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

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The China Compass is a dynamic presentation of the latest macroeconomic data for a wide range of indicators for China, as well as other major world economies. It presents a comprehensive picture of the ever-changing and evolving Chinese landscape and contains up-to-date statistics, topical themes and insights. It is presented in a reader-friendly format as a useful desk reference for executives with a China agenda.

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

  1. 1. International Advisory and Procurement The China Compass Figures, Forecast and Analysis January 2014 www.thebeijingaxis.com
  2. 2. International Advisory and Procurement 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 Through a unique combination of complementary services that span strategic intelligence and planning support, transaction support and outsourced/managed services, we partner with clients over the long term in key areas of their value chain. Our clients are some of the world’s leading companies across various sectors and industries. Strategy Beijing Singapore Perth Mumbai Procurement Commodities Capital Johannesburg www.thebeijingaxis.com
  3. 3. Agenda 1. 2. 3. 4. 5. 6. Foreword What‟s New: China‟s Ongoing Transformation China‟s Economic Indicators International Comparison Conclusions and Implications About The Beijing Axis The Beijing Axis 2
  4. 4. 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 kobus@thebeijingaxis.com The Beijing Axis 3
  5. 5. 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) A bubble this size represents a GDP of USD 1,000 bn 10% 8% 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 2,450 Africa 6% 25,771 Other Asia 3,627 South America 5,136 Forecast world average GDP growth until 2015: 3.9% Asia-Pacific 4% BRICS 2015F GDP (USD bn) 2012 Growth Rate (%) China Brazil 2,800 0.9% 2,544 3.4% India 0% 7.8% Russia 2% 11,020 2,308 5.0% 411 2.5% 2012 GDP Per Capita (USD) South Africa 0% 5% North America 6,091 20,452 11,340 Developed economies are expected to 14,037 continue to lose share 1,489 in the world‟s GDP over the coming years 7,508 10% Note: Translucent bubbles refer to 2012 data. Solid color bubbles refer to forecasted 2015 data. Source: IMF; The Beijing Axis Analysis 15% 22,426 Europe 20% 25% 30% Share of World’s GDP 35% The Beijing Axis 4
  6. 6. 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 GDP per Capita (USD, 2012) 60,000 A bubble this size represents a GDP of USD 200 bn GDP per capita: USD 67,035 Australia Japan Singapore 50,000 World Average: 3.1% 40,000 Brunei Developed Asia Hong Kong 30,000 S. Korea China is the largest economy in the region Taiwan 20,000 Philippines Malaysia 10,000 Thailand Nepal Source: IMF; World Bank; The Beijing Axis Analysis 2 Sri Lanka Indonesia PNG 4 Laos Mongolia Bhutan Vietnam Pakistan 0 0 India China Myanmar Cambodia Bangladesh 6 Timor-Leste 8 10 12 GDP Growth Rate (2001-2012) The Beijing Axis 5
  7. 7. 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 100% 90% USD 72 tn 60% 50% 40% 30% Others Africa Canada Italy Russia Brazil U.K. France Germany Japan China 20% 10% USD 27 tn USD 8.2 tn USD 8.2 tn USD 8.2 tn Northwest 80% 70% USD 72 tn US Other Developed Countries Other Developing Countries Govt. Consumption Expenditure Northeast Others Southwest Tertiary Industry Private Consumption Expenditure North Developed Asia1 Africa Other Developing Asia Indonesia India Other Developing Countries Africa Hunan Hubei Sichuan Liaoning Hebei Henan South Secondary Industry Zhejiang Shandong China Jiangsu China China GDP 2012 East 0% 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 Gross Capital Formation Primary Industry Guangdong World GDP in 2012 World GDP in 2012 GDP in Developing Countries 2012 USD 8.2 tn Net Exports China GDP 2012 China GDP 2012 China GDP 2012 The Beijing Axis 6
  8. 8. Snapshot of China‟s key economic indicators from 2012 through to the third quarter of 2013 Selected Economic Indicators - China (Q1 2012 - Q3 2013) 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* 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 The Beijing Axis 7
  9. 9. Various factors identify China as one of the world‟s most significant and unique countries 700,000 30,000 12,000 363 240 160 90 80 79 75 70 55 50 38 30 21 6.8 2 1.1 engineers graduate annually from schools in China Chinese MBA students graduated in 2012; the number was 0 within China in 1998 USD is the average cost of a license plate in Shanghai coal-fired power plants were planned to be built in China as of 2012 million vehicles are registered in China; more than half are passenger cars cities in China have populations that exceed 1 million; there are 9 in the US and just 2 in the UK percent of PCs in the global market in 2012 were produced in China percent of the world‟s zippers are produced in the factories of Qiaotou city in Zhejiang Province Chinese companies are among the Fortune Global 500 in 2012; the number was only 13 in 2002 percent of the world‟s toys are made in more than 10,000 toy factories across China percent of the world‟s pirated goods come from China new airports will be built over the next five years in China, helping to bring the total number to 244 by 2020 percent of the world‟s pork is eaten in China children are born every minute in China; 54,720 are born every day and 19,986,480 are born every year percent of young Chinese adults depend on their parents financially nuclear plants were scheduled for construction as of the end of 2012; 9 are currently under construction million students graduated from Chinese universities in 2012; the number in 1977 was 270,000 percent of China‟s population consumed 1/3 of global luxury goods in 2012 bn mobile phones were in circulation in China in 2012 Source: Various; The Beijing Axis Analysis The Beijing Axis 8
  10. 10. Setting the scene • 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 promarket 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‟ Source: The Beijing Axis Analysis The Beijing Axis 9
  11. 11. Agenda 1. 2. 3. 4. 5. 6. Foreword What’s New: China’s Ongoing Transformation - Political Transformation - Economic Transformation - Social Transformation China‟s Economic Indicators International Comparison Conclusions and Implications About The Beijing Axis The Beijing Axis 10
  12. 12. After the once-in-a-decade leadership change, China‟s new government is being led by President Xi Jinping and Premier Li Keqiang Current Composition of the Chinese Government (2013) 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 The highest political body in China President: Xi Jinping Vice President: Li Yuanchao The NPC is the de facto legislative body, but it also interprets the law Chinese People’s Political Consultative Conference (CPPCC) Chairman: Yu Zhengsheng National People’s Congress Standing Committee Chairman: Zhang Dejiang Supreme People’s Court Zhou Qiang The State Council The main political advisory body for the government Supreme People’s Procuratorate Cao Jianming Central Military Commission Chairman: Xi Jinping The command and control of the Chinese armed forces Vice Premiers Zhao Gaoli Vice Premier Liu Yandong Vice Premier Li Keqiang Premier Wang Yang Vice Premier Ma Kai Vice Premier The State Council is the chief administrative authority State Councillors Chang Wanquan Yang Jiechi Yang Jing* Guo Shengkun Wang Yong * Holds the concurrent position of Secretary-General of the State Council 25 Ministries and Commissions Under the State Council Details on next page Source: PRC government website; US-China Business Council; People‟s Daily Online; The Beijing Axis Analysis The Beijing Axis 12
  13. 13. 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 President Premier Xi Jinping Li Keqiang General Secretary of the CPC Central Committee; Chairman of the CPC Central Military Commission; President of the People‟s Republic of China 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 NPC Chairman CPPCC Chairman Secretary of CCCPC Secretariat Zhang Dejiang Yu Zhengsheng Liu Yunshan Wang Qishan Zhang Gaoli Member of the Standing Committee of the Political Bureau of the CPC Central Committee; Chairman of the NPC Standing Committee Member of the Standing Committee of the Political Bureau of the CPC Central Committee; Chairman of the CPPCC National Committee Member of the Standing Committee of the Political Bureau of the CPC Central Committee; First Secretary of the Secretariat of the CPC Central Committee Member of the Standing Committee of the Political Bureau of the CPC Central Committee; Secretary of Central Commission for Discipline Inspection Member of the Standing Committee of the Political Bureau of the CPC Central Committee; Vice Premier of the State Council Discipline Chief Executive Vice Premier 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 The Beijing Axis Source: Various; The Beijing Axis Analysis 13
  14. 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) 1 2 3 4 Encourage domestic consumption Balance social equity/ improve social safety net Industrial consolidation/ upgrading • Change mode of economic growth from investment- and exportdriven to consumptiondriven • Improve medical security, social insurance, education and housing security • Improve structure of key industries (equipment manufacturing, shipping manufacturing, automobiles, metallurgy, building materials, petrochemical products) • Automobiles, household appliances, consumer electronics, fast food sectors will develop rapidly • Encourage private investment • Increase household income and reduce wage inequality • Adjust income distribution • 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 Source: The Beijing Axis Analysis 5 Sustainable development and energy efficiency Sustainable urbanisation/ modernisation of rural infrastructure and agriculture • Develop a circular economy • Promote small cities‟ development • Control environmental pollution • Transfer the rural population to urban areas • Improve the ecological environment • Improve water conservancy and disaster prevention • Shut down lower-end polluting producers • Supportive policies for alternative energy • Strengthen infrastructure construction (transportation, communication, power, heating power, gas, water supply and drainage) 6 Balance regional development • Re-balance regional development and support economic growth • Revitalise northeast regions • Cultivate central region • Develop western regions by expanding infrastructure construction and promoting the ChengduChongqing Economic Zone as the region‟s key economic centre • Emphasis on workrelated safety The Beijing Axis 14
  15. 15. 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 Previous Leadership (2002-2012) New Leadership (2013-Present)   Structural Reforms Avoid hard-landing, baseline of acceptable GDP growth was set at 8% • More attention to income disparity Investment regarded as the main approach to stimulate the economy • Shift from double-digit growth • More amenable to slowdown, with GDP growth of about 7% • Investment still an important tool of growth, but desire to reduce reliance • Attempts to control high property prices   Pursuing a more market-oriented economy The new leadership is expected to be more liberal than the last in this area More emphasis on sustainable development Key Focus of Leadership Source: Various; The Beijing Axis Analysis The Beijing Axis 15
  16. 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 Policy Shift by New Leadership to Reduce Gov’t Intervention Gov’t Departments Limited consolidation of gov‟t departments vs. Increasing consolidation of departments and reduction of regulatory overlaps • 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 Approval Process Long, centralised and cumbersome approval processes vs. Reduction of approval times and decentralised decisionmaking • Ongoing streamlining and localisation of various administrative procedures • By September 2013, 242 administrative approval authorities had been abolished or decentralised to local authorities Elements 1 2 3 Level of Gov’t Market Intervention Source: The Beijing Axis Analysis Intensive government involvement in the economy vs. Increasing role of private companies in various sectors Despite greater liberalisation, some industries such as aviation have seen a retreat by the private sector and increased dominance by SOEs Selected Examples • 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 The Beijing Axis 16
  17. 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 Elements 1 Selected Policy Outputs from Previous Leadership Environmental Protection Focus on penalties and restrictions to curb pollution Overcapacity Focus on penalties including shutdowns of companies with overcapacity Growth Stimulation Focus on investment to stimulate economy Local Gov’t Debt Investigations were undertaken but limited action taken 2 Policy Shift by New Leadership to Increase Sustainability vs. Increase expenditure on curbing environmental pollution vs. More market-oriented approach vs. Less reliant on large capital investments to spur growth 3 4 Source: The Beijing Axis Analysis Hints of stricter investigation vs. procedures and specific actions are outlined Selected Examples • 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 • 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 • 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 • 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 17
  18. 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) Guiding thoughts for reform Basic economic system Reaffirm President‟s Xi Jinping‟s “Chinese Dream” theme 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 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 Source: Xinhua; U.S.-China Economic and Security Review Commission; The Beijing Axis Analysis The Beijing Axis 18
  19. 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) 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 Cultural system Social services Tackle corruption by reporting cases to higher-level discipline inspection commissions and stationing the Central Discipline Inspection Commission at all central organisations 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 Build up a modern public cultural service system; reform SOEs in the cultural sector 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 Party leadership over reform Establish a Leading Small Group for Comprehensive Deepening of Reform; get Party members in line with the new reform agenda Source: Xinhua; U.S.-China Economic and Security Review Commission; The Beijing Axis Analysis The Beijing Axis 19
  20. 20. Agenda 1. 2. 3. 4. 5. 6. Foreword What’s New: China’s Ongoing Transformation - Political Transformation - Economic Transformation - Social Transformation China‟s Economic Indicators International Comparison Conclusions and Implications About The Beijing Axis The Beijing Axis 20
  21. 21. The Beijing Axis 21
  22. 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 • Elements that are key drivers in China‟s economy in the past and will retain a prominent role with the new leadership going forward 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, energyintensive industries • Strong manufacturing in coastal regions 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 Emerging Drivers Growth via increasing private consumption Growing service sector Value-added manufacturing and innovation Growth in China‟s inland provinces Details on next slides Source: The Beijing Axis Analysis The Beijing Axis 22
  23. 23. Stable Driver 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 Selected Economic and Political Reforms in China (1978-2013) 1982: China implemented economic reform in rural areas 1978: Reform and opening up initiated by Deng Xiaoping 1978 1979: Established SEZs in Shenzhen, Zhuhai, Xiamen and Shantou 1986: Started stateowned enterprise reform 1983 1988 1984: Proposed planned economy 1987: Raised „one central task, two basic points‟. Economic development as the central task supported by reform and opening up 1996: Achieved significant progress in foreign exchange management system reform 1992: Deng Xiaoping's southern tour speech. Established goals on socialist market economic system reform 1993 1993: Tax-sharing reform. Raised goals on financial reform 2012: Hu Jintao raised points on deepening economic reform to accelerate the transformation of development mode 2001: China joins the WTO 1998 1999: Raised western development strategy 1994: Unification of exchange rates. Started commercialisation of urban housing Note: SAR - Special Administrative Region; SEZ - Special Economic Zone; FTA - Free Trade Area Source: The Beijing Axis Analysis 2002: Established the goal of building a moderately prosperous society at 16th Party Congress 2005: Adoption of a flexible RMB exchange rate 2003 2004: Abolition of agricultural tax regulations 2013: Blueprint for social and economic change over the next decade released 2008: China‟s four trillion bailout plan during US financial crisis 2008 2013 2010: „New Ten Terms‟ was published by State Council notice about resolutely curbing housing prices in some cities 2007: Promulgated Property Law 2013: The State Council approved the establishment of the China (Shanghai) Pilot Free Trade Zone The Beijing Axis 23
  24. 24. Stable Driver 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 (%, 2002-2020F) 60 2012 world average urbanisation rate was estimated at 55% 60 50 53 China‟s urbanisation rate exceeded 50% for the first time in 2011 40 30 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 20 10 0 02 03 04 05 Source: National Bureau of Statistics of China; The Beijing Axis Analysis 06 07 08 09 10 11 12 20F The Beijing Axis 24
  25. 25. Stable Driver 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) 2,500 China overtook Bubble Size: GDP = USD 1,000 bn Germany to become the world‟s largest exporter in 2010 2,000 A large economy, large exports and high exports to GDP ratio – however, the future growth model will not depend on exports China Germany US 1,500 China in 2002 1,000 Japan India 500 Brazil 0 France 10 China in 2007 2002 2007 2012 Total Exports (2012, USD bn) 1 2 3 4 5 6 7 8 9 10 United States Germany Japan China France UK Italy Canada Netherlands Belgium Germany China United States Japan France Italy Netherlands UK Belgium Canada China United States Germany Japan France Netherlands South Korea Russia UK Canada 2,049 1,546 1,416 799 557 555 548 525 481 453 South Korea Russia UK Netherlands Mexico Australia Spain 0 Rank 20 (500) Source: World Bank; IMF; UN Comtrade; The Beijing Axis Analysis Canada 30 Switzerland 40 Thailand 50 60 Malaysia 70 80 90 Export/GDP (%) The Beijing Axis 25
  26. 26. Fading Driver Consumption has replaced capital formation as the largest contributor to GDP growth while the growth of net exports has remained low Breakdown of China’s GDP Growth (%, 2002-2012) 16 In 2011, consumption surpassed investment for the first time in 10 years, once again becoming the largest contributor to China's GDP growth 12 8 4 0 -4 02 03 04 Final Consumption Expenditure Source: National Bureau of Statistics of China; The Beijing Axis Analysis 05 06 07 Gross Capital Formaton 08 09 10 Net Exports of Goods and Services 11 12 GDP Growth The Beijing Axis 26
  27. 27. Fading Driver 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 Average Annual Wage of Urban Workers in China (USD, 2002-2012) 8,000 Average Annual Growth Rate of Hourly Manufacturing Wage Across China (2000-2012) 7,424 6,000 Henan (18%) 4,000 17.4% Shanghai (18%) 10-15% per annum 15-17% per annum Guangdong (14%) >17% per annum 2,000 1,499 Labour Cost in China (2000 vs. 2012) Province Hourly Cost Hourly Cost Annual Cost* for 1,000 (USD, 2000) (USD, 2012) Workers (USD mn, 2000) Annual Cost* for 1,000 Workers (USD mn, 2012) Shanghai 0 02 03 04 05 06 07 08 09 10 11 12 X% The overall impact on suppliers‟ manufacturing cost is substantial Represents CAGR for the period 2002-2012 Note*: Annual cost is based on a workload of 2,000 hours per year for each worker. Source: National Bureau of Statistics of China; The Beijing Axis Analysis 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 The Beijing Axis 27
  28. 28. Fading Driver 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) Private Consumption Expenditure Gross Fixed Capital Formation 30 Capital formation is no longer the largest driver of China‟s economic growth 25 20 15 10 5 0 02 03 04 Note: Data is calculated at current prices. Source: National Bureau of Statistics of China; The Beijing Axis Analysis 05 06 07 08 09 10 11 12 The Beijing Axis 28
  29. 29. Fading Driver As wage inflation continues to rise in coastal regions, manufacturers are shifting production to emerging inland industrial clusters China’s Manufacturing Clusters (2012) Central Industry Clusters: Automotive, Industrial Machinery, Textiles, Electronics, Chemicals Important Cities: Changsha, Wuhan, Zhengzhou Total Exports (2012): USD 37 bn South-West Industry Clusters: Automotive, Industrial Machinery, Pharmaceuticals, Medical Products, Chemicals Important Cities: Chongqing, Chengdu Total Exports (2012): USD 22 bn 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 Yangtze River Delta Pearl River Delta Industry Clusters: Textiles, Automobiles, Apparel, Foodstuff, Consumer Electronics, Petrochemicals, Industrial Equipment, Electrical Equipment Important Cities: Shenzhen, Zhuhai, Jiangmen, Foshan, Dongguan, Guangzhou Total Exports (2012): USD 438 bn 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 Industry Clusters: Automobiles, Shipping, Aeronautics, Consumer Electronics, Textiles, Pharmaceuticals, Chemicals, Industrial Machinery, Electrical Equipment Important Cities: Shanghai, Nanjing, Yangzhou, Suzhou, Hangzhou, Ningbo, Shaoxing, Wenzhou Total Exports (2012): USD 590 bn The Beijing Axis 29
  30. 30. Emerging Driver China‟s inland provinces have been growing faster than coastal areas and will continue to be important engines of China‟s growth Nominal GDP Per Capita (USD ’000, 1982-2012) Annual Nominal GDP Growth (%, 1982-2012) Coastal and Developed Eastern Provinces Inland Provinces Coastal and Developed Eastern Provinces Inland Provinces 10 30 8 6 Inland now outgrowing coastal 25 Inland provinces are about five years behind coastal provinces, meaning there is still plenty of room to grow 40% gap 20 15 4 10 2 5 0 Coastal outgrew inland 0 1982 1987 1992 1997 2002 2007 2012 1982 1987 1992 1997 2002 2007 2012 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. The Beijing Axis Source: National Bureau of Statistics of China; The Beijing Axis Analysis 30
  31. 31. Emerging Driver Service sector companies now employ more people in China than manufacturers as the country evolves from a manufacturing to a service-based economy China’s GDP by Sector (%, 2000-2013E) China’s Employment by Sector (%, 2000-2012) 100% Primary Secondary Tertiary 60% 80% 50% 60% Service sector companies now employ more people in China than manufacturers 40% 40% 30% 20% Ten year 20% CAGR: 1.2% 10% 0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13E Service sector Industrial sector Agricultural sector Source: National Bureau of Statistics of China; China Statistical Yearbook; The Beijing Axis Analysis 0% 00 01 02 03 04 05 06 07 08 09 10 11 12 The Beijing Axis 31
  32. 32. Emerging Driver 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 Total Number of Patents Awarded to Selected Economies (’000, 2002 vs. 2012) CAGR (%) Share of Patents Held Globally by China for Selected Items (%, 2012) % of China’s Total Patents Digital Communication 26 2 Telecom 11 6 Electrical Machinery 5 1 Computer Technology 5 2 Environmental Technology 1 35 China Chinese government has set a goal of achieving 200,000 patents per year by 2015 US Japan Germany Majority of patents owned by domestic Chinese parties are utility model patents and industrial design patents UK Brazil 19 0 50 100 2002 150 200 Pharmaceuticals 22 India Chinese inventors filed 18,627 applications internationally in 2012, just 228 applications fewer than third-placed Germany, and behind the US and Japan Optics 250 2012 Source: World Intellectual Property Organisation; China State Intellectual Property Office; SIPO; MH&M; The Beijing Axis Analysis 0 5 10 15 5 2 20 The Beijing Axis 32
  33. 33. Emerging Driver Consequently, China‟s manufacturing export structure has shifted from labourintensive goods to high-value manufactured goods Composition of China’s Exports* (USD bn, 2001 vs. 2012) China’s Share of Global Exports for Select Products (%, 2002 vs. 2011) CAGR 2,000 23.5% 13.6% 21.0% 20.3% 12.6% 21.5% 9.9% Machinery and Electrical Equipment Foodstuffs Miscellaneous Manufactured Articles Products Classified by Material Mineral Items Chemical Products Others 1,500 Textiles and garments exports grew from 46.1 bn to 246 bn, representing a CAGR of 16.4% 26% 500 2001 X% 2012 Represents CAGR for the period 2001-2012 Note*: SITC Classification System Source: UN Comtrade; EIU; ITC; The Beijing Axis Analysis Derricks and Cranes Cruise/Cargo Ships, Barges Refrigerators, Freezers 12 15 22 22 13 Construction and Mining Parts Transmission Shafts/Cranks China‟s global exports presence in mid- and high-value products is considerably larger today than it was a decade ago Centrifuges 36% 33% 0 Increasing exports share 15 Silicon Wafers 20.4% Motorcycles Optical Fibres 47% 1,000 CAGR (%) 14 13 22 0 10 20 2002 30 40 50 2011 The Beijing Axis 33
  34. 34. Emerging Driver 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 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 • 6 R&D/innovation center No. of Econ. Zones: West China 1995 9 2010 158 13 1 No. of Econ. Zones: Central China 1995 2010 618 5 Central China Source: BrainNet EAC; The Beijing Axis Analysis 11 Industrial focus: • Steel • Automotive • Ship building • Chemicals • Machine building • Aerospace East China West China No. of high-tech industrial zones North China 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) Industrial focus: • Automotive • Machine building • Chemicals • Plastic processing No. of Econ. Zones: Coastal area 15 1995 South China Industrial focus • Automotive • Plastic processing • Machine building • Electrical industry 2010 808 27 Coastal Area The Beijing Axis 34
  35. 35. Agenda 1. 2. 3. 4. 5. 6. Foreword What’s New: China’s Ongoing Transformation - Political Transformation - Economic Transformation - Social Transformation China‟s Economic Indicators International Comparison Conclusions and Implications About The Beijing Axis The Beijing Axis 35
  36. 36. WIP
  37. 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 Selected Components Highlighting China’s Social Transformation 1 2 Changing Family Structure • The One Child Policy has led to the „1-2-4‟ phenomenon, with 1 child having to support 2 parents and 4 grandparents Low Birth Rate and Low Death Rate Future Decline in workforce 4 Urbanisation Past Other Social Changes Large Rural and Agricultural Population Future Increased Urban and Non-farm Population Consumption Source: The Beijing Axis Analysis Demographic Dividend Past • Cultural preference for sons will result in a pool of 24 million unmarried men by 2020 3 Declining Working Age Population Tertiary Education Internet Usage/ Online Shopping The Beijing Axis 37
  38. 38. 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) 2013 Age Male 2050 Female Age 80+ 75-79 70-74 70-74 65-69 65-69 60-64 60-64 55-59 55-59 50-54 50-54 45-49 45-49 40-44 40-44 35-39 35-39 30-34 30-34 25-29 25-29 20-24 20-24 15-19 15-19 10-14 10-14 5-9 5-9 0-4 Female 80+ 75-79 Male 0-4 60m 50m 40m 30m 20m 10m Source: UN Population Division; The Beijing Axis Analysis 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 60m 50m 40m 30m 20m 10m 0 10m 20m 30m 40m 50m 60m The Beijing Axis 38
  39. 39. 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 70 60 50 20 10.5 10 Projected decline due to China‟s One Child Policy – can potentially be reversed with recent easing of the One Child Policy -10 Proposed Working Population (15-62) 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 -16.6 Russia UK Current Working Population (15-59) -8.7 -30 India 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015F2020F2025F2030F 2.7 0 -20 450 5.9 Canada Such a demographic dividend has kept wage rates low and saving rates high 7.7 Dependency ratio is currently low for China due to a large working-age population. This will increase rapidly as the population ages -20.1 -21.0 Germany 24.4 US 750 29.0 Japan 30 550 36 40 850 650 Dependency Ratio (2012)* Brazil 950 The retirement age in China currently is 60 for men and 55 for female - expected to be pushed up by at least 3 years Mexico China‟s Working-age Population (mn) 1,050 Projected Working-age Population Growth Across Selected Countries (%, 2013F-2038F) China China’s Projected Working-age Population (mn, 1970-2030F) The Beijing Axis 39
  40. 40. 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 China’s Proportion of Urban Residents at Year-end (%, 2002-2050F) 100 60 40 3,500 China‟s urban population will exceed 1 bn residents 80 Ranked 1st with 17% of world‟s urban population Urban population was greater than rural for the first time China’s Annual Retail Sales (USD bn, 2000-2012) 80 68 61 51 53 48 50 46 47 42 43 44 39 41 Retail Sales (Urban) Retail Sales (Rural) In 2012, urban retail sales accounted for 87% of China‟s total 3,000 2,500 2,000 1,500 1,000 20 In 2003, urban retail sales accounted for 74% of China‟s total 500 0 02 03 04 05 06 07 08 09 10* 11 12 20F30F50F 0 00 01 02 03 04 05 06 07 08 09 10 11 12 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 The Beijing Axis 40
  41. 41. 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 Breakdown of China’s Urban Households by Economic Class* (%, 2002-2022F) Poor 100% 1 2 90% 7 90 80% Mass Middle Class Upper Middle Class 3 14 Affluent 9 53 54 70% 60% 50% 40% 30% 20% 22 29 16 10% 0% 2002 Total Households: 165 mn 2012 2022F 256 mn 357 mn 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. The Beijing Axis Source: UN; McKinsey Quarterly; The Beijing Axis Analysis 41
  42. 42. The expanding middle class will not be limited to big cities. Lower tier cities and cities in inland China will witness the fastest increases Share of Middle Class by Geographical Location (%, 2002 vs. 2022F) Share of Middle Class by Type of City* (%, 2002 vs. 2022F) 100% 100% 80% 3 15 8 80% 31 61 60% 60% 87 40% 20% 0% 39 13 2002 Inland China While the majority of China‟s middle class will reside along the coast, inland areas will witness the fastest growth rates 42 40% 20% Middle-class growth rates will be far higher in China‟s smaller Tier 3 and Tier 4 cities 45 40 16 0% 2022F Coastal China 2002 Tier 1 2022F Tier 2 Tier 3 Tier 4 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. The Beijing Axis Source: UN; McKinsey Quarterly; The Beijing Axis Analysis 42
  43. 43. 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 Number of Newly Enrolled and Successfully Graduated Students of Higher Education (mn persons, 2000-2012) Newly Enrolled Number of Newly Enrolled and Successfully Graduated Postgraduate Students (’000 persons, 2000-2012) Newly Enrolled Successfully Graduated 8 Successfully Graduated 700 7 7 6 6 590 600 486 500 5 400 4 3 300 2 200 2 1 1 100 0 128 59 0 00 01 02 03 04 05 06 07 08 Source: National Bureau of Statistics of China; The Beijing Axis Analysis 09 10 11 12 00 01 02 03 04 05 06 07 08 09 10 11 12 The Beijing Axis 43
  44. 44. 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 Number of Internet Users and Online Shopers1 (mn persons, 2002-2012) Internet Users Online Shopers 600 500 400 300 200 100 0 02 03 04 05 06 07 08 09 10 11 12 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) 0 Instant Messaging Search Engines Online News Online Music Blog/Personal Space Online Video Online Game Weibo Social Networking Sites Online Shopping Online Literature E-mail Online Payment Online Banking Forum/BBS Travel Reservation Group Buying Online Stock 20 40 60 80 2012 100 2007 The Beijing Axis 44
  45. 45. Agenda 1. 2. 3. 4. 5. 6. Foreword What‟s New: China‟s Ongoing Transformation China’s Economic Indicators - Selected Macroeconomic Indicators Domestic Consumption and Foreign Trade Domestic and Foreign Investment Financial Indicators Social Indicators International Comparison Conclusions and Implications About The Beijing Axis The Beijing Axis 45
  46. 46. 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 China’s Quarterly Y-o-Y GDP Growth Rate (%, 2009Q4 2013F) 15 Contribution to China’s GDP (%, 1998-2012) Net Exports of Goods and Services Gross Capital Formation Final Consumption Expenditure 140 2013 y-o-y GDP growth forecast: 7.6% 3-year (2009-2011) average: 9.4% Policy easing to provide room for growth moderation 10 Effect from stimulus package in 2009 120 100 80 Gross capital formation remains the largest contributor 60 5 40 2012 y-o-y GDP: 7.8% Government stimulus package (USD 586 bn) 20 0 2011 y-o-y GDP: 9.3% 0 Q1 2009 Q1 2010 Q1 2011 Falling net exports contribution -20 Q1 Source: National Bureau of Statistics of China; The Beijing Axis Analysis 2012 Q1 -40 2013 98 00 02 04 06 08 10 12 The Beijing Axis 47
  47. 47. 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) 16 Past periods of overheating 12 Overheating concerns 7-10% GDP growth band Soft landing amid global uncertainty 7-8% GDP growth band 8 4 0 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 Source: IMF; The Beijing Axis Analysis The Beijing Axis 48
  48. 48. 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 GDP by Province (USD bn, 2012) 0 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 Henan Hebei Liaoning Sichuan Hubei Hunan Shanghai Fujian Beijing Anhui Inner Mongolia Shaanxi Heilongjiang Guangxi Jiangxi Tianjin Shanxi Jilin Chongqing Yunnan Xinjiang Guizhou Gansu Hainan Ningxia Qinghai Tibet 250 Geographical Distribution of China’s GDP (2012) 500 750 1,000 Gansu Top 5 provinces‟ GDP equate to 39% of total GDP Highlighted on the map on right Note: Also includes the centrally-administered municipalities of Beijing, Tianjin, Chongqing and Shanghai Source: National Bureau of Statistics of China; The Beijing Axis Analysis Ningxia 27 30 Qinghai 29 2 4 31 Shandong Henan Jiangsu Zhejiang 3 5 Tibet 1 Guangdong 28 Top 5 Provinces by GDP Bottom 5 Provinces by GDP Hainan The Beijing Axis 49
  49. 49. Tianjin, Beijing and Shanghai, three of the centrally-administered municipalities, each have a per capita income greater than USD 12,000 GDP Per Capita by Province (USD, 2012) 0 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 Tianjin Beijing Shanghai Jiangsu Inner Mongolia Zhejiang Liaoning Guangdong Fujian Shandong Jilin Chongqing Hubei Shaanxi Hebei Ningxia Heilongjiang Xinjiang Shanxi Hunan Qinghai Hainan Henan Sichuan Jiangxi Anhui Guangxi Tibet Yunnan Gansu Guizhou 2,000 4,000 6,000 Provinces With Highest and Lowest GDP Per Capita in China (2012) 8,000 10,000 12,000 14,000 16,000 Inner Mongolia 5 2 Gansu China‟s GDP per capita reached USD 6,091 in 2012 Highlighted on the map on right Note: Also includes the centrally-administered municipalities of Beijing, Tianjin, Chongqing and Shanghai Source: Various; The Beijing Axis Analysis 28 Beijing 1 Tianjin 30 Tibet 4 3 31 Yunnan 29 Jiangsu Shanghai Guizhou Guangxi 27 Top 5 Provinces by GDP per capita Bottom 5 Provinces by GDP per capita The Beijing Axis 50
  50. 50. 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 GDP Growth Rate by Province (%, 2012) 0 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 5 10 China’s Fastest and Slowest Growing Provinces (2012) 15 Tianjin Chongqing Guizhou Yunnan Shaanxi Sichuan Gansu Qinghai Anhui Jilin Xinjiang Tibet Inner Mongolia Ningxia Fujian Hubei Hunan Guangxi Jiangxi Shanxi Henan Jiangsu Heilongjiang Shandong Hebei Liaoning Hainan Guangdong Zhejiang Beijing Shanghai Highlighted on the map on right Note: Also includes the centrally-administered municipalities of Beijing, Tianjin, Chongqing and Shanghai Source: National Bureau of Statistics of China; Beijing Axis Analysis 30 Shaanxi 1 5 Chongqing 2 Guizhou 3 Yunnan Beijing Tianjin 31 29 Shanghai Zhejiang 4 28 27 Top 5 Provinces by GDP growth Bottom 5 Provinces by GDP growth Guangdong Hainan The Beijing Axis 51
  51. 51. 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) Primary Sector CAGR (1997-2013F) - 11.0% Secondary Sector CAGR (1997-2013F) - 15.1% Tertiary Sector CAGR (1997-2013F) - 17.5% 11 10 9 0.9 8 7 6 4.3 5 4 3 2 4.3 1 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 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. The Beijing Axis Source: National Bureau of Statistics of China; The Beijing Axis Analysis 52
  52. 52. 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) 4,000 Industrial Sector Construction Sector Value-added Breakdown of Tertiary Sector (USD bn, 1997-2012) 4,000 3,500 3,500 3,000 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 Others Real Estate Financial Intermediation Hostels and Catering Services Wholesale and Retail Trades Transport, Storage and Post 0 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: National Bureau of Statistics of China; The Beijing Axis Analysis 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 The Beijing Axis 53
  53. 53. 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 Contribution to the Growth of GDP* (percentage points, 1997-H1 2013) Net Exports of Goods and Services Gross Capital Formation Final Consumption Expenditure (household + gov't) 10 8 6 4 2 0 -2 -4 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 H1 13 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% The Beijing Axis Source: China Statistical Yearbook; The Beijing Axis Analysis 54
  54. 54. 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) A bubble this size represents 1% of total Provinces in central and western China are very dependent on capital formation % of Provincial GDP 100 Tibet Qinghai Ningxia Yunnan 80 Xinjiang Hainan 60 Guangxi Tianjin Shaanxi Hunan Fujian Jilin Shanxi Guizhou Gansu Heilongjiang Chongqing Jiangxi Beijing Shanghai 40 Inner Mongolia Hubei Anhui Northern Northeastern Eastern Central & Southern Southwestern Northwestern Liaoning Henan Shandong Hebei Jiangsu Sichuan Zhejiang Guangdong East Asia & Pacific (all income levels) 28.1% 2011 20 0 50 100 150 Source: World Bank; China Statistical Yearbook; The Beijing Axis Analysis 200 250 300 350 400 450 Total Capital Formation (USD bn) The Beijing Axis 55
  55. 55. 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) A bubble this size represents 1% of total % of Provincial GDP 80 70 38% of China‟s total final consumption is centered in just four coastal provinces Tibet Guizhou 60 Northern Northeastern Eastern Central & Southern Southwestern Northwestern Yunnan Beijing Shanghai Heilongjiang Guangxi Xinjiang Jiangxi Sichuan Anhui Hunan Chongqing Shanxi Shaanxi Jilin Henan Tianjin Hebei Hubei Liaoning Inner Mongolia Fujian Gansu Qinghai 50Ningxia Hainan 40 30 Guangdong Zhejiang Shandong Jiangsu Total Final Consumption (USD bn) 20 0 50 100 150 200 250 Note*: Final consumption includes both household consumption expenditure and government consumption expenditure Source: China Statistical Yearbook; The Beijing Axis Analysis 300 350 400 450 500 The Beijing Axis 56
  56. 56. 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) USD bn Industrial Value Added Output 3,500 % Growth Rate (rhs) 45 2,800 36 2,100 27 1,400 WTO accession on 11 December 2001 18 700 9 0 0 00 02 Source: National Bureau of Statistics of China; The Beijing Axis Analysis 04 06 08 10 12 The Beijing Axis 57
  57. 57. 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) 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 120 115 110 107.9 108.0 107.8 104.7 105 100 95 90 107.6 104.4 108.9 107.3 102.9 106.6 104.2 The CCI tends to decrease during the 2nd half of the year and pick up right before the Chinese New Year holiday 103.8 99.9 100.4 99.6 105.8 105.6 108.1 103.4 106.6 105 103.9 105 104.2 100 97 100.5 100.5 103 CCI over 100 indicates that consumers are optimistic 98.2 108.2 106.1 105.1 104.5 103.7 103.7 102.6 100.8 99 97 97.8 99.3 99.4 97.2 85 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 80 Note: The consumer confidence index measures the level of optimism that consumers have about the performance of the economy Source: National Bureau of Statistics of China; The Beijing Axis Analysis The Beijing Axis 58
  58. 58. 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) General Rural Urban 8 7 6 5 China‟s inflation averaged 2.6% in 2012 4 Room for policy easing 3 3.5% is the designated inflation target set by the Chinese government for 2013 2 1 0 J F M A M J J A S O N D J 2011 Source: National Bureau of Statistics of China; The Beijing Axis Analysis F M A M J J A S O N D J 2012 F M A M J J A S 2013 The Beijing Axis 59
  59. 59. 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) 20 15 General Tobacco, Liquor and Articles Household Facilities, Articles and Services Transportation & Communication Food is an important driver, Residence with a weight of over 30% of the total CPI Food Clothing Health Cares & Personal Articles Recreation, Education, Culture Articles and Services Seasonal peaks due to Chinese New Year holiday There has been a recent increase in food prices 10 5 0 -5 J F M A M J J A S O N D J F M A M J 2011 J A S O N D J F M A M J 2012 J A S 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. The Beijing Axis Source: National Bureau of Statistics of China; The Beijing Axis Analysis 60
  60. 60. 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 Annual Consumer Price Inflation (%, 1997-H1 2013) Doubling of M2 money supply 7 6 5 Provinces with Highest and Lowest Consumer Inflation (%, August 2013) 2 Overheating and overinvestment Xinjiang 4.2 4 2 1 Deflation and overcapacity Commodity and food price pressure 1 4 Hunan 2.0 5 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13* Note*: First half year of 2013 Source: National Bureau of Statistics of China; The Beijing Axis Analysis 28 Jiangsu 2.1 30 Guangxi 1.7 -1 Beijing 3.4 3 29 0 -2 Qinghai 4.7 Tibet 3.1 3 Ningxia 3.6 31 27 Fujian 2.1 Zhejiang 2.0 Provinces with Highest Inflation Provinces with Lowest Inflation The Beijing Axis 61
  61. 61. 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) 10 Inflation for 2011 was 106 5 Deflation due to depressed overseas market demand and sluggish domestic manufacturing activity Details on next slide 0 -5 J F M A M J J A S O N D J F M A M J 2011 Source: China Monthly Economic Indicators; The Beijing Axis Analysis J A S O N D J F M A M J 2012 J A S 2013 The Beijing Axis 62
  62. 62. 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) 20 Mining & Quarrying Industry Food Durable Consumer Goods Raw Materials Industry Clothing Manufacturing Industry Articles for Daily Use 15 10 5 0 -5 -10 J F M A M J J A S O N D J F M A M J 2011 Source: China Monthly Economic Indicators; The Beijing Axis Analysis J A S O N D J F M A M J 2012 J A S 2013 The Beijing Axis 63
  63. 63. Depressed overseas market demand and sluggish domestic manufacturing activity have lowered producer prices in 2013, although there are signs of a bottoming out Annual Producer Price Inflation (%, 1997- H1 2013) Provinces with Highest and Lowest Producer Inflation (%, August 2013) Heilongjiang -0.7 8 Inner Mongolia -2.8 6 Qinghai -3.7 4 2 -2 Jilin 0.0 28 Liaoning 29 Tianjin -0.7 31 Ningxia Shanxi -2.8 -3.5 -9.7 5 3 -4 -6 -8 2 27 30 0 4 Jiangxi -0.5 Hainan 0.2 Provinces with Highest Producer Inflation Provinces with Lowest Producer Inflation 1 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13* Note*: First half year of 2013 Source: National Bureau of Statistics of China; China Monthly Economic Indicators; The Beijing Axis Analysis The Beijing Axis 64
  64. 64. 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) PMI 60 2 Month Moving Average A reading above 50 reflects expansion; below 50 reflects contraction 50 40 Source: National Bureau of Statistics of China; The Beijing Axis Analysis Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 Nov-10 Sep-10 Jul-10 May-10 Mar-10 Jan-10 30 The Beijing Axis 65
  65. 65. 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 Sales Price Index of Residential Buildings in Selected Cities (Y-o-Y, 2010-July 2013) 120 Beijing Tianjin Shanghai Chongqing Sales Price Index of Residential Buildings in Selected Cities (M-o-M, 2010-July 2013) Guangzhou Shenzhen 105 115 99 100 97 95 Guangzhou Shenzhen 101 105 Shanghai Chongqing 103 110 Beijing Tianjin 95 J MM J S N J MM J S N J MM J S N J MM J 2010 2011 Source: National Bureau of Statistics of China; The Beijing Axis Analysis 2012 2013 J MM J S N J MM J S N J MM J S N J MM J 2010 2011 2012 2013 The Beijing Axis 66
  66. 66. Agenda 1. 2. 3. 4. 5. 6. Foreword What‟s New: China‟s Ongoing Transformation China’s Economic Indicators - Selected Macroeconomic Indicators Domestic Consumption and Foreign Trade Domestic and Foreign Investment Financial Indicators Social Indicators International Comparison Conclusions and Implications About The Beijing Axis The Beijing Axis 67
  67. 67. 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) USD bn¹ 3,500 Retail Sales (Urban) Retail Sales (Rural) Suburban Growth (rhs) Retail Sales (Suburban) Urban Growth (rhs) Rural Growth (rhs) % 40 3,000 30 2,500 2,000 20 1,500 10 1,000 0 500 0 -10 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 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 68
  68. 68. 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 China’s Annual Retail Sales (USD bn, 1980-2012) China’s Monthly Retail Sales (USD bn, 2006-August 2013) Annual retail sales reached USD 3288.37 bn in 2012 3,600 350 300 3,000 Seasonal peaks due to Chinese New Year holiday 323 250 2,400 200 1,800 150 1,200 100 600 50 0 80 84 88 92 96 00 Source: National Bureau of Statistics of China; The Beijing Axis Analysis 04 08 12 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 The Beijing Axis 69
  69. 69. 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 China’s Annual Retail Sales of Consumer Goods by Sub-sector (1978 vs. 2012) Wholesale and Retail Trade Hotels and Catering Services Others 370 11% 4% 9% 87% 89% 2,532 1978 Total: USD120.3 bn Source: China Monthly Economic Indicators; The Beijing Axis Analysis 2012 CAGR = 10% Total: USD 3.3 tn The Beijing Axis 70
  70. 70. 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 Total Retail Sales of Consumer Goods by Province (USD bn, 2012) 0 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 50 100 150 200 Guangdong Shandong Jiangsu Zhejiang Henan Hubei Liaoning Sichuan Hebei Hunan Beijing Shanghai Fujian Anhui Heilongjiang Jilin Inner Mongolia Guangxi Shanxi Shaanxi Chongqing Jiangxi Tianjin Yunnan Guizhou Gansu Xinjiang Hainan Ningxia Qinghai Tibet Highlighted on the map on right Source: China Statistical Yearbook; The Beijing Axis Analysis 250 300 350 Provinces With Highest and Lowest Retail Sales (2012) 400 27 Xinjiang Ningxia Qinghai 29 2 30 31 Tibet 5 Henan Shandong 3 4 Jiangsu Zhejiang Guangdong 1 Hainan28 Top 5 Provinces by Retail Sales Bottom 5 Provinces by Retail Sales The Beijing Axis 71
  71. 71. 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 China’s Monthly Exports & Imports (USD bn, 2011September 2013) 250 Exports Imports 200 China’s Monthly Trade Balance (USD bn, 2011September 2013) 40 30 150 20 100 50 10 0 0 50 10 100 20 150 30 200 Import surge gives China decade-deep trade deficit 40 250 J M M J S N J M M J S N J M M J S 2012 2013 2011 Source: China Customs; The Beijing Axis Analysis J M M J S N J M M J S N J M M J S 2012 2013 2011 The Beijing Axis 72
  72. 72. After experiencing a prolonged slump during the global downturn, Chinese exports have now rebounded to pre-crisis levels China’s Annual Exports (1997-2012) USD bn Exports Exports' Growth Rate (rhs) China’s Monthly Exports (2011-September 2013) 2,500 50 USD bn 250 2,000 30 200 1,500 10 150 20 -10 100 -10 500 -30 50 -40 0 -50 0 -70 1,000 China‟s entry into the WTO 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: China Customs; China Monthly Economic Indicators; The Beijing Axis Analysis % % 80 Exports Exports' Monthly Growth Rate (rhs) Seasonal drop due to Chinese New Year holiday 50 J M M J S N J M M J S N J M M J S 2011 2012 2013 The Beijing Axis 73
  73. 73. 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) UK 2.3% US 17.2% Total Exports = USD 2,049 bn US Hong Kong Japan South Korea Germany Netherlands India UK Russia Singapore 352 324 152 88 69 59 48 46 44 41 Note: Hong Kong is admittedly used as a gateway to the rest of the world Source: China Customs; The Beijing Axis Analysis 8 1 Netherlands 2.9% Russia 2.2% 6 5 9 4 Germany 3.4% 7 India 2.3% 2 10 Singapore 2.0% South Korea 4.3% 3 Japan 7.4% Hong Kong 15.8% Top exported commodities • Electrical machinery, equipment and parts • Telecommunication, sound recording equipment and reproducing apparatus • Automatic data processing machines and parts The Beijing Axis 74
  74. 74. 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) 2,400 2,000 1,600 1,200 CAGR 10% 14% 14% 22% 20% 18% 24% 20% Others Mineral Items Foodstuffs Chemicals and Related Products Products Classified by Material Miscellaneous Manufactured Articles Machinery and Equipment Total 333 536 800 964 400 0 01 02 03 Note: Composition is according to the SITC Classification System Source: China Customs; The Beijing Axis Analysis 04 05 06 07 08 09 10 11 12 The Beijing Axis 75
  75. 75. 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 Annual Imports (2002-2012) USD bn 2,000 Imports' Growth Rate (rhs) China‟s entry into the WTO % 40 USD bn 200 20 Imports 1,500 1,000 China’s Monthly Imports (2011-September 2013) 150 30 0 100 10 Imports Imports' Monthly Growth Rate (rhs) % 50 500 -20 50 -10 0 -40 0 -30 02 03 04 05 06 07 08 09 10 11 12 Source: China Customs; China Monthly Economic Indicators; The Beijing Axis Analysis J M M J S N J M M J S N J M M J S 2012 2013 2011 The Beijing Axis 76
  76. 76. 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, technology, consumer goods US 7.3% Total Imports = USD 1,818 bn Japan South Korea US Taiwan Germany Australia Malaysia Saudi Arabia Brazil South Africa Germany 5.1% 3 92 85 58 55 52 45 Source: China Customs; The Beijing Axis Analysis Vehicles, Machinery 5 2 Petroleum 178 169 133 132 Japan 9.8% Brazil 2.9% Saudi Arabia 3.0% 9 Iron ore, soybean, petroleum South Africa 2.5% 8 4 10 South Korea Taiwan 9.3% Malaysia 3.2% Petroleum, soft commodities Machinery, electronics 7.3% 7 Minerals, metals Machinery, vehicles, electronics 1 6 Australia 4.7% Iron ore, coal Top imported commodities • Electrical machinery, equipment and parts • Mineral fuels, mineral oils and products of their distillation • Metalliferrous ores and metal scrap The Beijing Axis 77
  77. 77. 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) 1,800 CAGR 1,600 36% 20% 22% 12% 17% 27% 28% 18% 20% 1,400 1,200 1,000 800 600 2001-2012 86 35 137 146 Others Foodstuffs Miscellaneous Manufactured Articles Products Classified by Material Chemicals and Related Products Mineral Items Crude Materials Machinery and Equipment Total 179 313 270 400 653 200 0 107 2001 2002 2003 Note: SITC Classification System; Crude material: inedible, except fuels Source: China Customs; The Beijing Axis Analysis 2004 2005 2006 2007 2008 2009 2010 2011 2012 The Beijing Axis 78
  78. 78. 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) 9 US 12.5% US Hong Kong Japan South Korea Taiwan Germany Australia Malaysia Russia Brazil Germany 4.2% 1 Source: China Customs; The Beijing Axis Analysis Malaysia 2.5% 10 Brazil 2.2% Trade Surplus Trade Deficit South Korea 6.6% 3 Japan 5 Taiwan 8.5% 2 4.4% Hong Kong 8.8% 4 6 485 341 329 256 169 161 122 95 88 86 Russia 2.3% 8 Australia 3.2% 7 China‟s total trade with the world = USD 3,867 bn Total exports = USD 2,049 bn Total imports = USD 1,818 bn The Beijing Axis 79
  79. 79. 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) UK US China‟s world trade surplus = USD 231 bn 252 Hong Kong 202 US 50 Netherlands 29 UK India 29 Angola -29 Saudi Arabia -36 Australia -47 South Korea -81 Taiwan -95 Source: China Customs; The Beijing Axis Analysis Netherlands Saudi Arabia India South Korea Taiwan Hong Kong Angola Australia The Beijing Axis 80
  80. 80. 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) USD bn 40 Trade balance Exports, % change y-o-y (rhs) % 80 Imports, % change y-o-y (rhs) 30 60 20 40 10 20 0 0 10 -20 20 -40 30 -60 J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S 2006 2007 2008 Source: General Administration of Customs of PRC; The Beijing Axis Analysis 2009 2010 2011 2012 2013 The Beijing Axis 81
  81. 81. 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) Share of Net Exports in Quarterly GDP (%, 2008-Q2 2013) 10 10 8 8 6 6 4 4 2 2 0 0 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Q1-08 Source: National Bureau of Statistics of China; General Administration of Customs of PRC; The Beijing Axis Analysis Q1-09 Q1-10 Q1-11 Q1-12 Q1-13 The Beijing Axis 82
  82. 82. 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) Heilongjiang Xinjiang Gansu Percentage of China‟s total trade value: Top 60 % Next 20 % Next 20 % Liaoning Ningxia Hainan Source: China Customs; The Beijing Axis Analysis Jilin Tianjin Hebei Shanxi Shandong 6.3% Jiangsu Shaanxi Henan 14.1% Anhui Sichuan Shanghai Hubei Chongqing 11.3% Zhejiang Hunan Jiangxi 8.1% Guizhou Yunnan Fujian Guangxi 4.0% Taiwan Qinghai Tibet Inner Mongolia Beijing 10.5% Guangdong 25.4% Imports: USD 1,818 bn Exports: USD 2,049 bn Total Trade: USD 3,867 bn The Beijing Axis 83
  83. 83. Agenda 1. 2. 3. 4. 5. 6. Foreword What‟s New: China‟s Ongoing Transformation China’s Economic Indicators - Selected Macroeconomic Indicators Domestic Consumption and Foreign Trade Domestic and Foreign Investment Financial Indicators Social Indicators International Comparison Conclusions and Implications About The Beijing Axis The Beijing Axis 84
  84. 84. 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) USD bn 6,000 Urban Areas Rural Areas Growth of Total FAI² (rhs) 156 % 40 4,800 32 3,600 24 2,400 5,791 16 1,200 8 0 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 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 The Beijing Axis Source: National Bureau of Statistics of China; The Beijing Axis Analysis 85
  85. 85. 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) Urban Fixed Asset Investment 2 Month Moving Average 900 800 Investments gaining strength from favourable policies 700 600 500 400 300 200 100 0 J-F M A M J J A 2011 S O N D J-F M A M J J A S 2012 O N D J-F M A M J J A 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)‟ The Beijing Axis Source: China Monthly Economic Indicators; The Beijing Axis Analysis 86
  86. 86. 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 Fixed Asset Investment by Province (USD bn, 2012) 0 100 200 300 1 Shandong 2 Jiangsu 3 Liaoning 4 Henan 5 Hebei 6 Guangdong 7 Zhejiang 8 Sichuan 9 Hubei 10 Anhui 11 Hunan 12 Fujian 13 Shaanxi 14 Inner Mongolia 15 Jiangxi 16 Guangxi 17 Heilongjiang 18 Jilin 19 Shanxi Chongqing 20 Tianjin 21 Yunnan 22 Xinjiang 23 Beijing 24 Guizhou 25 Gansu 26 Shanghai 27 Hainan 28 Ningxia 29 Qinghai 30 Tibet 31 Highlighted on the map on right Source: China Statistical Yearbook; The Beijing Axis Analysis 400 500 Top 5 Provinces by Investment in Fixed Assets (2012) 600 Top five provinces account for 34% of total FAI Hebei 3 Ningxia Qinghai 1 30 Tibet Liaoning 5 29 4 31 Henan 2 Shandong Jiangsu 27 Shanghai 28 Top 5 Provinces by FAI Bottom 5 Provinces by FAI Hainan The Beijing Axis 87
  87. 87. China‟s manufacturing and real estate sectors attract the most fixed asset investment due to the country‟s ongoing industrialisation and urbanisation Fixed Asset Investment by Sector (USD bn, 2003-2012) CAGR 6,000 5,000 4,000 3,000 24% 29% 21% 28% 23% 29% 31% 27% Others Mining Utilities Environmental Protection and Public Facilities Transport, Storage and Post Real Estate Manufacturing Total 952 211 265 470 499 1,574 2,000 Real estate and manufacturing account for 60% of the total FAI 1,977 1,000 0 2003 2004 Source: China Statistical Yearbook; The Beijing Axis Analysis 2005 2006 2007 2008 2009 2010 2011 2012 The Beijing Axis 88
  88. 88. 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) USD bn FDI Inflow 160 % FDI Growth (rhs) 25 140 20 120 15 100 10 80 5 60 0 40 -5 20 -10 0 -15 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Note: FDI = Foreign Direct Investment Source: MOFCOM; The Beijing Axis Analysis The Beijing Axis 89
  89. 89. 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) USD bn Hong Kong Japan Singapore Taiwan US South Korea Germany Netherlands UK Switzerland 5 US 2.8% Germany 1.3% 9 UK 0.9% 8 7 Netherlands 1.0% 10 Switzerland 0.8% 71 7 7 6 3 3 1 1 1 1 2 Japan 6.6% 6 Hong Kong 63.7% 1 South Korea 2.7% 4 Taiwan 5.5% Singapore 3 5.8% China‟s total FDI inflow for 2012 amounted to USD 112 bn 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. Source: MOFCOM; The Beijing Axis Analysis The Beijing Axis 90
  90. 90. 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 FDI Inflow by Province (USD bn, 2012) 0 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 10 20 Jiangsu Liaoning Guangdong Tianjin Shanghai Zhejiang Henan Shandong Chongqing Anhui Beijing Jiangxi Sichuan Hunan Fujian Hebei Neimenggu Hubei Heilongjiang Shaanxi Shanxi Yunnan Jilin Hainan Guangxi Xinjiang Guizhou Ningxia Qinghai Tibet Gansu Highlighted on the map on right Source: China Statistical Yearbook; ACMR ,The Beijing Axis Analysis 30 Top 5 Provinces by FDI Inflow (2012) 40 50 Top 5 provinces account for 47% of total FDI inflows Gansu 31 Qinghai 29 Tibet 2 Ningxia 4 28 30 Liaoning Tianjin Jiangsu 1 5 Guizhou Shanghai 27 3 Guangdong Top 5 Provinces by FDI Inflow Bottom 5 Provinces by FDI Inflow The Beijing Axis 91
  91. 91. 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) CAGR 120 100 80 12% 17% 27% 11% 19% 3% 8% 2003-2012 Others Transport, Storage and Post Wholesale and Retail Trades Leasing and Business Services Real Estate Manufacturing Total 18 3 10 8 24 60 40 49 20 0 2003 2004 Source: China Statistical Yearbook; The Beijing Axis Analysis 2005 2006 2007 2008 2009 2010 2011 2012 The Beijing Axis 92
  92. 92. 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) USD bn OFDI Flow 100 % OFDI Growth Rate (rhs) 150 In 2005, SAFE* eased restrictions on overseas investments made by Chinese companies 75 100 50 50 25 Chinese companies increased acquisition of overseas depressed assets 0 03 04 Note*: SAFE - State Administration of Foreign Exchange Source: MOFCOM; The Beijing Axis Analysis 05 06 07 08 0 09 10 11 12 The Beijing Axis 93
  93. 93. 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) UK 3.2% USD bn Hong Kong US Kazakhstan UK Virgin Islands Australia Venezuela Singapore Indonesia Luxemburg US 4.6% Source: MOFCOM; The Beijing Axis Analysis 4 10 Luxemburg 1.3% 2 51.2 4.0 3.0 2.8 2.2 2.2 1.5 1.5 1.4 1.1 Kazakhstan 3.4% 5 7 British Virgin Islands 2.5.% Venezuela 1.8% 3 1 8 9 Hong Kong 58.2% Indonesia 1.5% Singapore 1.7% 6 Australia 2.5% China‟s total cumulative OFDI flow for 2012 amounted to USD 88 bn The Beijing Axis 94
  94. 94. 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 China’s OFDI by Province (USD mn, 2012) 0 China’s OFDI by Province (2012) 1,000 2,000 3,000 4,000 5,000 6,000 Guangdong 1 Shandong 2 Shanghai 3 Jiangsu 4 Liaoning 5 Zhejiang 6 Beijing 7 Gansu 8 Yunnan 9 Hunan 10 Fujian 11 12 Heilongjiang Anhui 13 Tianjin 14 Shaanxi 15 Sichuan 16 Hebei 17 Chongqing 18 19 Inner Mongolia Hubei 20 Xinjiang 21 Jiangxi 22 Henan 23 Hainan 24 Shanxi 25 Jilin 26 Guangxi 27 Ningxia 28 Guizhou 29 Qinghai 30 Tibet 31 Top 6 provinces‟ OFDI accounts for 59% of the total Highlighted on the map on right Note: OFDI figures include non-financial OFDI and exclude investments made by central enterprises Source: MOFCOM; The Beijing Axis Analysis Qinghai 30 Tibet 5 Ningxia Liaoning 28 2 31 Guizhou Shandong 4 Jiangsu 3 Shanghai 29 Guangxi 27 1 Guangdong Top 5 Provinces by OFDI Bottom 5 Provinces by OFDI The Beijing Axis 95
  95. 95. China‟s outward investments in finance, wholesale and retail trade grew substantially in 2012 China’s OFDI Flow by Sector (USD bn, 2004-2012) CAGR 90 47% 35% 18% 29% 42% 19% 58% 41% 80 70 60 50 40 Others Manufacturing Transport, Storage and Post Mining Wholesale and Retail Trades Finance Leasing and Business Services Total 13 9 3 14 13 10 30 20 27 10 0 2004 2005 2006 2007 2008 2009 2010 2011 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 The Beijing Axis Source: MOFCOM; The Beijing Axis Analysis 96
  96. 96. Agenda 1. 2. 3. 4. 5. 6. Foreword What‟s New: China‟s Ongoing Transformation China’s Economic Indicators - Selected Macroeconomic Indicators Domestic Consumption and Foreign Trade Domestic and Foreign Investment Financial Indicators Social Indicators International Comparison Conclusions and Implications About The Beijing Axis The Beijing Axis 97
  97. 97. 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) M2 M1 M0 20 18 16 14 12 10 8 6 4 2 0 J F M A M J J A S O N D J 2011 Note*: PBOC - The People‟s Bank of China Source: The People‟s Bank of China; The Beijing Axis Analysis F M A M J J A S O N D J 2012 F M A M J 2013 J A S The Beijing Axis 98
  98. 98. 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 Benchmark Lending Rates (%, 1997-2013) 6 months to 1 year (including 1 year) 12.00 1 year to 3 years (including 3 years) 3 years to 5 years (including 5 years) Longer than 5 years 10.00 First loan interest rate decrease in six years First loan interest rate decrease since the global financial crisis 8.00 6.00 Oct-97 Mar-98 Aug-98 Jan-99 Jun-99 Nov-99 Apr-00 Sep-00 Feb-01 Jul-01 Dec-01 May-02 Oct-02 Mar-03 Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 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-13 4.00 Note*: PBOC - The People‟s Bank of China Source: Hexun; The Beijing Axis Analysis The Beijing Axis 99
  99. 99. 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 Bank Deposit-Reserve Ratio (%, March 1998-October 20132) 25 20 Bank Deposit-Reserve Ratio1 (Medium & Small Financial Institutes) Bank Deposit-Reserve Ratio1 (Large Financial Institutes) Economic overheating Economic slowdown Inflationary pressures First cut in two years 20% 16.5% 15 10 Implement different RRR 5 21-Mar-98 21-Nov-99 21-Sep-03 25-Apr-04 05-Jul-06 15-Aug-06 15-Nov-06 15-Jan-07 25-Feb-07 16-Apr-07 15-May-07 05-Jun-07 15-Aug-07 25-Sep-07 25-Oct-07 26-Nov-07 25-Dec-07 25-Jan-08 25-Mar-08 25-Apr-08 20-May-08 25-Jun-08 15-Sep-08 15-Oct-08 05-Dec-08 25-Dec-08 18-Jan-10 25-Feb-10 10-May-10 16-Nov-10 29-Nov-10 20-Dec-10 20-Jan-11 24-Feb-11 25-Mar-11 21-Apr-11 18-May-11 20-Jun-11 05-Dec-11 24-Feb-12 18-May-12 18-Oct-13 0 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 The Beijing Axis Source: The People‟s Bank of China; The Beijing Axis Analysis 100
  100. 100. 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) 5 years 8 1 year 6 months 3 months First cut since global financial crisis 6 4 2 Source: China Statistical Yearbook; The Beijing Axis Analysis 29-Nov-13 5-Jul-12 7-Jun-12 7-Jul-11 6-Apr-11 9-Feb-11 26-Dec-10 20-Oct-10 23-Dec-08 30-Oct-08 9-Oct-08 21-Dec-07 15-Sep-07 22-Aug-07 21-Jul-07 19-May-07 18-Mar-07 19-Aug-06 19-Aug-06 29-Oct-04 21-Feb-02 10-Jun-99 7-Dec-98 1-Jul-98 25-Mar-98 0 27-Nov-08 Recent adjustments in 2012 to widen the range at which banks can set deposit rates mark an important step towards interest rate liberalisation The Beijing Axis 101
  101. 101. Chinese banks have funded themselves mainly from deposits at a loan-todeposit (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) Loans to Deposit 91 Ratio (%) Loans 90 86 80 78 77 76 Deposits 74 68 67 67 65 70 69 70 71 16,000 In 2007, the CBRC² implemented a 75% LTD ratio limit for all banks in China 12,000 8,000 4,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Note (1): Total Loans and Deposits in RMB and Foreign Currency Note (2): CBRC – China Banking Regulatory Commission Source: The People‟s Bank of China; The Beijing Axis Analysis The Beijing Axis 102
  102. 102. 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% Sources of Deposits* (USD bn, 2003-2012) Other Deposits Trust Deposits Agricultural Deposits Fiscal Deposits Deposits of Gov. Dept. & Org. Company Deposits Household Savings Deposits 15,000 Sources of Deposits (USD bn, 2012) Other Deposits Designated Deposits Temporary Deposits Fiscal Deposits Corporate Deposits Personal Deposits 16,000 14,564 7,283 12,000 50% 7,283 10,000 8,000 5,000 6,524 45% 4,000 6,524 388 26 4 340 0 0 03 04 05 06 07 08 09 10 11 12 Total Corporate Deposits Deposits Personal Deposits Fiscal Temporary Designated Other Deposits Deposits Deposits Deposits 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 The Beijing Axis Source: China Statistical Yearbook; The Beijing Axis Analysis 103
  103. 103. 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) Monthly Loan Size USD bn 250 Y-o-Y Growth Rate (rhs) % 100 Fall in lending as demand for credit eased in a slowing economy 200 80 60 40 150 20 0 100 -20 -40 50 -60 0 -80 J F MAM J J A S ON D J F MAM J J A S ON D J F MAM J J A S ON D J F MAM J J A S 2010 Source: The People Banks of China; The Beijing Axis Analysis 2011 2012 2013 The Beijing Axis 104
  104. 104. 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 Composition of New Loans* (USD bn, 2003-2012) Overseas Loans 12,000 Advances Bill Financing Financial Lease Short-term Loans Medium & Long-term Loans Other Loans Trust Loans Short-term Loans Medium & Long-term Loans 12,000 Composition of New Loans (USD bn, 2012) 9,999 5,602 8,000 56% 8,000 3,941 3,941 4,000 4,000 39% 5,602 94 324 0 0 03 04 05 06 07 08 09 10 11 12 Total Deposits Medium & Short-term Long-term Loans Loans Financial Lease 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. Source: China Statistical Yearbook; The Beijing Axis Analysis Bill Financing 9 29 Advances Overseas Loans The Beijing Axis 105
  105. 105. 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) Total Market Value (USD bn) 2,500 463 513 448 396 1,122 4,302 Number of companies listed on the Shenzhen Stock Exchange Number of companies listed on the Shanghai Stock Exchange 1,747 3,655 3,926 3,330 3,655 2007 global financial crisis created stock market bubble 2,000 1,500 1,169 547 592 690 740 1,411 1,540 830 500 509 507 715 780 837 834 842 860 864 864 894 931 954 2002 1,000 540 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 Source: China Monthly Economic Indicators; The Beijing Axis Analysis The Beijing Axis 106
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