China goes West

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China goes West

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China goes West

  1. 1. July 2010APCO Brief:China Goes West
  2. 2. Introduction to China‟s Western RegionChina‟s „Go West‟ PolicyOpportunities for Foreign Business
  3. 3. Introduction to China‟s Western Provinces 80% of China‟s water resources 70% of natural gas reserves 69% of overall land area 60% of coal reserves 27% of population 19% of GDP 17% of consumer spending 14% of FDI 10% of applied patents 6% of registered foreignenterprises 4% of exportsSource: China’s National Bureau of Statistics 2009, 2011China‟s 12 WesternProvinces account for:3
  4. 4. West More Reliant on Raw MaterialsSource: China Statistical Handbook2011 40%10%20%30%40%50%60%70%80%90%100%Greater China EasternProvincesWesternProvincesPrimary SectorSecondary SectorTertiary SectorComposition on China’s Economy474310 64945135136
  5. 5. Urban Household Income is dramaticallyless in the western provincesSource: China’s National Bureau of Statistics 2011XinjiangBeijingTianjinShanghaiChongqingGuangdongFujianTibetQinghaiGansuInner MongoliaHeilongjiangSichuanYunnanGuizhouGuangxiNingxiaShaanxiShanxiHebeiLiaoningJilinShandongHenanAnhuiJiangsuZhejiangJiangxiHunanHubeiHainan< RMB 20kRMB 20k-25kRMB 25k-30k> RMB 30k5
  6. 6. Western Consumerism Lags Behind theEastSource: National Bureau of Statistics 2011Per Capita Annual Living Expenditure6TotalConsumptionFood Education andRecreationHouseholdItemsRMB02000400060008000100001200014000160001800020000Eastern ProvincesWestern Provinces
  7. 7. Economic OverviewRegional Policies for Investment黑龙江吉林辽宁河北山东福建江西安徽湖北湖南广东广西河南山西内蒙古陕西宁夏甘肃青海四川贵州云南西藏新疆浙江北京重庆• 12 provinces• 27% of totalpopulation• 71% of total land area• Leverageinfrastructureinvestment to driveeconomicdevelopment• Attract foreigninvestment• China‟s rust belt• 3 provinces and 5 citiesof Inner Mongolia• 8% of total population• 11% of total land area• Revitalize old industrialbase• 10 provinces and cities• 60% of total GDP• 38% of total population• 7% of total land area• Leverage SEIs and R&Dinvestment to lead innovative& sustainable development• Link of East Coast and Western China• 6 provinces• 27% of total population, 30% of total ruralpopulation• 10% of total land area, 23.8% of total cultivatedarea• Promote industrialization, urbanization, andmodernization of agriculture“Go West” (1997)“Rise of Central China” (2006)“NortheastRevitalization”(2003)Developed EastCoast
  8. 8. Western Provinces face numerouschallengesSource: Social and Economic Atlas of Western Provinces, China Business Handbook 2009Geography- Extended distances between economiccenters- Low population density- Some extreme altitudes- Water shortages, particularly in the north- Inhospitable conditions in some areas andrelatively little arable landNature & Climate- Extreme temperatures, particularly in the north- Threat of natural disasters (e.g. earthquake inSichuan)- Degradation of the environment (particularlydeforestation, desertification)Ethnic Situation- Ethnically diverse regions- Persistent conflicts among ethnic groups (e.g.Tibetans, Uyghurs)Politics- Western provinces were politically neglectedfor a long time, only regaining serious politicalfocus for the last 10 years- Political problems are hinder economicprogress (e.g. Tibet, Xinjiang)SpecificChallenges inWestern China8
  9. 9. Introduction to China‟s Western ProvincesChina‟s „Go West‟ PolicyOpportunities for Foreign Business
  10. 10. China has been implementing the “GoWest” policy for more than a decadeThe Chinese government under Premier Zhu Rongji first clarified the guidelines ofits “Go West” policy in 1999; after which developments have steadily followed…“Western Development” plan begins2000Construction of the “West-East Gas Pipeline” initiated2002Policy of “Returning Grazing Land to Grassland” takes effect2003Law on Promoting Western Development is listed on thelegislative plan of the 10th National People’s Congress2004Compulsory education tuition and fees exempted in Westernareas2005Qinghai-Tibet Railway begins operation2006The Ministry of Finance invests RMB 280 billion in the west to support keyprojects2007NDRC announced US$100 billion in 23 new infrastructure projectsincluding airports, roads, railways, coal mines, and nuclear powerstations201010
  11. 11. Go West Policy has several key priorities• Construction of railway lines, highways, airportexpansion projects, and gas pipelines, hydropowerplants, telecommunications, etc.• By 2009, China had invested more than US$322billion• This month, the NDRC announced US$100 billion in23 new infrastructure projects includingairports, roads, railways, coal mines, and nuclearpower stationsInfrastructure• Preferential tax rates and flexible policies• Chongqing Liangjiang New AreaForeign Investment• Converting farmland to grassland and forest areasEcological Protection• Compulsory educationEducation & Retention ofEducated Workforce11
  12. 12. Go West Policy‟s Focus Regions &Industries Energy Chemicals Mineral mining and processing Agricultural goods processing Engineered products High-tech sectors TourismSeveral focus industries:Three focus regions:Chongqing-ChengduGuangxi “North Bay”Guanzhong-Tianshui12
  13. 13. The Go West policy has yieldedimpressive results…Source: China Statistical Yearbook, Yearbook of China Transportation and Communications32.51182000 2008FlightPassengers(m)350016500253202000 2008 2011Freeways(km)76 233 2992000 2008 2011PowerGenerationCapacity(GW)2200029500363072000 2008 2011RailTracks(km)CAGR: 18% CAGR: 21%CAGR: 4%CAGR: 15%13
  14. 14. …However, it has insufficiently closed thedevelopment gap73.30%60.87%79%1990 2000 2011West’sRelativeLevelofGDPper Capita20.88%17.13% 19%1990 2000 2011West’sContributiontoGDP14
  15. 15. Introduction to China‟s Western ProvincesChina‟s „Go West‟ PolicyOpportunities for Foreign Business
  16. 16. Corporations have prioritized several keylocations for potential investmentLOW HIGHHIGHCorporate PerspectiveAnalyticalPerspectiveNingxiaQinghaiTibetGuizhouXinjiangGansuYunnanInnerMongoliaGuangxiShaanxiChongqingSichuanSource: RolandBerger,16
  17. 17. Chengdu:City Overview Most prosperous and populouscity in western China, with 2009GDP of RMB 450 billion (USD66.17 billion), representing14.7% growth year on year; Economic hub in Western Chinafor electronics and ITmanufacturing.TransportationChina‟s sixth largest aviation hubcentered around ShuangliuInternational Airport;Competing with Chongqing to buildlargest transportation hub inWestern China;Investment RMB 20-50 billion (USD3-7.3 billion) per year to build 5,400km of new railways to 2020.DevelopmentZonesTwo national level developmentzones:• Chengdu High-techDevelopment Zone –electronics and IT• Chengdu Economic andTechnological DevelopmentZone – auto manufacturing
  18. 18. Chengdu:Industries and PoliciesPillar industries: electronics & IT, telecom and auto manufacturing• Sales revenue of electronics and IT industry in 2009 reached RMB 143.3 billion (USD 21.07billion), making up 31% of total GDP;• Major consumer electronics and IT companies in Chengdu includeNokia, Siemens, Samsung, Sony, Cisco Systems, Intel, HP and Foxconn;• Chengdu has a complete auto manufacturing supply chain with 8 major manufacturersincluding FAW-Volkswagen and over 150 auto components suppliers.• Chengdu also announced plans to build electric vehicle charging facilities by 2012 andmanufacture 910,000 electric vehicles by 2017, planning to generate RMB 193 billion (USD28.38 billion) in sales revenue.• Chengdu municipal government had decided to invest RMB 50 billion (USD 7.35 billion) tobuild a national-level telecom hub in 2008. By 2011, Chengdu will become, afterBeijing, Shanghai and Guangzhou, the fourth information broadcasting base in China.Sustainability: Chengdu-Chongqing Economic Zone and Tianfu New Area• Chengdu‟s Tianfu New Area is slated to become a major industrial and economic center inWestern China enjoying similar preferential policies as Pudong New Area;• The State Council approved Chengdu-Chongqing Economic Zone to be a new twin-citySpecial Economic Zone (SEZ), one of China‟s three western economic zones created tospur regional growth.
  19. 19. Chengdu:Tax IncentivesCorporateIncome Tax(CIT)• Encouraged sector firms: 15%• Non-encouraged sector firms:25%• Refund Rate: 100% refund oflocal portion (40%) of CIT for 3years and 50% for the following5 years• NPV=19%Value AddedTax (VAT)• Standard Rate: 17%• Refund Rate: 100% refund oflocal portion of VAT (16%) for 2years, and 50% refund for thefollowing 3 years.• NPV=8.41%• Free duty and VAT for importedequipment: eligible equipmentOthers Based On TE ProjectDescription:R&D subsidies: negotiable based onR&D investment capital and product;Employee training subsidies:Company is grant subsidy RMB 200 peremployee for signing contract with localresident for a minimum of one year;Individual income tax merits for high-level management: 100% refund oflocal portion (26%) of individual incometax;Business tax: 100% refund of localportion (65%) of business tax for 2 years;50% refund rate for the following 3 years.
  20. 20. Significant incentives provided by centraland local governments Corporate income tax reductions Personal income tax rebates Rental discounts Subsidies for employee training Subsidies for employee relocation Financing support R&D funding support Subsidy for standards certification Tax exemptions for equipment importation23
  21. 21. Advantages and challenges for foreignbusinessADVANTAGES  Market access: Western provinces provide access toquickly-growing local and regional marketsCHALLENGES Lower wages: Western regions wages are significantly below thosein China‟s east Government support: Wide-spread support for foreign investment can befound at both the national and local level Level of familiarity: Local authorities are less experienced in working withforeigner and foreign companies Personal relationships: “Guanxi” more important in Western regionswhich requires time and patience to develop Quality of Staff: Staff qualification level comparatively lowerthan found in China‟s eastern region24
  22. 22. Success in the West depends on yourpreparation and executionIn order for a company to take advantage of the opportunities in China’s west andthe ‘Go West’ policy it needs to be prepared and committed…Conduct thorough market analysisPerform solid technical and location due diligenceThoroughly vet partner and key customersBuild solid government relationshipsDevelop a dedicated and motivated team of managers and workersBe flexible to the changing environmentMonitor and track new opportunities and evolving governmentpriorities25

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