 5 Provinces by GDP per capita

Bottom 5 Provinces by GDP per capita Highlighted on the map on right

Guizhou

China‟s GDP per capita

reached USD 6,091 in

2012

The Beijing Axis 51 Note: Also includes the centrally-administered municipalities of Beijing, Tianjin, Chongqing and Shanghai

Source: National Bureau of Statistics of China; Beijing Axis Analysis

However, apart from Tianjin, the coastal regions are no longer the fastest growing regions in China. The government has placed a greater emphasis on developing inland provinces, including the establishment of special economic zones

0 5 10 15

TianjinChongqing

GuizhouYunnanShaanxiSichuan

GansuQinghai

AnhuiJilin

XinjiangTibet

Inner MongoliaNingxia

FujianHubei

HunanGuangxi

JiangxiShanxiHenan

JiangsuHeilongjiang

ShandongHebei

LiaoningHainan

GuangdongZhejiang

BeijingShanghai

GDP Growth Rate by Province (%, 2012) China’s Fastest and Slowest Growing Provinces (2012)

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

26 27 28 29 30 31

4

3

5

1 Tianjin

Shaanxi

Guangdong

Yunnan

30

31

29

28

27 Hainan

Shanghai

Zhejiang

Beijing

2

Chongqing

Guizhou

Top 5 Provinces by GDP growth

Bottom 5 Provinces by GDP growth Highlighted on the map on right

The Beijing Axis 52

4.3

4.3

0.9

0

1

2

3

4

5

6

7

8

9

10

11

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F

China‟s secondary sector remains the largest contributor to the country‟s GDP. However, the tertiary sector has been the fastest growing in recent years and its development is a centerpiece of China‟s 12th Five-Year Plan

Composition of GDP by Sector* (USD tn, 1997-2013F)

Note*: The primary sector includes industries involved in the extraction and collection of natural resources. The secondary sector of an economy is dominated by the manufacturing of finished products.

The tertiary industry is made up of companies that primarily earn revenue by providing intangible products and services.


Primary Sector

CAGR (1997-2013F) - 11.0%

Secondary Sector

CAGR (1997-2013F) - 15.1%

Tertiary Sector

CAGR (1997-2013F) - 17.5%

The Beijing Axis 53

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Industrial Sector Construction Sector


While China‟s secondary sector has traditionally played a larger role in China‟s economy, the tertiary sector is expected to take the lead in the near future

Value-added Breakdown of Secondary Sector (USD bn, 1997-2012)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Transport, Storage and Post

Wholesale and Retail Trades

Hostels and Catering Services

Financial Intermediation

Real Estate Others

Value-added Breakdown of Tertiary Sector (USD bn, 1997-2012)

The Beijing Axis 54

Contribution to the Growth of GDP* (percentage points, 1997-H1 2013)

Although capital formation and government consumption are the largest contributors to GDP, household consumption growth has increased substantially while the growth of net exports has remained low

-4

-2

0

2

4

6

8

10

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 H1 13

Net Exports of Goods and Services Gross Capital Formation Final Consumption Expenditure (household + gov't)

Note: The three components of GDP by expenditure approach are final consumption expenditure (composed of household and government consumption), gross capital formation and net exports of

goods and services. For 2009, the 92% gross capital formation, 52% final consumption expenditure and the -44% net exports of goods and services were reduced proportionately to form the bar

representing 100%

Source: China Statistical Yearbook; The Beijing Axis Analysis

The Beijing Axis 55

20

40

60

80

100

0 50 100 150 200 250 300 350 400 450

Capital formation remains a large contributor to China‟s economy, far surpassing the East Asia & Pacific average. Capital formation remains concentrated in the larger coastal provinces

China’s Gross Capital Formation (2012)

Ningxia

Total Capital Formation (USD bn)

% of Provincial GDP

Shandong

Jiangsu

Guangdong

Henan

Zhejiang

Liaoning

Hebei

Sichuan

Hunan Fujian

Guangxi

Tianjin

Yunnan

Shaanxi Shanxi

Beijing Anhui

Heilongjiang

Jiangxi

Chongqing

Xinjiang

Guizhou

Gansu

Hainan

Qinghai

A bubble this size represents 1% of total

Provinces in central and western China

are very dependent on capital formation

Hubei

Inner Mongolia

Shanghai

Tibet

Source: World Bank; China Statistical Yearbook; The Beijing Axis Analysis

Jilin

East Asia & Pacific

(all income levels)

28.1% 2011

Northern

Northeastern

Eastern

Central & Southern

Southwestern

Northwestern

The Beijing Axis 56

20

30

40

50

60

70

80

0 50 100 150 200 250 300 350 400 450 500

Final consumption is slightly more concentrated, with 38% of China‟s total centered in just four coastal provinces led by Guangdong province

China’s Final Consumption* (2012)

Note*: Final consumption includes both household consumption expenditure and government consumption expenditure


Total Final Consumption (USD bn)

38% of China‟s total final

consumption is centered in

just four coastal provinces

% of Provincial GDP

Qinghai Guangdong

Jiangsu Shandong

Zhejiang

Henan

Shanghai

Hebei

Liaoning

Sichuan

Beijing

Hunan

Hubei

Anhui

Fujian Inner Mongolia

Tianjin

Shaanxi Shanxi

Jilin

Heilongjiang Guangxi

Yunnan

Jiangxi

Chongqing

Guizhou

Gansu

Tibet

Xinjiang

Hainan

Ningxia

A bubble this size represents 1% of total

Northern

Northeastern

Eastern

Central & Southern

Southwestern

Northwestern

The Beijing Axis 57

China‟s industrial value output has grown by over 20% in the last decade. However, growth has slowed since 2008 due to weak overseas demand

Industrial Value Added Output (2000-2012)


0

9

18

27

36

45

0

700

1,400

2,100

2,800

3,500

00 02 04 06 08 10 12

Industrial Value Added Output Growth Rate (rhs)

WTO accession on

11 December 2001

USD bn %

The Beijing Axis 58

In recent years, Chinese consumer confidence has remained high and quite stable reflecting the overall future positive outlook shared by consumers

China’s Consumer Confidence Index (2010-August 2013)

Note: The consumer confidence index measures the level of optimism that consumers have about the performance of the economy


104.7

104.2

107.9

106.6

108.0

108.9

107.8

107.3 104.4

103.8

102.9

100.4

99.9

99.6

107.6

106.6

105.8 108.1

105.6

105

103.4

100.5 97

100.5

103.9 105

100

103

104.2

99.3

98.2

99.4

100.8

106.1 105.1

103.7 104.5

108.2

102.6 103.7

99 97

97.2

97.8

80

85

90

95

100

105

110

115

120

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

CCI over 100 indicates that consumers

are optimistic

The CCI tends to decrease during the

2nd half of the year and pick up right

before the Chinese New Year holiday

The calculation of CCI is combined by

the level of optimism that consumers

have about their consumption intention,

and satisfaction on their economic life

quality

The Beijing Axis 59

China‟s annual inflation rate stood at 2.5% through the first three quarters of 2013, comfortably below the official target of 3.5%. Policymakers are likely to continue their current neutral monetary policy approach to keep the economy stable

Consumer Price Inflation (%, 2011-September 2013)


0

1

2

3

4

5

6

7

8

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S

General Rural Urban

2012 2013

3.5% is the designated inflation

target set by the Chinese

government for 2013

China‟s inflation

averaged 2.6%

in 2012 Room for

policy easing

2011

The Beijing Axis 60

Despite a recent increase in food prices, which constitute roughly a third of CPI*, China‟s inflation has been largely stable in 2013

Consumer Price Inflation Breakdown (%, 2011- September 2013)

Note*: China‟s rate of inflation based on the consumer price index (CPI), which shows the change in prices of a standard package of goods and services which Chinese households purchase for consumption.


-5

0

5

10

15

20


General Food

Tobacco, Liquor and Articles Clothing

Household Facilities, Articles and Services Health Cares & Personal Articles

Transportation & Communication Recreation, Education, Culture Articles and Services

Residence Seasonal peaks due to Chinese New Year holiday

2011 2012

There has been a recent

increase in food prices

2013

Food is an important driver,

with a weight of over 30% of

the total CPI

The Beijing Axis 61

-2

-1

0

1

2

3

4

5

6

7

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Annual Consumer Price Inflation (%, 1997-H1 2013)

Note*: First half year of 2013


Provinces with Highest and Lowest Consumer Inflation (%, August 2013)

Stymying inflation is no longer a key concern for policymakers as it was in the aftermath of the global financial crisis. Inflation has since steadily fallen

Commodity and food

price pressure

Overheating and

overinvestment

Deflation and

overcapacity

Doubling of M2

money supply

Provinces with Lowest Inflation

Provinces with Highest Inflation

5

Xinjiang

4.2

Qinghai

4.7

30

4

1 Tibet

3.1

31

2

29

Ningxia

3.6

3

27

28 Jiangsu

2.1 Hunan

2.0

*

Beijing

3.4

Guangxi

1.7 Fujian

2.1

Zhejiang

2.0

The Beijing Axis 62

Producer prices in China been in deflationary territory for 19 consecutive months although the pace of the decrease has been easing for four straight months

Producer Price Inflation (%, 2011-September 2013)

Source: China Monthly Economic Indicators; The Beijing Axis Analysis

-5

0

5

10


Details on next slide

2011 2013

Inflation for

2011 was 106

Deflation due to depressed

overseas market demand

and sluggish domestic

manufacturing activity

2012

The Beijing Axis 63

The main drivers of declining producer prices are in the mining, raw materials and manufacturing sectors. Industrial overcapacity, rising costs and sluggish overseas demand have also contributed to falling prices

Producer Price Inflation Breakdown by Industries (%, 2011-September 2013)


-10

-5

0

5

10

15

20


Mining & Quarrying Industry Raw Materials Industry Manufacturing IndustryFood Clothing Articles for Daily UseDurable Consumer Goods

2011 2013 2012

The Beijing Axis 64

-8

-6

-4

-2

0

2

4

6

8

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Annual Producer Price Inflation (%, 1997- H1 2013)

Note*: First half year of 2013

Source: National Bureau of Statistics of China; China Monthly Economic Indicators; The Beijing Axis Analysis

Provinces with Highest and Lowest Producer Inflation (%, August 2013)

Depressed overseas market demand and sluggish domestic manufacturing activity have lowered producer prices in 2013, although there are signs of a bottoming out

Provinces with Lowest Producer Inflation

Provinces with Highest Producer Inflation

31

4

28

27

Shanxi

-9.7

1

Heilongjiang

-0.7

Hainan

0.2

2

29

Jiangxi

-0.5

5

3

Liaoning

-0.7

*

Ningxia

-3.5

Jilin

0.0 Qinghai

-3.7

30 Tianjin

-2.8

Inner Mongolia

-2.8

The Beijing Axis 65

China‟s manufacturing sector has largely remained in expansionary territory in 2013. There have been renewed calls for a more liberal credit policy in the face of low inflation in order to boost production

China’s Purchasing Managers’ Index of the Manufacturing Industry (2010-September 2013)


30

40

50

60

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

PMI 2 Month Moving Average

A reading above 50 reflects expansion;

below 50 reflects contraction

The Beijing Axis 66

J M M J S N J M M J S N J M M J S N J M M J

95

100

105

110

115

120Beijing Shanghai Guangzhou

Tianjin Chongqing Shenzhen

Sales Price Index of Residential Buildings in Selected Cities (Y-o-Y, 2010-July 2013)

95

97

99

101

103

105

J M M J S N J M M J S N J M M J S N J M M J

Beijing Shanghai Guangzhou

Tianjin Chongqing Shenzhen


Sales Price Index of Residential Buildings in Selected Cities (M-o-M, 2010-July 2013)

Housing prices in China‟s major cities have been recovering since mid-2012. With real estate being a key contributor to demand, policymakers have eased purchase restrictions amidst slower growth

2010 2011 2012 2010 2011 2012 2013 2013

The Beijing Axis 67

Agenda

1. Foreword







- Social Indicators




The Beijing Axis 68

China‟s booming retail sector demonstrates consumers‟ confidence in the economy. Urban areas still make up an overwhelmingly large part of retail sales, despite a narrowing growth rate between urban and rural areas

China’s Annual Retail Sales and Growth Rate by Administrative Level (1978-2012)

-10

0

10

20

30

40

0

500

1,000

1,500

2,000

2,500

3,000

3,500

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Retail Sales (Urban) Retail Sales (Suburban)Retail Sales (Rural) Urban Growth (rhs)Suburban Growth (rhs) Rural Growth (rhs)

USD bn¹ %

Note: (1) Figures converted from RMB to USD using the average exchange rate for the respective years. The growth rate, however, does not factor in exchange rate fluctuations

(2) Chinese Statistics Bureau has changed the structure of these figures since 2010. In the new category breakdown, urban includes suburban.

Source: China Statistical Yearbook; China Monthly Economic Indicators; The Beijing Axis Analysis

The Beijing Axis 69

0

600

1,200

1,800

2,400

3,000

3,600

80 84 88 92 96 00 04 08 12

China’s Annual Retail Sales (USD bn, 1980-2012)

0

50

100

150

200

250

300

350

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13


China’s Monthly Retail Sales (USD bn, 2006-August 2013)

Increased domestic consumption remains in line with the 12th Five-Year Plan. The dramatic increase in retail sales over the past decade still falls short of making domestic consumption a key pillar of the Chinese economy

Seasonal peaks

due to Chinese

New Year holiday

Annual retail sales

reached USD 3288.37

bn in 2012 323

The Beijing Axis 70

China’s Annual Retail Sales of Consumer Goods by Sub-sector (1978 vs. 2012)

87%

4% 9%

Wholesale and Retail Trade

Hotels and Catering Services

Others

2,532

370


While wholesale and retail trade continue to dominate retail sales, hotels and catering services have seen considerable growth, made evident by the massive rise of five-star hotels in China's first- and second-tier cities

1978

Total: USD120.3 bn

2012

Total: USD 3.3 tn

89%

11%

CAGR = 10%

The Beijing Axis 71

0 50 100 150 200 250 300 350 400

GuangdongShandong

JiangsuZhejiang

HenanHubei

LiaoningSichuan

HebeiHunanBeijing

ShanghaiFujianAnhui

HeilongjiangJilin

Inner MongoliaGuangxi

ShanxiShaanxi

ChongqingJiangxiTianjin

YunnanGuizhou

GansuXinjiangHainanNingxiaQinghai

Tibet

Total Retail Sales of Consumer Goods by Province (USD bn, 2012)


Provinces with large populations, high employment and high disposable income also have the highest retail sales. Guangdong, Shandong and Jiangsu have the highest retail sales

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Guangdong

Jiangsu

Shandong

Zhejiang

1

5

4

3

2

28

29

30

31

Hainan

Ningxia

Qinghai

Tibet Henan

Top 5 Provinces by Retail Sales

Bottom 5 Provinces by Retail Sales

Provinces With Highest and Lowest Retail Sales (2012)

27 Xinjiang

Highlighted on the map on right

The Beijing Axis 72

250

200

150

100

50

0

50

100

150

200

250

J M M J S N J M M J S N J M M J S

Exports Imports

China’s Monthly Exports & Imports (USD bn, 2011-September 2013)

40

30

20

10

0

10

20

30

40


Source: China Customs; The Beijing Axis Analysis

China’s Monthly Trade Balance (USD bn, 2011-September 2013)

Declining exports due to weakened overseas demand, coupled with increasing imports buoyed by an appreciating RMB, are putting pressure on China to expedite its move away from an export-oriented growth model

2011 2012 2013 2011 2012 2013

Import surge gives

China decade-deep

trade deficit

The Beijing Axis 73

-50

-30

-10

10

30

50

0

500

1,000

1,500

2,000

2,500

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Exports Exports' Growth Rate (rhs)

China’s Annual Exports (1997-2012)

-70

-40

-10

20

50

80

0

50

100

150

200

250


ExportsExports' Monthly Growth Rate (rhs)

Source: China Customs; China Monthly Economic Indicators; The Beijing Axis Analysis

China’s Monthly Exports (2011-September 2013)

After experiencing a prolonged slump during the global downturn, Chinese exports have now rebounded to pre-crisis levels

China‟s

entry into

the WTO

2011 2012 2013

USD bn % USD bn %

Seasonal drop due to Chinese New

Year holiday

The Beijing Axis 74

Half of China‟s total exports are destined for the US, Hong Kong, Japan, South Korea and Germany. Exports growth to the EU, US, and especially Japan, has been sluggish amidst weak external demand

China’s Top Export Destinations (USD bn, 2012)

Note: Hong Kong is admittedly used as a gateway to the rest of the world


Total Exports = USD 2,049 bn

Top exported commodities

• Electrical machinery, equipment and parts

• Telecommunication, sound recording equipment

and reproducing apparatus

• Automatic data processing machines and parts

India

2.3%

Hong Kong

15.8%

Japan

7.4%

Germany

3.4%

US

17.2%

South Korea

4.3%

Netherlands

2.9%

UK

2.3% Russia

2.2%

Singapore

2.0%

352

324

152

88

69

59

48

46

44

41

US

Hong Kong

Japan

South Korea

Germany

Netherlands

India

UK

Russia

Singapore

1

2

3

4 5

6 8

7

9

10

The Beijing Axis 75

Machinery and equipment not only make up almost half of China‟s export revenue, but also represent the fastest growing component of China‟s export profile. This reflects China‟s continuing shift to value-added exports

Composition of China’s Exports (USD bn, 2001-2012)

Note: Composition is according to the SITC Classification System


964

536

333

0

400

800

1,200

1,600

2,000

2,400

01 02 03 04 05 06 07 08 09 10 11 12

Others

Mineral Items

Foodstuffs

Chemicals and Related Products



Machinery and Equipment

CAGR

10%

14%

14%

22%

20%

18%

24%

20% Total

The Beijing Axis 76

-30

-10

10

30

50

0

50

100

150

200


Imports Imports' Monthly Growth Rate (rhs)

-40

-20

0

20

40

0

500

1,000

1,500

2,000

02 03 04 05 06 07 08 09 10 11 12

Imports Imports' Growth Rate (rhs)

China’s Annual Imports (2002-2012)

Source: China Customs; China Monthly Economic Indicators; The Beijing Axis Analysis

China’s Monthly Imports (2011-September 2013)

Imports reached an all-time high of USD 183 bn in March 2013. In general, imports are expected to increase as domestic consumption becomes a central part of the economy

China‟s entry

into the WTO

2011 2012 2013

USD bn % USD bn %

The Beijing Axis 77

In 2012, Japan, South Korea, the US, Taiwan and Germany were China‟s top import sources, accounting for about 40% of China‟s total imports

Top Countries of Origin for China’s Imports (USD bn, 2012)


Machinery, vehicles,

electronics

Top imported commodities

• Electrical machinery, equipment and parts

• Mineral fuels, mineral oils and products of their distillation

• Metalliferrous ores and metal scrap

Total Imports = USD 1,818 bn

178

169

133

132

92

85

58

55

52

45

Japan

South Korea

US

Taiwan

Germany

Australia

Malaysia

Saudi Arabia

Brazil

South Africa

Taiwan

7.3%

South Korea

9.3%

Germany

5.1% US

7.3%

Japan

9.8%

Australia

4.7%

Malaysia

3.2% South Africa

2.5%

Saudi Arabia

3.0% Brazil

2.9%

2 1

4

3

5

6

7

9

8

10

Machinery, technology,

consumer goods

Vehicles,

Machinery

Iron ore, soybean,

petroleum

Petroleum

Minerals,

metals

Petroleum, soft

commodities Iron ore,

coal

Machinery,

electronics

The Beijing Axis 78

As a manufacturing powerhouse, China relies on a variety of imported products namely machinery, chemicals and increasingly minerals for the purpose of export and domestic consumption

Composition of China’s Imports (USD bn, 2001-2012)

Note: SITC Classification System; Crude material: inedible, except fuels


179

146

137 35 86

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Others

Foodstuffs



Chemicals and Related Products

Mineral Items

Crude Materials

Machinery and Equipment

CAGR

36%

20%

22%

12%

17%

27%

28%

18%

20% Total

313

270

653

2001-2012

107

The Beijing Axis 79

Over 40% of China‟s total trade is with the US, Hong Kong, Japan, South Korea and Taiwan. The US, China‟s largest trading partner, accounted for USD 485 bn in 2012

China’s Largest Trading Partners (USD bn, 2012)


China‟s total trade with the world = USD 3,867 bn

Total exports = USD 2,049 bn

Total imports = USD 1,818 bn

Hong Kong

8.8%

Japan

8.5%

Germany

4.2% US

12.5%

South Korea

6.6%

485

341

329

256

169

161

122

95

88

86

US

Hong Kong

Japan

South Korea

Taiwan

Germany

Australia

Malaysia

Russia

Brazil

Taiwan

4.4%

Australia

3.2%

Brazil

2.2%

Russia

2.3%

Malaysia

2.5%

1 3

2

4 6

5

7

8

10

9

Trade Surplus

Trade Deficit

The Beijing Axis 80

China has a large trade surplus with both Hong Kong and the US. Meanwhile, its trade deficit is largely centered in the Asia-Pacific economies of Taiwan, South Korea and Australia China’s Trade Balance with its Five Largest Surplus and Deficit Regions (USD bn, 2012)


US

Hong Kong

South Korea

UK

Australia

Netherlands

Saudi Arabia

Hong Kong

US

Netherlands

UK

India

Angola

Saudi Arabia

Australia

South Korea

Taiwan

252

202

50

29

29

-29

-36

-47

-81 -95

China‟s world trade surplus = USD 231 bn India

Taiwan

Angola

The Beijing Axis 81

-60

-40

-20

0

20

40

60

80

30

20

10

0

10

20

30

40

J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S

Trade balance Exports, % change y-o-y (rhs) Imports, % change y-o-y (rhs)

China‟s foreign trade is becoming more balanced. Import growth has consistently outpaced export growth since H2 2009, narrowing China‟s surplus with the rest of the world

China’s Monthly Trade Balance (2006-September 2013)

Source: General Administration of Customs of PRC; The Beijing Axis Analysis

2011 2012 2013 2008 2009 2010 2006 2007

% USD bn

The Beijing Axis 82

0

2

4

6

8

10

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Source: National Bureau of Statistics of China; General Administration of Customs of PRC; The Beijing Axis Analysis

Share of Net Exports in Quarterly GDP (%, 2008-Q2 2013)

Net exports‟ share of GDP is declining, with fixed asset investment and total consumption now the primary drivers of GDP growth. This is in line with the government‟s policy of boosting domestic consumption

Share of Net Exports in Annual GDP (%, 1998-2012)

0

2

4

6

8

10

Q1-08 Q1-09 Q1-10 Q1-11 Q1-12 Q1-13

The Beijing Axis 83

80% of China‟s total international trade value is concentrated in just seven provinces, largely as a result of their access to world class port facilities along the coast

Trade by Province as A Percentage of China’s Total (2012)


Percentage of China‟s total trade value:

Top 60 %

Next 20 % Next 20 %

Imports: USD 1,818 bn

Exports: USD 2,049 bn

Total Trade: USD 3,867 bn

Shandong 6.3%

Shaanxi Henan

Hunan

Fujian 4.0% Taiwan

Guangdong 25.4%

Guangxi

Guizhou

Yunnan

Heilongjiang

Jilin

Liaoning

Hebei

Jiangsu 14.1%

Shanghai 11.3%

Anhui

Zhejiang 8.1% Jiangxi

Tibet

Hubei

Inner Mongolia

Ningxia

Sichuan

Qinghai

Xinjiang

Gansu

Shanxi

Tianjin

Chongqing

Beijing 10.5%

Hainan

The Beijing Axis 84

Agenda

1. Foreword







- Social Indicators




The Beijing Axis 85

In 2012, China‟s total fixed asset investment stood at almost USD 6 tn¹. Concern over the economic slowdown prompted the government to accelerate new project approvals in the power, water and railway industries

Total Fixed Asset Investment in Urban and Rural Areas (1997-2012)

Note: (1) Fixed asset investment figures are often overstated by local governments, with figures even exceeding GDP in some provinces. In June 2013, NBS announced a pilot reform of data collection

relating to fixed asset investment in order to make local economic statistics more reliable,

(2) FAI = Fixed Asset Investment


0

8

16

24

32

40

0

1,200

2,400

3,600

4,800

6,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Urban Areas Rural Areas Growth of Total FAI² (rhs)

156

5,791

USD bn %

The Beijing Axis 86

Stressing quality and efficiency to keep local debt levels in check, the central government is promoting reasonable investment growth in urban infrastructure projects such as airports, railways and affordable housing

Monthly Urban Fixed Asset Investment* (USD bn, 2011-August 2013)

Note*: In 2011, the National Bureau of Statistics of China extended the statistical scale of monthly fixed assets investment to cover both urban areas and rural enterprises, and defined it as „Investment in

Fixed Assets (Excluding Rural Households)‟


0

100

200

300

400

500

600

700

800

900

J-F M A M J J A S O N D J-F M A M J J A S O N D J-F M A M J J A

Urban Fixed Asset Investment 2 Month Moving Average

2011 2012 2013

Investments gaining strength

from favourable policies

The Beijing Axis 87

0 100 200 300 400 500 600

ShandongJiangsu

LiaoningHenanHebei

GuangdongZhejiangSichuan

HubeiAnhui

HunanFujian

ShaanxiInner Mongolia

JiangxiGuangxi

HeilongjiangJilin

ShanxiChongqing

TianjinYunnanXinjiangBeijing

GuizhouGansu

ShanghaiHainanNingxiaQinghai

Tibet

Fixed Asset Investment by Province (USD bn, 2012)


China‟s fixed asset investment (FAI) continues to be primarily focused in the more developed coastal provinces. The top five provinces account for over 30% of total FAI

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Top five provinces

account for 34% of

total FAI

1

4

3

2

5

Jiangsu Henan

Shandong

Liaoning

Hebei

Top 5 Provinces by Investment in Fixed Assets (2012)

31 Tibet

Top 5 Provinces by FAI

Bottom 5 Provinces by FAI

Qinghai 30

Ningxia

29

28

Hainan

27 Shanghai


The Beijing Axis 88

China‟s manufacturing and real estate sectors attract the most fixed asset investment due to the country‟s ongoing industrialisation and urbanisation


1,977

1,574

499

470 265 211

952

0

1,000

2,000

3,000

4,000

5,000

6,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Others

Mining

Utilities

Environmental Protection and Public Facilities


Real Estate

Manufacturing

CAGR

24%

29%

21%

28%

23%

29%

31%

27% Total

Fixed Asset Investment by Sector (USD bn, 2003-2012)

Real estate and

manufacturing account

for 60% of the total FAI

The Beijing Axis 89

China's low cost production base has been a key driver of FDI flows in the past. However, with rising domestic costs, the country's large market size and liberalisation of various sectors will be a key driver of FDI going forward

FDI Inflow (USD bn, 1997-2012)

Note: FDI = Foreign Direct Investment

Source: MOFCOM; The Beijing Axis Analysis

-15

-10

-5

0

5

10

15

20

25

0

20

40

60

80

100

120

140

160

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

FDI Inflow FDI Growth (rhs)% USD bn

The Beijing Axis 90

In 2012, 95% of China‟s FDI came from just five regions led by Hong Kong. Hong Kong remains a crucial gateway for other countries‟ FDI into China as well as FDI from Chinese firms headquartered in the SAR¹

China’s FDI Inflow by Source Region² (USD bn, 2012)

Note: (1) SAR stands for Special Administrative Region

(2) 2012 data on China‟s FDI Inflow includes these countries‟ investing through Virgin Is., Cayman Is., Samoa, Mauritius and Barbados.


Hong Kong

Japan

Singapore

Taiwan

US

South Korea

Germany

Netherlands

UK

Switzerland

1

9

3

4

7

6

5 10 2 8

US 2.8%

Hong Kong 63.7%

Japan 6.6%

South Korea

2.7%

Taiwan 5.5%

Switzerland 0.8% Netherlands 1.0%

UK 0.9%

Germany 1.3%

Singapore

5.8%

USD bn

China‟s total FDI inflow for 2012 amounted to USD 112 bn

71

7

7

6

3

3

1

1

1

1

The Beijing Axis 91

0 10 20 30 40 50

JiangsuLiaoning

GuangdongTianjin

ShanghaiZhejiang

HenanShandongChongqing

AnhuiBeijingJiangxi

SichuanHunanFujianHebei

NeimengguHubei

HeilongjiangShaanxi

ShanxiYunnan

JilinHainan

GuangxiXinjiangGuizhouNingxiaQinghai

TibetGansu

FDI Inflow by Province (USD bn, 2012)

Source: China Statistical Yearbook; ACMR ,The Beijing Axis Analysis

China‟s coastal regions still attract the majority of FDI inflows, but new FDI guidelines utilise incentivisation schemes to encourage foreign companies to invest in less-developed central and western regions

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

4

5

3

1

2

Shanghai

Liaoning

Jiangsu

Guangdong

Tianjin

Top 5 provinces

account for 47% of

total FDI inflows

Top 5 Provinces by FDI Inflow (2012)

Top 5 Provinces by FDI Inflow

Bottom 5 Provinces by FDI Inflow

30

Tibet

Qinghai 29

Gansu 31

28

Ningxia

27

Guizhou


The Beijing Axis 92

China‟s manufacturing sector receives the bulk of China‟s FDI inflow. New FDI guidelines provide incentives for foreign companies to invest in China‟s high-end manufacturing, high-tech and service sectors

China’s FDI Inflow by Sector (USD bn, 2003-2012)


49

24

8

10 3

18

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Others



Leasing and Business Services

Real Estate

Manufacturing

CAGR

12%

17%

27%

11%

19%

3%

8% Total

2003-2012

The Beijing Axis 93

China‟s OFDI flow is expected to grow steadily, largely driven by Chinese companies‟ increasing need to access new markets, technology and resources. In 2012, China‟s OFDI reached USD 88 bn

China’s OFDI Flow (2003-2012)

Note*: SAFE - State Administration of Foreign Exchange


0

50

100

150

0

25

50

75

100

03 04 05 06 07 08 09 10 11 12

OFDI Flow OFDI Growth Rate (rhs)

In 2005, SAFE* eased restrictions

on overseas investments made by

Chinese companies

Chinese companies increased

acquisition of overseas

depressed assets

USD bn %

The Beijing Axis 94

While China‟s OFDI extends to all continents, international financial centres and tax havens such as Hong Kong and BVI receive the bulk of OFDI stock

China’s OFDI Flow by Destination (2012)


Hong Kong

US

Kazakhstan

UK

Virgin Islands

Australia

Venezuela

Singapore

Indonesia

Luxemburg

USD bn

Hong Kong 58.2% 1

3

2

British Virgin Islands

2.5.% 5

US 4.6%

Australia 2.5%

4

8

Singapore 1.7%

Kazakhstan 3.4%

9

UK 3.2%

7

10

6

Indonesia 1.5%

China‟s total cumulative OFDI flow for 2012 amounted to USD 88 bn

Venezuela 1.8%

51.2

4.0

3.0

2.8

2.2

2.2

1.5

1.5

1.4

1.1

Luxemburg 1.3%

The Beijing Axis 95

0 1,000 2,000 3,000 4,000 5,000 6,000

GuangdongShandongShanghai

JiangsuLiaoningZhejiang

BeijingGansu

YunnanHunanFujian

HeilongjiangAnhui

TianjinShaanxiSichuan

HebeiChongqing

Inner MongoliaHubei

XinjiangJiangxiHenanHainanShanxi

JilinGuangxiNingxia

GuizhouQinghai

Tibet

China’s OFDI by Province (USD mn, 2012)

Note: OFDI figures include non-financial OFDI and exclude investments made by central enterprises


In 2012, over half of China‟s non-financial OFDI came from just six provinces, all located along the east coast. Guangdong province, one of the forerunners of China‟s „going out‟ policy, registered the highest OFDI

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

2

3

Guangdong

Shandong

1

5

Liaoning

Jiangsu 4

Shanghai

Top 6 provinces‟

OFDI accounts for

59% of the total

China’s OFDI by Province (2012)

Top 5 Provinces by OFDI

Bottom 5 Provinces by OFDI

31 Tibet


30

29

28

27

Qinghai Ningxia

Guizhou

Guangxi

The Beijing Axis 96

China‟s outward investments in finance, wholesale and retail trade grew substantially in 2012

China’s OFDI Flow by Sector (USD bn, 2004-2012)

Note*: Business services includes investment in holding companies, regional headquarters and SPVs often established in offshore financial centers from where investments are made in other countries

and sectors; Finance includes investments in the banking industry such bank branch offices, bank affiliated institutions, bank rep. offices and insurance institutions; Wholesale and retailing as well as

transportation, warehousing and postal services are closely linked with China‟s export and import activities


27

10

13

14

3

9

13

0

10

20

30

40

50

60

70

80

90

2004 2005 2006 2007 2008 2009 2010 2011 2012

Others

Manufacturing


Mining


Finance

Leasing and Business Services

CAGR

47%

35%

18%

29%

42%

19%

58%

41% Total

The Beijing Axis 97

Agenda

1. Foreword







- Social Indicators




The Beijing Axis 98

The PBOC* has set an M2 growth target of 13% for 2013, with policymakers aiming to achieve steady credit growth

Money Supply (USD tn, 2011- Sep 2013)

Note*: PBOC - The People‟s Bank of China

Source: The People‟s Bank of China; The Beijing Axis Analysis

0

2

4

6

8

10

12

14

16

18

20


M2 M1 M0

2011 2012 2013

The Beijing Axis 99

Benchmark Lending Rates (%, 1997-2013)

Note*: PBOC - The People‟s Bank of China

Source: Hexun; The Beijing Axis Analysis

4.00

6.00

8.00

10.00

12.00

Oct

-97

Mar

-98

Aug

-98

Jan-

99

Jun-

99

Nov

-99

Apr

-00

Sep

-00

Feb

-01

Jul-0

1

Dec

-01

May

-02

Oct

-02

Mar

-03

Aug

-03

Jan-

04

Jun-

04

Nov

-04

Apr

-05

Sep

-05

Feb

-06

Jul-0

6

Dec

-06

May

-07

Oct

-07

Mar

-08

Aug

-08

Dec

-08

May

-09

Oct

-09

Mar

-10

Aug

-10

Jan-

11

Jun-

11

Nov

-11

Apr

-12

Sep

-12

Feb

-13

Jul-1

3

6 months to 1 year (including 1 year) 1 year to 3 years (including 3 years)

3 years to 5 years (including 5 years) Longer than 5 years

First loan interest rate

decrease in six years

First loan interest rate

decrease since the

global financial crisis

In Q2 of 2012, the PBOC* cut rates to spur economic growth, however, the rates have since been left constant with no indication of further cuts

The Beijing Axis 100

16.5%

20%

0

5

10

15

20

25

21-M

ar-9

821

-Nov

-99

21-S

ep-0

325

-Apr

-04

05-J

ul-0

615

-Aug

-06

15-N

ov-0

615

-Jan

-07

25-F

eb-0

716

-Apr

-07

15-M

ay-0

705

-Jun

-07

15-A

ug-0

725

-Sep

-07

25-O

ct-0

726

-Nov

-07

25-D

ec-0

725

-Jan

-08

25-M

ar-0

825

-Apr

-08

20-M

ay-0

825

-Jun

-08

15-S

ep-0

815

-Oct

-08

05-D

ec-0

825

-Dec

-08

18-J

an-1

025

-Feb

-10

10-M

ay-1

016

-Nov

-10

29-N

ov-1

020

-Dec

-10

20-J

an-1

124

-Feb

-11

25-M

ar-1

121

-Apr

-11

18-M

ay-1

120

-Jun

-11

05-D

ec-1

124

-Feb

-12

18-M

ay-1

218

-Oct

-13

Bank Deposit-Reserve Ratio (Medium & Small Financial Institutes)

Bank Deposit-Reserve Ratio (Large Financial Institutes)

Bank Deposit-Reserve Ratio (%, March 1998-October 20132)

Note: (1) The Bank Deposit-Reserve Ratio is a standard determined by a central bank. It governs the relationship between the amount of money that banks must keep on hand and the amount that they

can lend. By raising and lowering the ratio, the central bank can decrease or increase money supply

(2) The date is effective date


After initial concerns about a slowing economy that twice led to reductions in the bank reserve requirement ratio in 2013, the ratio has remained constant throughout 2013 as the economy has picked up

Economic

overheating

Economic

slowdown

First cut in

two years Inflationary

pressures

Implement

different RRR

1

1


The PBOC has warned of credit expansion pressure and vowed to maintain a prudent monetary policy

Deposit Interest Rates (% p.a., March 1998-November 2013)


0

2

4

6

8

25-M

ar-9

8

1-Ju

l-98

7-D

ec-9

8

10-J

un-9

9

21-F

eb-0

2

29-O

ct-0

4

19-A

ug-0

6

19-A

ug-0

6

18-M

ar-0

7

19-M

ay-0

7

21-J

ul-0

7

22-A

ug-0

7

15-S

ep-0

7

21-D

ec-0

7

9-O

ct-0

8

30-O

ct-0

8

27-N

ov-0

8

23-D

ec-0

8

20-O

ct-1

0

26-D

ec-1

0

9-F

eb-1

1

6-A

pr-1

1

7-Ju

l-11

7-Ju

n-12

5-Ju

l-12

29-N

ov-1

3

5 years 1 year 6 months 3 monthsFirst cut since

global financial

crisis

Recent adjustments in 2012 to widen the range at

which banks can set deposit rates mark an

important step towards interest rate liberalisation


0

4,000

8,000

12,000

16,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Loans Deposits

Chinese banks have funded themselves mainly from deposits at a loan-to-deposit (LTD) ratio of about 70%. Total deposits reached USD 15 tn by the end of 2012, while loans amounted to USD 10.7 tn

Total Loans and Deposits¹ (USD bn, 1997-2012)

Note (1): Total Loans and Deposits in RMB and Foreign Currency

Note (2): CBRC – China Banking Regulatory Commission


Loans to Deposit

Ratio (%) 91 71 90 86 80 78 77 76 74 68 67 67 65 70 69 70

In 2007, the CBRC²

implemented a 75% LTD ratio

limit for all banks in China


14,564 7,283

6,524

388 26 4 340

0

4,000

8,000

12,000

16,000

TotalDeposits

CorporateDeposits

PersonalDeposits

FiscalDeposits

TemporaryDeposits

Designated Deposits

OtherDeposits

Sources of Deposits* (USD bn, 2003-2012)

Note*: Since 2011, classification in Sources & Uses of Credit Funds of Financial institutions has been adjusted. Some data are not comparable with that before 2010. In 2011, Deposits by Enterprises

changed to Corporate Deposits; Savings Deposits changed to Personal Deposits


Sources of Deposits (USD bn, 2012)

China‟s high savings rate remains a main source of funds for Chinese banks. In 2012, household banking deposits accounted for 44% of total deposits, while company deposits accounted for 51%

50%

45%

6,524

7,283

11 12

Other Deposits

Designated Deposits

Temporary Deposits

Fiscal Deposits

Corporate Deposits

Personal Deposits

0

5,000

10,000

15,000

03 04 05 06 07 08 09 10

Other DepositsTrust DepositsAgricultural DepositsFiscal DepositsDeposits of Gov. Dept. & Org.Company DepositsHousehold Savings Deposits


After bottoming out in December 2012, lending rates in China have steadily increased. In 2013, the government enacted a policy to liberalise interest rates to boost competitiveness in the economy

Monthly Bank Loans (USD bn, 2010-September 2013)

Source: The People Banks of China; The Beijing Axis Analysis

-80

-60

-40

-20

0

20

40

60

80

100

0

50

100

150

200

250

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S

Monthly Loan Size Y-o-Y Growth Rate (rhs)

2010 2011 2012

USD bn %

Fall in lending as

demand for credit

eased in a slowing

economy

2013


9,999 5,602

3,941

94 324

9 29 0

4,000

8,000

12,000

TotalDeposits

Medium &Long-term

Loans

Short-termLoans

FinancialLease

BillFinancing

Advances OverseasLoans

Composition of New Loans* (USD bn, 2003-2012)

Note*: Since 2011, classification in Sources & Uses of Credit Funds of Financial Institutions has been adjusted. Some data are not comparable with that before 2010.


Composition of New Loans (USD bn, 2012)

In 2012, medium and long term loans, a key measure of appetite for investment, made up 56% of total loans. However, recent banks‟ reticence to lend may result in a slower pick up in domestic investment

56%

39%

0

4,000

8,000

12,000

03 04 05 06 07 08 09 10

Other Loans

Trust Loans

Short-term Loans

Medium & Long-term Loans

5,602

3,941

11 12

Overseas LoansAdvancesBill FinancingFinancial LeaseShort-term LoansMedium & Long-term Loans


715 780 837 834 842 860 864 864 894 931 954

509 507 540 547 592 690 740 830 1,169

1,411 1,540

0

500

1,000

1,500

2,000

2,500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Number of companies listed on the Shenzhen StockExchange

Number of companies listed on the Shanghai StockExchange

By the end of 2012, the Shanghai and Shenzhen Stock Exchanges were the world‟s seventh- and sixteenth-largest stock markets respectively, by market capitalisation

Number of Listed Companies and Total Market Value of China’s Stock Exchanges (2002-2012)


463 513 448 396 1,122 4,302 1,747 3,655 3,926 3,330 3,655 Total Market Value

(USD bn)

2007 global financial

crisis created stock

market bubble


0

500

1,000

1,500

2,000

2,500

3,000

3,500

J A J O J A J O J A J O J A J

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Market Value of Tradable SharesComposite Index (rhs)

Shanghai Stock Exchange Composite Index (2010-August 2013)

0

3,000

6,000

9,000

12,000

15,000

0

200

400

600

800

1,000

J A J O J A J O J A J O J A J

Market Value of Tradable Shares

Component Index (rhs)


Shenzhen Stock Exchange Component Index (2010-August 2013)

While China‟s stock exchange indices have remained highly volatile and followed a downward trend since the beginning of 2011, the market value of tradable shares has been on an upswing

USD bn USD bn

2011 2012 2013 2011 2012 2013 2010 2010


Shenzhen Stock Exchange Trading Volume and Composite Index (2002-2012)

Source: China Monthly Economic Indicators; Sina Finance; The Beijing Axis Analysis

Shanghai Stock Exchange Trading Volume and Composite Index (2002-2012)

Since recovering from the global financial crisis in 2009, China‟s stock markets have since declined as both domestic and overseas investors have become weary of lax corporate governance and dampened profit outlooks

0

5,000

10,000

15,000

20,000

0

500

1,000

1,500

2,000

02 03 04 05 06 07 08 09 10 11 12

0

2,000

4,000

6,000

0

2,000

4,000

6,000

02 03 04 05 06 07 08 09 10 11 12

bn shares

Average

P/E Ratio 34.4 36.5 24.2 16.3 33.3 59.2 14.9 28.7 21.6 13.4 12.3

Total

Turnover

USD bn 205 252 320 235 725 4,017 2,597 6,469 5,893 3,682 2,609

Average

P/E Ratio 39.8 37.0 36.2 24.6 16.4 32.7 69.7 16.7 46.0 44.7 23.1 22.0

Total

Turnover

USD bn 188 133 136 192 152 410 2,040 1,248 2,909 3,360 2,095 2,382

bn shares SH Composite Index (rhs)

Volume

SZSE Component Index (rhs)

Volume


0

12

24

36

48

60

0

800

1,600

2,400

3,200

4,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 H12013

Foreign Exchange Reserves Growth Rate (rhs)

Foreign Exchange Reserves (USD bn, 1997-Jun 2013)

Note*: FX stands for foreign exchange


China holds the world‟s largest FX* reserves. Despite a slower rate of accumulation since 2008, China‟s foreign reserves stood at USD 3.5 tn by the end of H1 2013, fuelled by huge inflows into China‟s financial system

Slowest growth since 2001, caused

by slowing of „hot money‟ inflows

USD bn %


-5

0

5

10

15

20

25

30

35

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

Foreign Exchange Reserves Y-o-Y Growth Rate (rhs)

China‟s FX* reserves reached an all-time high of USD 3.5 tn in June 2013. However, reserves are expected to drop in the future as the country transforms itself from a major exporter of goods into a major exporter of capital

Foreign Exchange Reserves (2010-June 2013)

Note*: FX stands for foreign exchange


2010 2011 2013

USD bn %

2012

China‟s foreign exchange reserves

experienced its first quarterly drop in

more than a decade in Q4-2011


Although there is a broad consensus that the Renminbi (RMB) is undervalued, the exact degree of undervaluation is often a subject of debate. The IMF estimates this undervaluation to be between 5% and 27%

Annual RMB Exchange Rate (2001-H1 2013)

Note: Index 2001 = 100

Source: OANDA; The Beijing Axis Analysis

60

80

100

120

140

160

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 H1 2013

EUR AUD ZAR USD RUB JPY KRW

AUD EUR

USD

ZAR KRW JPY

RUB

RMB appreciated against the world‟s

major currencies in 2012


Since China resumed the semi (controlled) floating exchange rate mechanism in 2010, the RMB has appreciated by around 10% in real terms against the US dollar and more than 30% since the initiation of exchange rate reform in 2005

RMB to USD Exchange Rate (100 USD, 2010-June 2013)


600

610

620

630

640

650

660

670

680

690

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J

2010 2011 2012

In June 2010, China announced

that it will target the RMB against

a basket of currencies rather

than solely on the USD

2013

In April 2012, China announced that

it will widen RMB‟s daily trade limit

band against the USD from 0.5% to

1%


Agenda

1. Foreword







- Social Indicators





China has a population of over 1.3 bn, but its population growth has slowed continually to the current 0.5%

China’s Population Indicators (1978-2012)

Source: IMF; National Bureau of Statistics of China; The Beijing Axis Analysis

0%

6%

12%

18%

0

500

1,000

1,500

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Population Natural Growth Ratemn %

18

12

6

0


China’s Annual Births (1980-2012)

Note*: The recently amended One Child Policy now allows families to have a second child if either the father or the mother are an only child.


0.0

0.4

0.8

1.2

1.6

2.0

0

6

12

18

24

30

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Birth Rate Population Natural Growth Rate

Children born during the boom of the mid-

1980s are entering childbearing age

Chinese citizens born during the boom in the mid-1980s are now reaching childbearing age, but China‟s birth rate has since declined significantly – rising costs of living are discouraging young families from having more than one child*

Rising costs of living are discouraging

young urban families from having

more than one child

0

2

mn %


China Provincial Population Breakdown by Urban and Rural Residences (mn, 2012)


As more migrants move to coastal areas in search of better economic opportunities, the already populous regions are facing new socioeconomic problems such as how to accommodate the incoming population

0 20 40 60 80 100 120

GuangdongShandong

HenanSichuanJiangsu

HebeiHunanAnhuiHubei

ZhejiangGuangxiYunnanJiangxi

LiaoningHeilongjiang

ShaanxiFujian

ShanxiGuizhou

ChongqingJilin

GansuInner Mongolia

ShanghaiXinjiangBeijingTianjinHainanNingxiaQinghai

Tibet

Urban Population

Rural Population

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

2

4

3 5

1

Henan

Hainan

Shandong

Guangdong

Jiangsu Sichuan

31

Tibet

30

Qinghai 29

Ningxia

28

27 Tianjin

Top 5

Bottom 5

Highlighted on the

map on right

Most and Least Populated Provinces (2012)

Higher wages in more developed

areas attract migrant workers from

surrounding provinces


Primary industry, 258

mn, 34%

Secondary industry, 232

mn, 30%

Tertiary industry, 277

mn, 36%

In 2011, employment in China‟s tertiary industry overtook the primary industry for the first time. As China‟s economy continues to develop, the tertiary industry will play an even more important role

Total Employed Persons by Sector (mn, 1978-2012)

Note: The sizeable gap between the 1989 and 1990 figures is due to the adjustment of urban and rural employed persons‟ subtotals in accordance with the data obtained from

the 5th National Population Census

Source: MOHRSS; The Beijing Axis Analysis

0

100

200

300

400

500

600

700

800

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Primary industry

Secondary industry

Tertiary industry

Although the primary sector makes the smallest

contribution to GDP, it employs a relatively large

proportion of people


Despite a slow narrowing of rural-urban disparity, income levels in urban households are still three times those of rural households

Annual Income of Urban and Rural Households Per Capita (1997-2012)

Note: (1) Annual disposable income of urban households and net income of rural households per capita

(2) Growth rates are calculated at current prices


622

3,899

252

1,257

0

6

12

18

24

30

0

800

1,600

2,400

3,200

4,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Urban Rural Urban Growth (rhs) Rural Growth (rhs)USD %


2,000 0 2,000 4,000 6,000 8,000

ShanghaiBeijing

ZhejiangGuangdong

JiangsuTianjinFujian

ShandongLiaoning

Inner MongoliaChongqing

HunanGuangxiYunnan

AnhuiHainanHubei

ShaanxiHebei

HenanShanxi

SichuanJilin

JiangxiNingxia

GuizhouTibet

XinjiangHeilongjiang

QinghaiGansu

Urban

Rural

1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Beijing and Shanghai, China‟s political and financial capitals, continue to lead the country in terms of wealth accumulation. Overall, income levels are skewed towards the more developed eastern coastal provinces

Income of Urban and Rural Households Per Capita by Province* (USD, 2012)

Note*: Represents disposable income of urban households and net income of rural households


Zhejiang

Guangdong

Jiangsu

Beijing

4

1

3

5

2

29 28

30

31

27

Gansu

Qinghai

Xinjiang

Top 5

Bottom 5 Highlighted on

the map on right

Provinces with Highest and Lowest Urban Household Incomes (2012)

Shanghai Tibet

Heilongjiang


While the downward trend of Engel‟s coefficient* reflects a progressively higher standard of living, temporary increases in 2007, 2008 and 2011 underscore concerns over food price spikes China’s Urban and Rural Engel’s Coefficients (%, 1978-2012)

Note*: Engel's Law states that household expenditure on food, on aggregate, declines as income rises; in other words, the income elasticity of demand for food on aggregate is less than one and declines towards

zero with income growth. A common application of this statistic is to regard it as a reflection of the living standards of a country. Engel‟s coefficient has an inverse correlation with the standard of living of a country

Source: National Bureau of Statistics of China; Hexun database; The Beijing Axis Analysis

25

35

45

55

65

75

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Urban Areas Rural Areas

39.3

36.2

57.5

67.7

Temporary increases from high

levels of food inflation

Failed price reforms fueled

inflation, especially in urban

areas


Income inequality in China is growing, as measured by the Gini Coefficient*. Growing income equality, if left unchecked, can undermine social stability and future economic growth China’s Gini Coefficient (1978-2012)

Note*: The Gini Coefficient is a measure of statistical dispersion. It is most prominently used as a measure of inequality of income distribution or inequality of wealth distribution. It is defined as a ratio with

values between 0 and 1. A low Gini Coefficient indicates more equal income or wealth distribution, while a high Gini Coefficient indicates more unequal distribution


0.3

0.47

0.0

0.1

0.2

0.3

0.4

0.5

0.6

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

China crossed the 0.40

recognised warning

level in 2000

Official data shows China‟s Gini Coefficient

peaked in 2008 at 0.491, while non-official data

shows it has already exceeded 0.5 for a

significant time, which signals severe inequality

0


China‟s urban population outnumbered its rural population for the first time in 2011, marking an important milestone in China‟s ongoing socio-economic transformation

China’s Urbanisation Rate (%, 1978-2012)

Source: China Statistical Yearbook; Annual Report on Urban Development of China;The Beijing Axis Analysis

0

10

20

30

40

50

60

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

China‟s urbanisation rate

exceeded 50% for the first time

in 2011


Agenda

1. Foreword

2. What‟s New: China Moves Towards Growth Moderation and Sustainability

3. China Economic Indicators






- Social Indicators




China‟s rapid economic growth has positioned it as the world‟s second-largest economy and it is likely to overtake the US around 2025 to become the world‟s largest economy

GDP of Top Economies, excl. US (USD bn, 1990-2015F)

Note: Forecast GDP growth based on IMF Economic Outlook


China Rank 10 10 9 7 9 8 7 7 7 7 6 6 6 6 6 5 4 3 3 3 2 2 2 2 2 …1?

0

2,000

4,000

6,000

8,000

10,000

12,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F 15F

China

Japan

Germany

France

UK

Brazil

Russia

Italy

India

Indonesia

South Africa

2005: China

Surpassed

France

2007: China

surpassed

Germany

2006: China

surpassed UK

2010: China

surpassed

Japan

2000: China

surpassed

Italy

1996: China

surpassed

Brazil

1995: China

surpassed

Canada

At current growth

rates, China is likely

to overtake the US

around 2025

2012

2

3

4

5

6

7

9

10

16

29

2015F*

2

3

4

6

8

7

11

10

17

31

Rank

8 9


The magnitude of China‟s economy can be highlighted by the fact that its provinces have GDP figures comparable to those of various countries worldwide

China GDP by Province Compared with Similar World Economies (USD bn, 2012)

906 858

794 549

473 422

394 379

353 352

319 313

283 273

254 229

217 207 206 205

192 189 182

164 119 108

90 45 37 30

11

1,156 878

794 549

485 475

384 382 366 366 359

314 277 269 250 232 213 210 208 199 196 183 176 169

119 98 92

46 36 31 11

1,200 1,000 800 600 400 200 0 200 400 600 800 1,000 1,200

GuangdongJiangsuShandongZhejiangHenanHebeiLiaoningSichuanHubeiHunanShanghaiFujianBeijingAnhuiInner MongoliaShaanxiHeilongjiangGuangxiJiangxiTianjinShanxiJilinChongqingYunnanXinjiangGuizhouGansuHainanNingxiaQinghaiTibet

Korea Indonesia Turkey Iran Belgium Argentina South Africa Venezuela Colombia Thailand UAE Denmark Singapore Nigeria Philippines Pakistan Portugal Ireland Algeria Peru Czech Qatar Ukraine Romania Angola Morocco Slovak Slovenia Panama Jordan Chad

Source: National Bureau of Statistics of China; IMF; The Beijing Axis Analysis


Since 1980, China‟s annual GDP growth rate has consistently exceeded the world average. China‟s average growth rate of 9.6% during this period is unprecedented by any major economy

China vs. US, Annual GDP Growth (% y-o-y, 1980-2013F)


-4

0

4

8

12

16

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F

China US World Average


China‟s economy has shown greater resilience than most other major economies, with an average growth rate of 9.3% between 2008 and 2012. The economy is now stabilising at a growth rate of about 7.5%

GDP Growth Comparison (%, 2001-2013F)


-10

-5

0

5

10

15

20

01 02 03 04 05 06 07 08 09 10 11 12 13F

Australia Brazil China India Japan Russia South Africa US EU

Over the past decade,

China‟s growth has outpaced

those of large nations

China still experienced strong

economic growth despite the

global recession in 2009 Economy stabilising at

sub-8% growth


Although China's economic growth „slowed‟ to 7.8% in 2012, it still outpaced the rest of Asia and other major economies

Annual GDP Growth for Asia and Major Economies (% y-o-y, 2012)


7.8

6.6 6.4 6.2 5.6

5.0

4.0

2.2 2.0 2.0 1.4 1.3 1.3

0.2

-0.6 -2

0

2

4

6

8

10

Chi

na

Phi

lippi

nes

Tha

iland

Indo

nesi

a

Mal

aysi

a

Vie

tnam

Indi

a

US

Sou

th K

orea

Japa

n

Hon

g K

ong

Sin

gapo

re

Tai

wan UK

Eur

o A

rea


Despite the size of its economy, China‟s GDP per capita remains low compared to other developed and developing countries. In 2012, China‟s GDP per capita was just above USD 6,000

Nominal GDP Per Capita (USD, 2012)


USD 25,000 or more

USD 10,000-USD 25,000

USD 2,500-USD 10,000

Less than USD 2,500 or no data


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

01 02 03 04 05 06 07 08 09 10 11 12

Australia Brazil China

India Japan Russia

South Africa US EU

GDP Per Capita Comparison of Selected Economies (USD, 2001-2012)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

01 02 03 04 05 06 07 08 09 10 11 12

Brazil China India

Russia South Africa

Source: World Bank; The Beijing Axis Analysis

China‟s GDP per capita also lags behind those of all other BRICS nations except India

In 2012, China‟s

GDP per capita

reached USD 6,091


0%

20%

40%

60%

80%

100%

US

Chi

na

Japa

n

Ger

man

y

Fra

nce

UK

Bra

zil

Rus

sia

Italy

Indi

a

Can

ada

Aus

tral

ia

Spa

in

Mex

ico

Sou

th K

orea

Indo

nesi

a

Tur

key

Net

herla

nds

Sw

itzer

land

Sau

di A

rabi

a

Sw

eden

Iran

Nor

way

Pol

and

Bel

gium

Arg

entin

a

Aus

tria

Sou

th A

fric

a

Ven

ezue

la

Col

ombi

a

Agriculture Industry Services

Unlike other large economies, China‟s economy is still dominated by its secondary industry. This means that there is plenty of room for the already growing tertiary sector to expand as the economy transitions

Share of GDP by Industry (2012)

Note: 2012 figures are estimates

Source: CIA World Factbook; The Beijing Axis Analysis

GDP Rank 2012

Advancing the services

industry is an integral part of

the current 12th Five-Year Plan


-20

0

20

40

60

80

100

120

US

*

Chi

na

Japa

n*

Ger

man

y

Fra

nce

UK

Bra

zil

Rus

sia

Italy

Indi

a

Can

ada*

Aus

tral

ia

Spa

in

Mex

ico

S. K

orea

Indo

nesi

a

Tur

key

Net

herla

nds

Sau

di A

rabi

a

Sw

itzer

land

*

Sw

eden

Nor

way

Pol

and

Bel

gium

Arg

entin

a

Aus

tria

Sou

th A

fric

a

UA

E

Ven

ezue

la

Col

ombi

a*

Net Exports Final consumption expenditure Gross capital formation

The contribution of consumption to China‟s GDP is much lower than other countries. This highlights the massive potential for an economic transformation if China is able to increase the share of consumption in the economy

Composition of GDP - Expenditure Approach (%, 2012)

Note*: Data sources are as of 2011

Note: For the reason of decimal point rounding, sums of 3 figures for some countries are higher or lower than 100%

Source: World Bank; The Beijing Axis Analysis


Agenda

1. Foreword








- Social Indicators




(500)

0

500

1,000

1,500

2,000

2,500

0 10 20 30 40 50 60 70 80 90

In 2012, China was the world‟s largest exporter with exports totaling USD 2 tn - about 25% of its GDP

World’s Major Exporters (2012)


Exports (USD bn)

Russia

Malaysia

Netherlands

France

China

S. Korea


US Germany

Japan

UK Mexico

Brazil

India

Australia Spain Thailand Switzerland

Export/GDP (%)

China overtook

Germany to become

the world‟s largest

exporter in 2010

China’s Exports (USD bn)

2002 326

2007 1,220

2012 2,048

CAGR (2002-2012) 20%

A large economy, large exports

and high exports to GDP ratio –

however, its future growth model

will not depend on exports

Canada

China in 2007

China Developing Asia Developed Asia Others


China’s Top 10 Export Commodities 2012 (HS Code) Top 20 Exporters of Electrical Machinery (USD bn, 2012)

China has widened its lead as the world‟s largest exporter of electrical machinery. In 2012, China exported a total of USD 487 bn, or 25% of the world‟s total electrical machinery

0 100 200 300 400 500

ChinaHong Kong

USGermany

JapanS. Korea

SingaporeMexico

MalaysiaNetherlands

FranceUK

ThailandCzech

HungaryPhilippines

PolandSwedenSlovakia

Spain

Total: USD 2,049 bn

Electrical machinery and equipment

Nuclear reactors, machinery and mechanical appliances

Articles of apparel and clothing accessories (knitted)

Furniture, lighting, signs, prefabricated buildings

Optical, photo, technical, medical, etc. apparatus

Articles of apparel and clothing accessories (not knitted)

Iron and steel

Vehicles other than railway, tramway

Plastics and articles

Footwear, gaiters and the like, parts of such art 33%

2% 3% 3% 3% 3% 4% 4% 4%

18%

24%

85

84

61

94

90

62

73

39

87

64

Other

Source: UN Comtrade; The Beijing Axis Analysis

China 2002 2012

Export of Electrical

Machinery (USD bn) 65.1 487.3

% of World Total 7.6 24.7


China’s Top 10 Export Commodities 2012 (HS Code)


Top 20 Exporters of Power Generation Equipment (USD bn, 2012)

China is the world‟s largest exporter of power generation equipment. In 2012, China exported a total of USD 376 bn, or 20% of the world‟s power generation equipment

0 100 200 300 400

ChinaGermany

USJapan

NetherlandsHong Kong

UKFrance

S. KoreaSingapore

MexicoThailandBelgiumCanada

Czech Rep.Austria

SwedenMalaysia

SwitzerlandPoland

Total: USD 2,049 bn







Iron and steel




2% 3% 3% 3% 3% 4% 4% 4%

18%

24%

85

84

61

94

90

62

73

39

87

64

Other

China 2002 2012

Export of Power Generation

Equipment (USD bn) 50.8 375.9





Top 20 Exporters of Knitted Articles of Apparel (USD bn, 2012)

China is by far the world‟s largest exporter of knitted articles of apparel and clothing accessories. In 2012, China exported a total of USD 87 bn, or 48% of the world‟s knitted apparel and clothing accessories

0 5 10 15 20

ChinaHong Kong

GermanyTurkey

IndiaCambodia

BelgiumFranceSpain

NetherlandsIndonesia

UKUS

PortugalPakistan

Sri LankaThailandDenmark

El SalvadorMexico

87 Total: USD 2,049 bn







Iron and steel




2% 3% 3% 3% 3% 4% 4% 4%

18%

24%

85

84

61

94

90

62

73

39

87

64

Other

China 2002 2012

Export of Knitted Articles of

Apparel (USD bn) 16.0 87.1





Top 20 Exporters of Furniture and Lightings (USD bn, 2012)

China is the world‟s largest exporter of furniture and lighting. In 2012, China exported a total of USD 78 bn, or 41% of the world‟s furniture and lighting

0 10 20 30 40 50 60 70

ChinaGermany

USPolandMexico

CanadaFrance

NetherlandsCzech Rep.

MalaysiaSweden

UKBelgium

DenmarkSpain

AustriaTurkey

South KoreaRomania

Indonesia

78 Total: USD 2,049 bn







Iron and steel




2% 3% 3% 3% 3% 4% 4% 4%

18%

24%

85

84

61

94

90

62

73

39

87

64

Other

China 2002 2012

Export of Furniture &

Lightings (USD bn) 9.9 77.9





Top 20 Exporters of Optical and Photographic Equipment (USD bn, 2012)

China is the second-largest exporter of optical and photographic equipment. In 2012, China exported 14% of the world‟s products in this category, indicating that the country is moving up the value chain

0 30 60 90

USChina

GermanyJapan

S. KoreaNetherlands

FranceUK

Hong KongSwitzerland

SingaporeMexico

BelgiumIreland

MalaysiaCanadaSweden

DenmarkAustria

Thailand

Total: USD 2,049 bn







Iron and steel




2% 3% 3% 3% 3% 4% 4% 4%

18%

24%

85

84

61

94

90

62

73

39

87

64

Other

China 2002 2012

Export of Optical & Photographic




In 2012, China was the second-largest importer after the US, importing a total of USD 1,818 bn worth of goods, equivalent to about 22% of its GDP

World’s Major Importers (2012)


0

400

800

1,200

1,600

2,000

2,400

2,800

0 10 20 30 40 50 60 70 80

Japan

Imports (USD bn)

Imports/GDP (%)

S. Korea

Malaysia

US

Brazil


UK

Canada

Thailand

Germany

Turkey

Mexico

Australia

Russia

Spain

France

India Netherlands

In 2000, the

US‟ imports

were six times

China‟s imports

Imports of raw materials to be re-

exported as finished products and

increasing domestic consumption

are the key drivers of imports

2002 295

2007 956

2012 1,818

CAGR (2002-2012) 20%

China’s Imports (USD bn)

China in 2002

China

China Developing Asia Developed Asia Others


China’s Top 10 Import Commodities 2012 (HS Code)


Top 20 Importers of Electrical Machinery (USD bn, 2012)

China is the world‟s largest importer of electrical machinery and equipment. In 2012, China imported a total of USD 382 bn, or 18% of the world‟s electrical machinery and equipment

21%

3% 3% 4% 4% 4%

6%

7%

10%

17%

21%

85

27

84

26

90

87

39

99

29

74

Other

Total: USD 1,818 bn


Mineral fuels, mineral oils and products of their distillation


Ores, slag and ash

Optical, photographic and cinematographic, equipment



Commodities not elsewhere specified

Organic chemicals

Copper and articles

21%

0 80 160 240 320 400

ChinaUS

Hong KongGermany

JapanSingapore

MexicoS. Korea

UKFrance

MalaysiaNetherlands

CanadaThailand

RussiaIndia

BrazilAustralia

Czech Rep.Hungary

China 2002 2012

Import of Electrical

Machinery (USD bn) 73.2 381.5





Top 20 Importers of Mineral Fuels (USD bn, 2012)

China is the world‟s second-largest importer of mineral fuels. In 2012, China imported a total of USD 313 bn, or 10% of the world‟s mineral fuels

21%

3% 3% 4% 4% 4%

6%

7%

10%

17%

21%

85

27

84

26

90

87

39

99

29

74

Other




Ores, slag and ash





Organic chemicals

Copper and articles

21%

Total: USD 1,818 bn

0 90 180 270 360 450

USChinaJapan

S. KoreaIndia

GermanySingapore

NetherlandsFrance

UKSpain

BelgiumTurkey

CanadaThailand

IndonesiaAustralia

BrazilMexico

Malaysia

China 2002 2012

Import of Mineral

Fuels (USD bn) 19.3 313.1





Top 20 Importers of Power Generation Equipment (USD bn, 2012)

China is the world‟s second-largest importer of power generation equipment. In 2012, China imported a total of USD 182 bn, or 10% of the world‟s power generation equipment

21%

3% 3% 4% 4% 4%

6%

7%

10%

17%

21%

85

27

84

26

90

87

39

99

29

74

Other




Ores, slag and ash





Organic chemicals

Copper and articles

21%

Total: USD 1,818 bn

0 70 140 210 280 350

USChina

GermanyUK

FranceHong Kong

CanadaJapan

NetherlandsMexicoRussia

SingaporeS. KoreaAustralia

IndiaThailand

BrazilBelgium

IndonesiaTurkey

China 2002 2012

Import of Power Generation

Equipment (USD bn) 52.1 182





Top 20 Importers of Ores, Slag and Ash (USD bn, 2012)

China is the world‟s largest importer of ores, slag and ash. In 2012, China imported a total of USD 134 bn, or 52% of the world‟s ores, slag and ash

21%

3% 3% 4% 4% 4%

6%

7%

10%

17%

21%

85

27

84

26

90

87

39

99

29

74

Other




Ores, slag and ash





Organic chemicals

Copper and articles

21%

Total: USD 1,818 bn

0 10 20 30 40 50

ChinaJapan

S. KoreaGermany

IndiaSpain

USCanadaBelgium

UKFranceFinland

NetherlandsAustria

BulgariaTurkeyOman

MalaysiaSwedenMexico

134

China 2002 2012

Import of Ores, Slag

and Ash (USD bn) 4.3 133.7





Top 20 Importers of Optical and Photographic Equipment (USD bn, 2012)

China is the world‟s largest importer of optical and photographic equipment. In 2012, China imported a total of USD 106 bn, or 21% of the world‟s optical and photographic equipment

21%

3% 3% 4% 4% 4%

6%

7%

10%

17%

21%

85

27

84

26

90

87

39

99

29

74

Other




Ores, slag and ash





Organic chemicals

Copper and articles

21%

Total: USD 1,818 bn

0 30 60 90 120

ChinaUS

GermanyJapan

NetherlandsFrance

S. KoreaHong Kong

UKCanadaMexico

BelgiumRussia

SingaporeAustralia

SwitzerlandIndia

BrazilThailand

Spain

China 2002 2012

Import of Optical & Photographic




-788

231

-87

243

-107

-169

19 14

-199

-9

209

-40

6 0 28

54

-84

-2

28 9

-12

10

233

15

74

-11

12

-15 -18

12

-250

-200

-150

-100

-50

0

50

100

150

200

250

US

Chi

na

Japa

n

Ger

man

y

Fra

nce

UK

Bra

zil

Italy

Indi

a

Can

ada

Rus

sia

Spa

in

Aus

tral

ia

Mex

ico

S. K

orea

Net

herla

nds

Tur

key

Indo

nesi

a

Sw

itzer

land

Bel

gium

Pol

and

Sw

eden

Sau

di A

rabi

a

Iran

Nor

way

Aus

tria

Arg

entin

a

Sou

th A

fric

a

Tha

iland

Den

mar

k

Trade Balance of the World’s Major Economies (USD bn, 2012)


China‟s 2012 trade surplus narrowed to USD 231 bn - significantly lower than the peak of USD 290 bn in 2008. However, China still runs one of the world‟s largest surpluses despite efforts to balance trade


Agenda

1. Foreword








- Social Indicators




397

65

0 50 100 150 200

US

Japan

UK

France

Hong Kong

Belgium

Switzerland

Russia

China

Virgin Is.

Germany

Canada

Italy

Spain

Netherlands

Austria

Sweden

Singapore

Denmark

S. Korea

329

68

0 50 100 150 200

US

Germany

France

Hong Kong

China

Switzerland

Japan

Russia

Canada

Belgium

Netherlands

Sweden

Australia

Spain

Italy

Virgin Is.

Singapore

S. Korea

Luxembourg

Ireland

In 2012, China ranked third overall and first among all developing economies for OFDI, with total outbound investment reaching USD 84 bn

In 2011, China‟s ranking

slipped to 9th overall, as

the Euro debt crisis

discouraged overseas

investments

In 2010, China

ranked 5th

Top 20 World FDI Outflows (USD bn, 2010-2012)

329

84

0 50 100 150 200

US

Japan

China

Hong Kong

UK

Germany

Canada

Russia

Switzerland

Vigin Is.

Canada

France

Sweden

Korea

Italy

Mexico

Singapore

Chile

Ireland

Luxembourg

In 2012, China

ranked 3rd

Note: To make international comparisons, this section utilises China‟s FDI and OFDI figures from the WIR 2012 instead of figures from MOFCOM

Source: WIR 2013; The Beijing Axis Analysis

2010 2011 2012


168 121

0 50 100 150 200

USChina

Hong KongBrazil

Virgin Is.UK

AustraliaSingapore

RussiaCanada

ChileIreland

LuxembourgSpainIndia

FranceIndonesiaColumbia

KazakhstanSweden

Top 20 World FDI Inflows (USD bn, 2012)


Top 20 World FDI Outflows (USD bn, 2012)

China remains a key destination for FDI inflows, which are still larger than FDI outflows. In 2012, China was the second-largest recipient of FDI, behind only the US

China ranked 2nd

329

84

0 50 100 150 200

US

Japan

China

Hong Kong

UK

Germany

Canada

Russia

Switzerland

Vigin Is.

Canada

France

Sweden

Korea

Italy

Mexico

Singapore

Chile

Ireland

Luxembourg

In 2012, China

ranked 3rd


Top 20 World FDI Inward Stock (USD bn, 2012)


Top 20 World FDI Outward Stock (USD bn, 2012)

China ranked sixth overall and second in Asia for FDI inward stock with USD 833 bn in 2012. For OFDI, it ranked 13th with USD 509 bn

5,191

509

0 1,000 2,000 3,000 4,000

US

UK

Germany

France

Hong Kong

Switzerland

Japan

Belgium

Netherlands

Canada

Spain

Italy

China

Virgin Is.

Australia

Russia

Sweden

Singapore

Ireland

Denmark

3,932

833

0 1,000 2,000 3,000 4,000

US

Hong Kong

UK

France

Belgium

China

Germany

Brazil

Singapore

Switzerland

Canada

Spain

Australia

Netherlands

Russia

Sweden

Virgin Is

Italy

Mexico

Ireland

China ranked sixth

China ranked 13th


40

30

20

10

0

10

20

30

Aus

tral

ia

Bra

zil

Can

ada

Chi

na

Fra

nce

Ger

man

y

Indi

a

Indo

nesi

a

Italy

Japa

n

Mex

ico

Net

herla

nds

Rus

sia

S. K

orea

Sau

di A

rabi

a

Spa

in

Sw

itzer

land

Tur

key

UK

US

FDI Inflows as a Percentage of GFCF FDI Outflows as a Percentage of GFCF

China‟s inflows as a percentage of GFCF* remain relatively small, mainly due to restrictions on foreign investment. The low ratio for outflows reflects the low amount of Chinese investment in capital formation projects

Top 20 GDP Countries’ FDI Inflow/Outflow as a Percentage of Gross Fixed Capital Formation (%, 2012)

Note: GFCF = Gross fixed capital formation

Source: UNCTAD; The Beijing Axis Analysis

-13% -2% 10% -2% -35% -87% -29% 3% -72% -199% -41% -101% -7% -3% -25% 3% -69% -23% 22% -26%

13% 174% 8% 13% -38% 28% -31% -30% -43% 14% 111% -109% -24% 14% 28% -113% -6% 73% -33% -17%

FDI Inflow Growth 2011-2012

FDI Outflow Growth 2011-2012


Sovereign wealth funds are playing an even greater role in overseas investment. China is home to three of the world‟s largest sovereign wealth funds (four, if Hong Kong is included)

Note*: As of October 2013

Source: Sovereign Wealth Fund Institute; The Beijing Axis Analysis

Locations of World’s Top 20 Sovereign Wealth Funds (USD bn, 2013*)

Norway

785

UAE

627

China

575

Saudi Arabia

676

China

568

Kuwait

386

China

161

Hong Kong

327

Singapore

285

Singapore

173

Qatar

115

Australia

89

UAE

70

UAE

65

Libya

65

Kazakhstan

76

China

1. China Investment Corporation

2. SAFE Investment Company

3. Hong Kong Monetary Authority

Investment Portfolio

4. National Social Security Fund

Algeria

77

Russia

88

Russia

86

Oil

Non-Commodity

Oil & Gas


Rank Economy Fund Type Assets under management

(USD bn)

1 Norway Government Pension Fund – Global Oil 785.2

2 Saudi Arabia SAMA Foreign Holdings Oil 675.9

3 UAE – Abu Dhabi Abu Dhabi Investment Authority Oil 627

4 China China Investment Corporation Non-Commodity 575.2

5 China SAFE Investment Company Non-Commodity 567.9

6 Kuwait Kuwait Investment Authority Oil 386

7 China – Hong Kong Hong Kong Monetary Authority Investment Portfolio Non-Commodity 326.7

8 Singapore Government of Singapore Investment Corporation Non-Commodity 285

9 Singapore Temasek Holdings Non-Commodity 173.3

10 China National Social Security Fund Non-Commodity 160.6

11 Qatar Qatar Investment Authority Oil 115

12 Australia Australian Future Fund Non-Commodity 88.7

13 Russia National Welfare Fund Oil 88

14 Russia Reserve Fund Oil 86.4

15 Kazakhstan Samruk-Kazyna JSC Non-Commodity 77.5

16 Algeria Revenue Regulation Fund Oil & Gas 77.2

17 UAE – Dubai Investment Corporation of Dubai Oil 70

18 Kazakhstan Kazakhstan National Fund Oil 68.9

19 UAE – Abu Dhabi International Petroleum Investment Company Oil 65.3

20 Libya Libyan Investment Authority Oil 65

China‟s sovereign wealth funds are some of the largest in the world. The ranking continues to be dominated by Middle and East Asian countries

Note*: As of October 2013

Source: SWF Institute; The Beijing Axis Analysis

Ranking of World’s Top 20 Sovereign Wealth Funds (USD bn, 2013*)


Agenda

1. Foreword








- Social Indicators




In 2012, Germany had the world‟s largest current account balance at USD 238 bn, followed by China (USD 214 bn) and Saudi Arabia (USD 177 bn)

Current Account Balance for Select Countries (USD bn, 2012)

Note*: IMF Estimates


Top 5 current account surpluses

Top 5 current account deficits

US*

-475 bn

Russia

81 bn

Japan

59 bn

China

214 bn Turkey

-47 bn

Italy

-10.7 bn

Germany

238 bn

UK

-86 bn

Saudi Arabia*

177 bn

France

-63 bn


China, the world‟s largest holder of foreign exchange reserves, possesses more than triple the FX reserves of the next largest holder, Japan. Asian countries dominate the top 15 Top 30 Largest Holders of Foreign Exchange and Gold Reserves (USD bn, 2012E)

Note: Estimates are as of 31 December 2012


0

400

800

1,200

1,600

2,000

Chi

na

Japa

n

Sau

di A

rabi

a

Rus

sia

Sw

itzer

land

Tai

wan

Bra

zil

S.K

orea

Hon

g K

ong

Indi

a

Sin

gapo

re

Ger

man

y

Alg

eria

Fra

nce

Italy

Tha

iland

Mex

ico

US

Mal

aysi

a

Tur

key

Liby

a

Indo

nesi

a

Pol

and

UK

Den

mar

k

Isra

el

Phi

lippi

nes

Iran

Can

ada

UA

E

3,341

Asia


In 2012, China‟s external debt of around USD 770 bn accounted for less than 1% of the world‟s total external debt

Top 30 Economies with Largest External Debt (USD bn, 2012)

Note*: CIA World Factbook Estimates


0

4,000

8,000

12,000

16,000

20,000

EU

US

UK

Ger

man

y

Fra

nce

Japa

n

Luxe

mbo

urg

*Ita

ly

Net

herla

nds

Spa

in

Irel

and

Sw

itzer

land

*Aus

tral

ia

Bel

gium

Can

ada

*Sin

gapo

re

*Hon

g K

ong

Sw

eden

Aus

tria

*Chi

na

Nor

way

*Rus

sia

Fin

land

Den

mar

k

Gre

ece

Por

tuga

l

*Bra

zil

*Ind

ia

*Pol

and

*Mex

ico

At the end of Q3 2012,

China‟s external debt

amounted to USD 771 bn

The external debt of the EU

was USD 15 tn

15,500


China‟s discount rate is relatively low at 2.25%, which is lower than that of other large developing economies

Note1: The interest rate charged by a central bank on loans to its member banks. A change in the discount rate is usually followed by similar changes in the interest rates charged by banks and in money markets.

Note2: The central bank discount rate is updated to the latest available month in 2013.

Note*: CIA World Factbook latest Estimates


Central Bank Discount Rate1 of Select Economies (%, 2013)2

0

2

4

6

8

10

Vie

tnam

*Rus

sia

*Bra

zil

*Ken

ya

Indo

nesi

a

*Ind

ia

Tur

key

Sou

th A

fric

a

Col

ombi

a

*Mex

ico

*Chi

le

*Aus

tral

ia

*Chi

na EU

S. K

orea

*Can

ada

*UK

US

Japa

n

2.25%

High rate countries

Medium rate countries

Low rate countries


0

20

40

60

Mad

agas

car

Bra

zil

Kyr

gyzs

tan

Par

agua

y

Gam

bia

Mon

golia

Tan

zani

a

Bur

undi

Arg

entin

a

Bul

garia

Cro

atia

Hun

gary

Sou

th A

fric

a

Rus

sia

Nam

ibia

Alg

eria

Aus

tral

ia

Chi

na

New

Zea

land

Cze

ch R

epub

lic

Bru

nei

Sin

gapo

re

Italy

Isra

el

Bah

amas

Sw

itzer

land

Net

herla

nds

Japa

n

UK

As of November 2013, China‟s prime lending rate was 6%, which is comparable to that of its Asia-Pacific neighbours Australia and New Zealand

Note: (1) Prime lending rate is a short-term interest rate quoted by a commercial bank to its best commercial customers. Even though banks frequently charge more and sometimes less than the quoted prime

rate, it is a benchmark against which other rates are measured. For various reasons, a rising prime rate is generally considered detrimental to security prices.

(2) All lending rates are updated to the latest available monthly data in 2013. For February: Madagascar, Namibia; for March: Burundi, Brunei, Israel, Switzerland; for May: South Africa, Algeria, Australia,

Bahamas, Singapore, UK, Mongolia; all other countries are updated as of April.


… …

High rate countries

Medium rate countries

Low rate countries 6

Commercial Bank Prime Lending Rate1 of Select Economies (%, 20132)


Agenda

1. Foreword








- Social Indicators




China is the most populous country in the world with 1.3 billion people. A cultural preference for male heirs has left China with one of the highest male-to-female ratios in the world, alongside UAE, Saudi Arabia and India Population of Top 30 Economies by GDP (mn, 2013F)

Source: CIA World Factbook; World Bank; The Beijing Axis Analysis

USChinaJapan

GermanyFrance

United KingdomBrazil

RussiaItaly

IndiaCanada

AustraliaSpain

MexicoS.Korea

IndonesiaTurkey

NetherlandsSwitzerland

Saudi ArabiaSweden

IranNorwayPoland

BelgiumArgentina

AustriaSouth Africa

VenezuelaColombia

GDP rank 2012 Total

97 106

95 97 96 99 98 86 93

108 99

101 97 96

100 100 102

98 97

121 98

103 98 94 96 97 95 99 98 98

655 695

587 634

Ratio

Male/female

317 1,350

127 81 66 63

201 143

61 1,221

35 22 47

116 49

251 81 17

8 27

9 80

5 38 10 43

8 49 28 46

Female Male


-5

0

5

10

15

20

25

30

35

0 5 10 15 20 25 30

While China currently has a demographic makeup that is highly favourable, its working-age population (15-64) is forecasted to shrink from 2015 due to a rapidly ageing population

Child and Elderly Population for Selected Countries (2013F)


Population under 15 (%)

Population aged 65+ (%)

India

Saudi Arabia

Poland

S. Korea

US

Canada

Norway

Belgium

Argentina

France

Russia

Austria

China Sweden United Arab Emirates

Iran

Taiwan

Indonesia

Switzerland

A bubble this size represents a

population of 10,000

Japan

Germany Italy Spain

UK Netherland

Australia

Turkey

Brazil

Mexico

South Africa


98

52

32

2

48

68

Bel

gium

Arg

entin

a

Japa

n

Aus

tral

ia

Den

mar

k

Fra

nce

Bra

zil

Sw

eden

Net

herla

nds

US

S. K

orea

S. A

rabi

a

Can

ada

UK

Nor

way

Spa

in

Mex

ico

Ger

man

y

Rus

sia

Pol

and

Sw

itzer

land

Tur

key

Italy

Iran

Aus

tria

Gre

ece

S. A

fric

a

Chi

na

Indo

nesi

a

Indi

a

Urban Rural

China‟s level of urbanisation is still much lower than most large economies. However, along with India and Indonesia (both at 2.5%), it has one of the fastest growing urbanisation rates at 2.9%

Urban and Rural Population of Selected Economies (%, 2012)


Annual rate of urbanisation change (%, 2010-2015F)

0

100

Urban 0.4 1.1 0.6 1.2 0.5 1.0 1.1 0.6 0.8 1.2 0.7 2.4 1.1 0.7 1.2 1.0 1.2 0.0 0.1 -0.0 0.5 2.4 0.5 1.3 0.6 0.6 1.2 2.9 2.5 2.5


10080604020020406080100

USChinaJapan

GermanyFrance


RussiaItaly

IndiaCanada

AustraliaSpain

MexicoS. Korea

IndonesiaTurkey


S. ArabiaSweden

IranNorwayPoland

BelgiumArgentina

TaiwanAustria

VenezuelaColombia

Male Female

While the average life expectancy for both men and women in China is higher than in other large developing economies, it still lags behind more developed economies

Life Expectancy of Top 30 Economies by GDP (years, 2012)


GDP Rank 2012


China‟s economic activity rate is comparatively larger than those of major developed economies. China has the second-highest female economic activity rate among the world‟s top economies

Adult (15 and older) Economic Activity Rate (%, 2012)

Source: UN Statistics Division; World Bank; The Beijing Axis Analysis

10080604020020406080100

USChinaJapan

GermanyFrance


RussiaItaly

IndiaCanada

AustraliaSpain

MexicoS. Korea

IndonesiaTurkey


S. ArabiaSweden

IranNorwayPoland

BelgiumArgentina

AustriaS. Africa

VenezuelaColombia

Male FemaleTotal

63.6 74.1 60.1 59.6 56.3 61.9 69.9 63.0 48.4 55.6 66.6 65.5 59.3 61.9 77.5 67.5 49.5 64.7 67.6 49.9 63.7 44.8 65.9 55.9 54.0 60.7 60.5 52.3 66.1 67.4

GDP Rank 2012


Agenda

1. Foreword







A number of factors in China‟s political, economic and social environments are driving China‟s ongoing transformation


Political

Economic Social

China’s

Transformation

Political, Economic and Social Factors Driving China’s Transformation

Conclusions

• New Push for More Gov‟t Efficiency

• Renewed Focus on Sustainable Growth

• Continued Implementation of 12th Five-Year Plan

• Gradual Market Liberalisation

• Anti-Corruption Drive

• SOEs Strong Influence in Key Sectors

• Environmental Protection

• International Diplomacy

• Increasing Inequality

• Changing Age Structure

• Challenges of One Child Policy

• Increasing Education Levels

• Increasing Importance of the Internet

• Moderating GDP Growth

• Continued Urbanisation

• Increasing High-value Exports

• Rise of Inland Provinces

• Rising Labour Costs

• Increasing Domestic Consumption

• Growing Service Sector

• Increasing Spending on R&D

• RMB Appreciation

• Continued Rise of 2nd, 3rd and 4th Tier Cities

• Stable Inflation

• Manufacturing‟s Continued Importance

• High Consumer Confidence

• Continued Rise in Both FDI & OFDI

• More Balanced Trade

• Large & Growing FX Reserves

Political

Social

Economic


China‟s new leadership will continue to implement the main components of the 12th Five-Year Plan and deepen economic structural reform

Concluding Views on China’s Policy Landscape


New Push for More

Gov‟t Efficiency

Continued

Implementation of

12th Five-Year Plan

Renewed Focus on

Sustainable Growth

2

3

1

Gradual Market

Liberalisation

Anti-Corruption

Drive

5

4

Theme: Political Theme: Political Overview/Examples Overview/Examples

• End of „growth-at-all-costs‟ model

• Reduction of overcapacity and gov‟t waste

e.g. through reining in SOE waste

• Banks to price loans according to the

market

• Pilot Free Trade Zone in Shanghai

• Liberalisation of previously restricted

sectors to foreign participation

• Tightening of gov‟t costs, especially among

SOEs

• New central gov‟t drive to reign in local

gov‟t spending

• Smaller Standing Committee will streamline

national decision making

• Approval processes will be also streamlined

SOEs Strong

Influence in Key

Sectors

6 • Although the government has been opening

up some sectors, SOEs continue to dominate

sectors that are deemed to be strategic such

as aviation, telecommunications etc.

• Policies to encourage domestic consumption

• Balance social equity/improve social safety

net

• Industrial consolidation/upgrading

Conclusions

Environmental

Protection

7 • Renewed emphasis on the environment

• Increased investment in clean

technologies

International

Diplomacy

8 • China‟s economic rise will continue to

enhance its diplomatic aspiration and

clout, especially in the eastern hemisphere

i.e. ASEAN


China‟s economy will continue to undergo structural changes as it transitions from being investment and export-led to one based on domestic consumption

Concluding Views on China’s Economic Landscape


Increasing High-

Value Exports

Continued

Urbanisation

2

3

Rising Labour Costs

Increasing Domestic

Consumption

6

5

Overview/Examples Overview/Examples

• Government will continue to encourage

migration to cities to increase consumption

• Changing structure of exports in response to

increasing wages, more investment in R&D

and increasing competitiveness

• Although labour wages have risen sharply

in recent years, productivity gains continue

to outstrip increases in labour costs

• Domestic consumption has increased on

the back of favourable gov‟t policies and

an expanding middle class

Growing Service

Sector

7 • The service sector has been expanding as

the role of agriculture in the economy

shrinks and industry sees slower growth

Rise of Inland

Provinces

4 • Due to gov‟t incentives and rising costs in

inland areas, businesses are moving to

China‟s inner provinces

Increasing

Spending on R&D

8 • China is increasing spending on R&D and

the large number of patents emerging from

the country is one small sign of this

investment

Theme: Economic Theme: Economic

Conclusions

• „Quality over quantity growth‟ is now

emphasised, which will lead to more

moderate and sustainable growth

Moderating GDP

Growth

1


The structural changes to the economy will not occur simultaneously and rebalancing will have to occur in various parts of the economy in order to achieve the overarching economic reform goals

Concluding Views on China’s Economic Landscape


Stable Inflation

Continued Rise of

2nd, 3rd and 4th Tier

Cities

10

11

High Consumer

Confidence

Continued Rise in

Both FDI & OFDI

14

13

Theme: Economic Theme: Economic Overview/Examples Overview/Examples

• Middle class rising faster in lower-tier cities

but still larger in China‟s megacities

• With the exception of food costs, CPI has

remained relatively low during the past two

years, leaving some room to loosen

monetary policy if needed

• With a steadily rising middle class and a

stabilising economy, Chinese consumer

confidence has remained high and quite

stable in recent years

• China‟s FDI has experienced nearly

double-digit growth in the last decade

• OFDI flows catching up with FDI flows

More Balanced

Trade

15

Manufacturing‟s

Continued

Importance

12 • China‟s manufacturing sector has largely

remained in expansionary territory in 2013,

despite depressed demand from overseas

Large & Growing

FX Reserves

16 • With one of the world‟s largest foreign

exchange reserves, China seeks to

diversify its holdings away from T-bills into

stable yet higher-yielding assets

• Although China is still a net exporter,

import growth now more evenly matches

export growth due to rising imports of

finished goods

Conclusions

RMB Appreciation

9 • RMB will continue to steadily appreciate

against major currencies due to strong

underlying economic fundamentals


Ongoing social changes such as an ageing population will not only impact the economy, but also influence how the society transforms

Concluding Views on China’s Socio-Economic Landscape


Increasing

Inequality

Challenges of One

Child Policy

Changing Age

Structure

2

3

1

Increasing

Education Levels

Increasing

Importance of the

Internet

5

4

Theme: Social Theme: Social Overview/Examples Overview/Examples

• With declining birth and death rates, China‟s

population is rapidly ageing

• China‟s working-age population is expected

to peak by 2016

• With a very slow population growth rate,

China faces the danger of„ „growing old

before getting rich‟

• The number of graduates and new

students in China‟s tertiary education has

continued to rapidly increase during the

last decade

• The Internet‟s role as a marketplace and

source of information will continue to grow

• Despite a narrowing of rural-urban disparity,

income levels in urban households are still

three times those of rural households

Conclusions


China‟s transformation holds innumerable implications and opportunities for foreign companies seeking to do business with and in China


Producer

Consumer Source of Capital

Implications &

Opportunities for

Foreign

Companies

High-level Views on China as a…

Implications

As a consumer, China will continue to be an important source of growth for foreign companies seeking to meet the demands of an increasingly urbanised population seeking a higher standard of living than their predecessors. As the government continues to encourage Chinese citizens to buy more of the cars, clothes, appliances and electronics that China currently exports, multinationals will find it increasingly lucrative to tweak their manufacturing facilities to serve China‟s domestic market rather than traditional export markets

As a producer, foreign companies need to be aware of China‟s changing manufacturing competitiveness. As structural economic reform advances and some cost advantages fade away, investment-driven growth must give way to higher productivity, which entails more than simply purchasing better machinery. China often lacks the soft skills required for economic transformation and will need new management techniques to reduce wastage, improve quality and simplify procedures, to move up the value chain

As a source of capital, Chinese investors are seeking a wider variety of assets that better position them to capture‟s China‟s move towards a consumption-driven economy. Chinese companies‟ increasing need to access new markets, technology and resources provide ample opportunities for foreign companies looking to attract investment from Chinese investors across a range of sectors


Implications of Government Policy on China as a Producer, Consumer and Source of Capital*

Implications of China‟s changing economy for foreign companies (1/4)

Note: Producer - From the perspective of a foreign manufacturer already in China or looking to enter China; Consumer - From the perspective of a foreign company already selling to China or looking to

sell to China; Source of Capital - From the perspective of a foreign company or country looking to raise capital by accessing China sources


Element Producer Consumer Source of Capital

Push for Gov‟t

Efficiency

• Allow faster registration, approvals for firms

• Increases transparency

• May reduce final cost of goods

• Allow bigger role for markets • Allows for more efficient transfer of capital

Renewed Focus on

Sustainable Growth

• Costs likely to increase

• Government incentives provided to

industries favoured in new policy

• Companies must understand new regulatory

regime before investment

• Companies marketing environmentally-

friendly products are likely to experience

improved consumer perception

• FDI, OFDI and domestic investment will be

directed towards those sectors that are the

focus of current government policies, both

for domestic and overseas investment

More Pro-Market

Policies

• Creates a more level playing field for foreign

firms to compete against domestic firms

• Gain access to previously restricted

industries

• Creates a more level playing field for foreign

firms to compete against domestic firms (i.e.

reducing import tariffs, reducing export

rebates, etc.)

• Enhance the role of the private sector in

providing capital financing

• Increase availability of bank loans as

government allows banks to set interest

rates based on market-based benchmarks

Anti-Corruption Drive

• Reduces the cost of doing business

• Need to understand the new rules of the

game

• Governance elevated in importance

• Reduced discretionary spending from public

sector/officials

• Greater transparency in the awarding of

public contracts

• More governance in tender processes

• More transparency in project financing

SOEs Strong Influence

in Key Sectors

• Uneven playing field; difficult to compete in

sectors where SOEs dominate

• Industry consolidation to create SOE

champions

• SOEs in certain areas are suitable targets

for sales/engagement

• Need to understand the proper channels to

market to SOEs

• Easier access to public funding makes SOEs

a viable source of capital funding, especially

for overseas projects

• Gradually more sophisticated investment

management by SOEs

Implications

1

2

3

4

5


Implications of Economic Factors on China as a Producer, Consumer and Source of Capital*






RMB Appreciation • Higher cost of doing business in China

• More expensive to import from China

• Increase in the purchasing power of Chinese

consumers, especially towards imports

• Likely to increase OFDI, as the cost of acquiring

overseas assets is now relatively cheaper

Increasing Urbanisation • Likely to lead to an increase in labour costs

• Consumption market continually expanding

• Larger potential market for goods

• Greater concentration of buying power

Increasing High-value

Exports

• Favourable policy towards firms entering in high-

end industries

• Potential to partner with local firms seeking to

gain access to foreign expertise/technology

• Compete better against US, EU, Japan etc

• Face more competition from India, Indonesia,

Vietnam, etc

• Technology/quality advantage likely to decrease

as domestic companies catch up

Rise of Inland Provinces

• Improving infrastructure, education and

urbanisation are making inland areas more

attractive for establishing production facilities

• Larger market for goods and services as

purchasing power of consumers in inland

provinces increases

Rising Labour Costs

• Higher cost of doing business in China

• Companies in labour-intensive industries are

moving production inland or overseas

• Foreign goods and services will become more

price competitive as prices of domestically

produced goods and services increase

• Likely to increase OFDI as Chinese firms move

overseas to lower labour costs

Increasing Domestic

Consumption

• More companies are entering China, not so much

as to reduce costs, but rather to tap into the

domestic market

• Companies have a growing target consumer

base that has a rising purchasing power

• Less government-directed OFDI as savings rates

decrease due to increased domestic spending

Growing Service Sector • China increasingly open to FDI in service sectors • Higher living standards will drive demand for a

wider array of services

• As China‟s financial system opens up, the

number of cross-border M&As and OFDI will

increase

Increasing Spending on

R&D

• Opportunities for higher-end companies to enter

the market or establish local partnerships

• Technology/quality advantage likely to decrease

as domestic companies catch up

• Increased opportunity for foreign firms to partner

with Chinese R&D firms who will bring capital

Implications

1

2

3

4

5

6

7

8


Implications of Economic Factors on China as a Producer, Consumer and Source of Capital*






Moderating GDP

Growth

• May result in overcapacity of existing

production facilities

• May need to reduce scale and or improve

efficiency of current production facilities

• Growth in per capita income likely to slow

• Despite this, consumer spending is unlikely to

slow down as the new GDP growth model

focuses on increasing domestic consumption

• Government-directed OFDI will likely be

more prudent, seeking long-term growth

rather than immediate high ROIs

Stable Inflation • Domestic costs will be more stable and

less likely to fluctuate

• Domestic purchasing power is likely to remain

strong and will not be eroded by inflation

• Stable inflation helps contribute to higher

savings rates, which is a main source of

available capital

Manufacturing Still

Important to Economy

• Still plenty of opportunities for foreign

manufacturers to enter China, especially

those that can bring new technology

and/or create many jobs

• Sales of input machinery and raw materials will

continue to be in high demand

High Consumer

Confidence

• Local market becomes an alternative to

exports esp. with greater spending power

• Confident consumers typically spend more and

save less – likely to lead to an increase in

domestic consumption

• Confident consumers typically spend more

and save less – potentially less capital

available for government-directed OFDI

Continued Rise in Both

FDI and OFDI

• Incentives for high-value technology/

services companies to invest in China

• China‟s upper class is investing in real

estate overseas, especially high-end

properties

Large and Growing FX

Reserves

• More opportunities for government-directed

OFDI

• China likely to buy more non-US bonds as it

seeks to diversify its foreign reserves

Implications

9

10

11

12

13

14


Implications of Socio-economic Factors on China as a Producer, Consumer and Source of Capital*






Changing Age

Structure

• Labour costs likely to further increase as

labour force shrinks

• Other developing countries will challenge

China‟s labour competitiveness

• Ageing population will boost demand for

elderly-care services/products

• Shrinking domestic demand as the elderly

generally spend less

• Increased cost of health and social care

needed to take care of the elderly will

reduce available sources of capital,

particularly government-directed OFDI

Easing of One Child

Policy

• Will attempt to offset the negative impact

of shrinking labour availability in the

coming years

• Possible baby boom, and long-term

implications of emerging new consumer

Increasing Education

Levels

• Larger pool of talent with better language

and technical skills

• More Chinese can now speak English

• Opportunity for providers of skills in global

demand (English)

• Likely to lead to higher labour costs

• Creates more sophisticated consumers who

will demand more in terms of quality and

selection

• Higher education backgrounds lead to higher

incomes, hence more disposable spending

Increasing Internet Use

• Platforms such as Alibaba and other B2B

sites have made it easier to sell and buy

directly from China without the need to

establish a physical presence

• Growing e-commerce in China makes it easier

for foreign companies to sell to China without

the need to establish a physical presence

• Any serious consumer-oriented product cannot

neglect the Internet as means of promotion i.e.

via social media or sales via online shopping

• Launch of Internet platforms for investment

and venture capital along with credit checks

will facilitate the movement of capital

Implications

1

2

3

4


Final word


• China‟s rise has been unique in terms of both speed and the country‟s sheer scale – China will continue to map its own blueprint as

the new leadership simultaneously continues with past reforms and introduces new reforms

• China has become an important engine of global production, growth, capital, trade and consumption

• China will not relinquish its position as the world‟s top exporter and world‟s second-largest importer anytime soon

• China is shifting from being a net inbound investment destination to a net outbound investor as China Inc. goes global

• Although China has the economic hardware, it still suffers from shortages in software – services will become an increasingly

important component of China‟s GDP

• After three decades of relying on a „growth at all costs‟ model, China is putting a sharper focus on low carbon and sustainable

innovation to reverse the effects of years of environmental degradation

• As structural economic reform advances, and cost advantages fade away, investment-driven growth must give way to higher

productivity in order to sustain rapid growth

• China will compete with global leaders of high-value manufacturing in the medium to long-term

• China will continue to promote private-sector development and allow greater international access to the domestic market

• Despite a booming middle class, there are still those that have been left behind in the economy making rising inequality a top social

concern facing China today

• Should current reforms continue to take place unhindered, China is poised to become the world‟s largest economy in about a

decade


Agenda

1. Foreword







The Beijing Axis (TBA) is an international advisory and procurement firm

• Established in 2002, The Beijing Axis: o Supports our clients‟ international initiatives with cross-border advisory and procurement solutions o Thrives in dynamic and challenging emerging and frontier markets o Emphasizes strategy implementation, focused on „actions and transactions‟ o Collaborates with clients and provides integrated solutions across their value chain

• The Beijing Axis has formed a strategic partnership with Imperial Logistics, which creates an end-to-end, integrated supply chain from Asia to Africa and vice versa

• The Beijing Axis Africa has been integrated within Resolve, an Imperial Logistics company. Resolve is a newly formed venture that merges Imperial Group companies Volition, e-Logics and associated Consulting, Technology and Managed Services businesses within the group

Strategy and

Management Consulting

1

• Research and analytics

• Strategy formulation

• Strategy implementation

• International sales, distribution

and brand management

Procurement

Services

2

• Procurement advisory

• Strategic sourcing

• Transactional procurement

• Outsourced and managed

procurement

Commodity

Trading

3

• Sales and marketing

• Procurement

• Financial and transaction

structuring

• Intelligence

Capital

Advisory

4

• Origination

• Financial advisory

• Due diligence

• Transaction project

management


The Beijing Axis as Value Chain Partner

Client Value Chain and Our Interventions

Strategy, Planning and Management

Inbound

Supply Chain

Core Operations and

Business Processes

Outbound

Supply Chain

HR Finance IT Infrastructure

Strategy formulation, implementation

support and strategic intelligence 1 Sales, distribution and

brand management in

new markets

1

Marketing of

commodities and

raw materials 3

Procurement for

CAPEX projects,

CAPEX replenishment,

and MRO

2

Procurement of

strategic raw

materials 3

Capital advisory on buy-side, sell-side,

funding and project co-investment 1

Investors

Investments /

Acquisition Targets

Internal Environment

External Environment Other Stakeholders Competitors

Customers Suppliers

Our Business and Services

Strategy and

Management Consulting

1

• Research and analytics

• Strategy formulation

• Strategy implementation

• International sales, distribution

and brand management

Procurement

Services

2

• Procurement advisory

• Strategic sourcing

• Transactional procurement

• Outsourced and managed

procurement

Commodity

Trading

3

• Sales and marketing

• Procurement

• Financial and transaction

structuring

• Intelligence

Capital

Advisory

4

• Origination

• Financial advisory

• Due diligence

• Transaction project

management


Format


The Beijing Axis Publications

DOING BUSINESS IN

CHINA:

The System and The

Strategies

Written by Kobus van der

Wath & Commissioned by

China Ministry of Foreign

Affairs

INVEST IN SOUTH

AFRICA

Written by The Beijing

Axis & Commissioned by

China Ministry of

Commerce

THE CHINA COMPASS

By The Beijing Axis

THE CHINA ANALYST

By The Beijing Axis

A comprehensive guide to

conducting business in China

A knowledge tool by TBA for

executives with a China agenda

A detailed manual for Chinese

companies entering and investing

in South Africa

A dynamic presentation of the latest

macroeconomic data for a wide

range of indicators, for China as well

as the other major world economies


TBA China Sourcing Blog @ www.chinasourcingblog.org

An Up-to-date Information Platform for Procurement and Trade Industries in China


Disclaimer

This document is issued by The Beijing Axis. While all reasonable care has been taken in the preparation of this

document, no responsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only, and solely for private circulation. The information contained here has been compiled from sources believed to be reliable. While every effort has been made to ensure that the information is correct and that the views are accurate, The Beijing Axis cannot be held responsible for any loss, irrespective of how it may arise. In addition, this document does not

constitute any offer, recommendation or solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. All concerned are advised to form their own independent judgement with respect to any matter contained in this document.

www.thebeijingaxis.com COPYRIGHT© The Beijing Axis Ltd. 2014. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of The Beijing Axis.

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The China Compass - Figures, Forecast and Analysis - January 2014

Business

Transcript of The China Compass - Figures, Forecast and Analysis - January 2014