A guide to china's regions, provinces and cities

Multi-asset China Research December 2010 Inside the growth engine A guide to China’s regions, provinces and cities This guide shows how local autonomy and inter-regional competition are helping to transform China’s economy. It gives comprehensive economic, ﬁnancial and corporate data for 31 regions, provinces and municipalities and 21 big cities. We forecast that six Chinese provinces will be as big as Russia, Spain or Canada by 2020. By Zhang ZhimingDisclosures and Disclaimer This report must be read with the disclosures and analyst certiﬁcations in the Disclosure appendix, and with the Disclaimer, which forms part of it

Inside the growth engine China Research abc December 2010The emperor is far away“The sky is high and the emperor is far away” is an old Chinese saying that refers to how much localofficials can achieve themselves with little supervision from above. It is an adage that is very relevant toChina’s dynamic expansion today as much of the country’s growth is being driven by local initiatives anddevelopments, rather than by Beijing.Chinese reforms have empowered local governments with unprecedented economic authority following aprocess of economic decentralisation that began in 1979. Indeed local officials in China’s provinces andcities have occasionally reduced the effectiveness of Beijing’s policies, as shown by the capital’s recentdifficulties in cracking down on property speculation. This brings to mind a modern rendering of the oldsaying, namely that “there are policies above and counter-measures below.”To try and capture the scale of this local dynamism, we have put together a 244 page guide, covering 31provinces, municipalities and autonomous regions and 21 major cities. For each, we give key economic,financial and demographic data, list their strengths and challenges, and provide a five-year outlook.This “bottom up” perspective on China, rather than the usual “top down” one, has thrown up someextraordinary statistics. By 2020, China will have six provinces with an annual GDP of more than USD1 trillion, equal to six countries the size of Russia (or Spain or Canada). With 47% of the population now living in cities, eight Chinese cities have a population of more than 10m, and 93 have more than 5m. By comparison, in the US only New York City has a population of more than 5m. Beijing, China’s Washington DC, is also China’s Silicon Valley. Its Zhongguancun area saw 23 high- tech IPOs in 2009, against just one for Silicon Valley. There have been another 35 IPOs so far in 2010. Kunshan, one of 2,000 county-level cities, produces more than half of the world’s notebook PCs, or 85m units – and yet IT manufacturing is not even its top-ranked industry. Suzhou, one of 280 prefecture-level cities, has a per capita GDP which is 70% and 46% higher than Beijing and Shanghai, respectively. Jiangsu, a province little known to outsiders, is poised to overtake the much better-known southern province of Guangdong to become China’s largest provincial economy as early as 2012. The 1.5m inhabitants of Erdos, a city rich in natural resources in the otherwise poor western part of the country, will have a higher GDP per capita than Hong Kong in three years time. 1

Inside the growth engine China Research abc December 2010 Among the 1m villages – the lowest unit in the administrative chain – there are some extraordinary contrasts, for example, between the fiercely-capitalist Huaxi, where every ex-farmer is a millionaire, and the communist Nanjie, where collective interests still prevail over those of individuals.What does it mean for China’s future when local officials have widespread powers over land sales,infrastructure, commercial and residential property construction, natural resource exploration and foreigndirect investment?First, sizzling growth should continue for at least another five years. Local governments have managed tobeat Beijing’s growth targets by a few percentage points every year since 1980. Published data for thecoming 12th Five-Year Plan from 2011 to 2015 show most provinces remain ambitious in their targets.Second, these growth ambitions have increased inter-regional competition. Provinces have far moreambitious plans for the expansion of their rail networks and clean energy activities than those stipulatedby national targets. In some cases, the local target is double the national one. One reason for this is that toget promoted in China, you have to outperform your peers.The danger, however, is that over-investment leads to overcapacity. For example, Kunshan’s strongposition in IT is being challenged by the municipality of Chongqing. Together they could soon supply 80per cent of the world’s notebook PCs – raising concentration risks as well as oversupply concerns.Third, overcapacity may lead to bad credits. For example, a recent report submitted by the ChinaAcademy of Science to the State Council raised concerns about unsustainable debt levels and the risk ofloss-making activities. It noted that the 1,000km Wuhan to Guangzhou bullet train, which startedoperating earlier this year, was running at less than half its capacity and would never make enough moneyto pay off the loans used to finance it.Fourth, policies at the centre risk being less effective if they are quietly resisted by local authorities.Beijing launched its fierce crackdown on property speculation in April – and yet eight months on, notonly have prices barely moved downwards, volumes actually rose again in September and October. Not asingle city has rolled out the much expected property tax. Vested interests have also blunted Beijing’srepeated calls for consolidation in the country’s iron and steel industry.Fortunately, Beijing is increasingly aware of this challenge to its policy effectiveness. It consistentlyrequires Beijing officials to gain in-depth local experience and promotes prominent local officials tonational level. A large-scale campaign is underway, making local postings for promising new leadersmandatory.Starting from the top, eight out of nine of the Politburo’s Standing Committee (China’s highest decision-making body) were Party secretaries for at least one province or municipality. Xi Jinping, the man widelyseen as China’s leader-in-waiting, is a good example. He has spent 31 years away from Beijing in variouspositions, which includes being Party secretary for two provinces and for one municipality.What emerges from this guide is a more complex picture of China than even many experts have assumed.For anyone hoping to conclude a business deal in China it offers this message: don’t assume you onlyhave to deal with decision-makers in Beijing. You must also make sure local officials are on your side.Whether you are a China expert or a mere beginner, we hope you enjoy what follows.2

Inside the growth engine China Research abc December 2010China’s regions and provinces Heilongjiang Jilin Liaoning Xinjiang Inner Mongolia Beijing Tianjin Hebei ia Shanxi gx Shandong Nin Qinghai Gansu Henan Jiangsu Shaanxi Tibet Anhui Shanghai Hubei Sichuan ing gq on Zhejiang Ch Hunan Jiangxi Guizhou Fujian Eastern Region Western Region Yunnan Guangxi Guangdong Central Region Northeast Region HainanSource: HSBCMajor Chinese cities and other locations mentioned in this report Harbin Changchun Urumqi Shenyang Beijing Erdos Dalian Tianjin Xining Qingdao Jinan Lanzhou Nanjie village Wuxi / Jiangyin / Huaxi village Xi’an Suzhou / Kunshan Nanjing Shanghai Chengdu Wuhan Hangzhou Ningbo Lhasa Chongqing Nanchang Changsha Xiamen Guiyang Kunming Nanning Shenzhen GuangzhouSource: HSBC 3

Inside the growth engine China Research abc December 2010ContentsPowered from below 7 Western Region 75Reform empowers locals 8 Chongqing (重庆) 78Following the Party (跟党走) 8 Gansu (甘肃) 83Pictures worth a thousand words 9 Guangxi Zhuang Autonomous Region (广西) 87Facts you may not know 10 Guizhou (贵州) 91 Inner Mongolia Autonomous Region (内蒙古) 95How the system works 16 Ningxia Hui Autonomous Region (宁夏) 99Local government hierarchy 16 Qinghai (青海) 103 Shaanxi (陕西) 107Urbanisation and consumption 19The four Deltas 20 Sichuan (四川) 111Cities and consumption 21 Tibet Autonomous Region (西藏) 115 Xinjiang Uygur Autonomous Region (新疆) 119The next five years 25 Yunnan (云南) 123Sizzling growth to continue 25 Central Region 127Provinces 29 Anhui (安徽) 129 Henan (河南) 133Eastern Region 30Beijing (北京) 32 Hubei (湖北) 137Fujian (福建) 36 Hunan (湖南) 141Guangdong (广东) 40 Jiangxi (江西) 145Hainan (海南) 45 Shanxi (山西) 149Hebei (河北) 49Jiangsu (江苏) 53 Northeast Region 153 Heilongjiang (黑龙江) 155Shandong (山东) 58 Jilin (吉林) 159Shanghai (上海) 62 Liaoning (辽宁) 163Tianjin (天津) 67Zhejiang (浙江) 714

Inside the growth engine China Research abc December 2010Province Comparison 167 Major Cities Comparison 225Major Cities 177 Appendix 230 A: China maps 230Summary 178 B: Monthly minimum wage level by province 236Beijing (北京) 179 C: List of government-guided venture capital funds 236Changchun (长春) 184 D: Seismic shifts in China’s local IPO markets 237Chengdu (成都) 186Chongqing (重庆) 188 Glossary 240Dalian (大连) 190Guangzhou (广州) 192 Disclosure appendix 243Hangzhou (杭州) 194 Disclaimer 244Harbin (哈尔滨) 196Jinan (济南) 198Nanjing (南京) 200Ningbo (宁波) 202Qingdao (青岛) 204Shanghai (上海) 206Shenyang (沈阳) 208Shenzhen (深圳) 210Suzhou (苏州) 212Tianjin (天津) 214Wuhan (武汉) 216Wuxi (无锡) 218Xiamen (厦门) 220Xi’an (西安) 222 5

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Inside the growth engine China Research abc December 2010Powered from belowEven though China has opened up extensively to What is undeniable is that China, with athe outside world in the last 30 years, for many population of 1.3bn people, is big. As a result,observers it is as complex and intriguing as ever. most analysts, investors and business leaders stillBy the same token, views on China’s future, even take a big picture view of the Middle Kingdom.among leading China experts, have become more They fail to dig down to China’s economicdiverse. realities at province, municipality and city level – yet this is where the real action is.Some are awed by the startling way in which thecountry shrugged off the impact of the global Our guide offers a “bottom up” perspective offinancial crisis. Others question the sustainability of China’s growth engine. The focus is on China’sthe growth-at-all-costs model and fear the provinces and cities, and the administrativeexperiment could end badly. Some applaud China’s hierarchy. Within a complex structure, officials atstate-run capitalist model as a competitive or better various local levels are vying with each other toalternative to laissez-faire capitalism. Others produce the most stunning rates of economiccontend that what China has done is not much more development.than “the Japanese model on steroids”. The We highlight the strengths, challenges and theoptimistic predict that China is destined to replace upcoming five-year plans of the 31 provinces, asthe US by 2025 or earlier as the world’s largest well as details of economic activities, statisticseconomy. Others argue that it’s “on a treadmill to and strategic plans down to the level of 21 majorhell”. The battle of words is on and it’s loud. cities.Even David Pilling, the veteran Asia editor of the We also provide a glimpse of the economicFinancial Times, confesses to being baffled. In an dynamism of county-level cities (of which thereOctober 2010 column, he wrote, “After a great are more than 2,000) and of China’s top-rankeddeal of time spent travelling in China, reading villages. These are the lowest level of localabout China and thinking deep thoughts about administrative unit, yet their ambitions andChina, I have come to the conclusion that the most achievements may surprise all China watchers.profound thing one can say about it is this: Chinais exceedingly big.” After apologising for this“awfully trite observation” he went on to explain,“China’s sheer size helps to explain much aboutthe country, from its impact on global commoditymarkets to the fact that one of the world’s poorestcountries is now routinely mentioned in the samebreath as the (still) mighty US.” 7

Inside the growth engine China Research abc December 2010Reform empowers locals government incentives and vested interests have so far been deaf to the “emperor’s” call.A major theme of our report is that it is far toosimplistic to see China as a centrally-planned Another example is the iron and steel industry. Iteconomy, where local officials merely carry out is a pillar industry for many provinces andorders from their bosses in Beijing. That is China’s total output exceeds that of the next 10because Chinese reforms have empowered local largest foreign countries combined. However, thegovernments with unprecedented economic average sales price for iron and steel is about aauthority over the last 30 years. third to half of China’s comparable import price. That suggests that China’s 2,000-plus iron andIt all began in 1979. Before then, the central steel companies are focusing on low-endgovernment essentially controlled local economic manufacturing and that competition isdecision-making via a vast network of ministries, fragmented, despite Beijing’s calls for industrybureaux and committees. consolidation.But then came a massive programme of economic China’s rare earth sector shares exactly the samedecentralisation and privatisation and everything problem. As the world’s largest and dominantchanged. These days, local officials have exporter of rare earths, China should wieldwidespread powers over land sales, infrastructure, considerable pricing power. In reality, it has littlecommercial and residential property construction, authority over pricing (unlike Western peers in thespecial economic zones, natural resource iron ore industry) because smaller exportersexploration and foreign direct investment. across the country are under-cutting each other.They are also involved in investments via local But local governments do not always resist callsgovernment-owned or sponsored investment from the centre. When the aims and incentives ofvehicles that include a growing number of local the centre and the levels below are aligned, thegovernment-owned venture capital funds (see “emperor’s” mission can be accomplished withexamples in Appendix B), initial public offerings superb efficiency and speed. China’s strong, V-and mergers and acquisitions involving local shaped recovery after its RMB4.2trn stimulusstate-owned enterprises or small and medium- programme and the RMB9.6trn in bank loanssized enterprises. issued in 2009 (nearly a third of its GDP at thatIn such a world it is not surprising that the old adage time) have been jointly propelled by Beijing and“the emperor is far away” springs to mind. The local governments at all levels.authority of the centre appears increasingly distantas the local authorities become more empowered by Following the Party (跟党走)the country’s economic reform process. Beijing has taken a keen interest in these developments.Take Beijing’s latest property market crackdown,for example. Eight months after the capital Indeed, over the years, China’s top Party leadersannounced a series of harsh measures to cool have acted to ensure future leaders have a firmproperty speculation, prices in large cities have grip on developments at ground level.hardly budged and volumes surged again in Eight out of the nine current Politburo StandingSeptember and October. To date, not one city has Committee members (the country’s highestrolled out the property tax. It appears that local decision-making body) have in the past been Party8

Inside the growth engine China Research abc December 2010secretaries, the highest ranking local authority Meanwhile, in July 2010, the Party’s Centralposition, for at least one province or municipality. Organisation Department in Beijing sentOf the 25 current Politburo members, 18 (or 72%) instructions for 60 Director-General level officialshave been (or still are) Party secretary for at least (excluding their deputies), one notch belowone province or municipality. Deputy-Minister level, to be appointed as the deputy heads of cities in the country’s provinces.Deep-rooted local experience, which usually This is an experience now deemed necessary formeans decade-long assignments across many further promotion. It sends a very clear signal thatprovinces, has become a prerequisite for joining the top Party leadership cares deeply about localthe top Party and State leadership. experience and knowledge.Take the example of the top leaders for the Pictures worth a thousandcoming 5th generation – XI Jinping (习近平) andLI Keqiang (李克強). Mr. Xi worked 31 years wordsaway from Beijing, holding Party secretary How are the changes playing out in economicpositions at various county and city levels. He was terms at province and municipality level?also the Party secretary for two provinces and one We start by comparing the GDP of the provincesmunicipality. Mr. Li had 10 years experience as a as it was 10 years ago with how it was in 2009Party secretary for two provinces. Both have since and we forecast how it might look in 10 yearsjoined the highest decision-making body, the time.Politburo Standing Committee, in Beijing. Figure 1: China GDP in 2000 by provinces: a union of poor, mainly Third World countries Romania Ur uguay Albania Algeria Lebanon Bulgar ia Kazakhstan Kuwait UAE Luxem bou rg Croati a Egypt Zam bia Slovak Czech Portugal Albania Czech L ib ya Moro cco N ew Zealand Oman Pakistan Dominican Nigeria Republic Sudan Hungary Above $1,000bn Between $500bn – $1,000bn Vietnam Ukraine Greece Between $100bn – $500 bn Below $1 00bn Uganda Source: HSBC, CEIC, IMF, CIA 9

Inside the growth engine China Research abc December 2010Figs. 1 to 3 show maps of China’s provinces and Facts you may not knowmunicipalities in 2000, 2009 and 2020 (projected) Sifting through the data, one constantlycompared to countries with similar GDP in the encounters surprising and intriguing facts, and werespective years. The 2020 comparison is based highlight some of the more startling facts below.on assumptions of 1) a 7% and 4% differential innominal GDP growth rates between Mainland Beijing is China’s Silicon ValleyChina and the developed world and developing Beijing is considered China’s Washington D.C.,countries, respectively, and 2) a 3% annual but few realise that it is also home to China’sappreciation of the RMB against the USD over Silicon Valley. Its Zhongguancun (中关村) areathe coming decade. Both assumptions are quite has a heavy concentration of high-tech enterprisesconservative relative to current market forecasts and entrepreneurs and is also the most popularand the trend over the last decade. spot for venture capital funds.Six USD1trn provinces by 2020 In many ways, it has already become Silicon Ten years ago, after two decades of economic Valley “squared”. For example, in 2009, reform, China still largely resembled a union Zhongguancun had 23 high-tech IPOs whereas of African countries, or a collection of sub- Silicon Valley had only one. So far this year, developing nations, with only three provinces Zhongguancun has had another 35 IPOs. having an annual GDP above USD100bn. See Zhongguancun is home to some of China’s top IT Fig. 1. companies, such as Legend Holdings, Founder By 2009, GDP in the vast majority of Group and Tsinghua Holdings with the latter two provincial economies had risen to more than founded in and named after Beijing University USD100bn. At this point, China looked more and Tsinghua University (China’s leading like a collection of diverse developing world universities), respectively. It is one of five or six countries, such as ASEAN countries, Turkey, national level high-tech zones, but there are Czech Republic, South Africa, and Egypt. See hundreds of similar high tech zones at provincial Fig. 2. and city level. By 2020, China will have six USD1 trillion The richest city is in the poor northwest economies, under our conservative China is well known for its rich coastal cities in assumptions. At this point, the country will the east and poor provinces in the west. look more like a collection of second-tier Surprisingly, the city with the highest per capita developed world and leading developing GDP – set to surpass Hong Kong’s on a per capita countries. See Fig. 3. basis in about three years’ time – is the city of Erdos (鄂尔多斯) in Inner Mongolia, theThat’s just a quick snapshot of GDP. More traditionally poor north-west. Its per capita GDPstatistics that include fixed asset investment in 2009 had already reached RMB134,361 or(FAI), income, consumption, property sales and more than USD20,000.prices, auto sales vs. expressway growth, industryproduction and electricity usage, foreign trade and Erdos, with a population of 1.5m, has also becomeforeign direct investment (FDI), energy efficiency China’s luxury car capital with more Rolls-Royce,etc. down to major city level are provided in later Ferrari, Jaguar and Mercedes-Benz cars per capitachapters. than any other city in China.10

Inside the growth engine China Research abc December 2010Figure 2: China GDP in 2009 by provinces: a union of leading developing countries Peru Vietnam Estonia Portugal Croatia Thailand Algeria Slovenia Singapore es h Kazakhstan glad Switzerland Uganda B an New South Indonesia Africa P Ph Zealand ilip Haiti Ireland p in Egypt n es s Czech Morocco Venezuela Malaysia Kuwait Above $1,000bn Ecuador Nigeria Between $500bn – $1,000bn Slovak Turkey Ukraine Between $100bn – $500bn Below $100bn PanamaSource: HSBC, CEIC, IMF, CIAFigure 3: China GDP in 2020 by provinces (projected): a union of second-tier developed and top-tier developing countries Thailand Malaysia Sri Lanka Netherlands Israel South Africa Kazakhstan Argentina Korea Colombia Denmark Canada Kenya ia r ab Russia iA Turkey ud Sa Zambia Indonesia Belgium Poland Switzerland Sweden Australia Israel Egypt Greece Iran Argentina Above $1,000bn Singapore Between $500bn – $1,000bn Nigeria Venezuela Spain Between $100bn – $500bn Below $100bn SudanSource: HSBC, CEIC, IMF, CIA 11

Inside the growth engine China Research abc December 2010This is thanks to its rich natural resources. Some classical gardens and parks that have been dubbed80% of its 87,000 sq km of land contains coal and “heaven on earth” by locals and tourists and these50% contains natural gas reserves. This means are now UNESCO World Heritage sites.Erdos has the vast majority of Inner Mongolia’s What is less well known is that the main drivers298bn tonnes of proven coal reserves (according of this success are the highly efficient and pro-to the National Mineral Reserves Report of 2007), business county-level cities under theor about one quarter of the world’s total, administrative authority of Suzhou. All five areaccording to an estimate by the Energy ranked in the top 10 of China’s 2,000 county-levelInformation Administration. The latest local cities and four are ranked in the top five.government figure is as high as 702bn tonnes. InNovember 2009, one of China’s youngest and For example, in the first three quarters of 2010most promising political stars, HU Chunhua (胡春 alone, Suzhou’s top-ranked county-level city,华), a top candidate to lead China’s 6th- Kunshan (昆山), exported USD23.4bn worth ofgeneration leadership in 10 years’ time, was notebook computers. In fact, one in every twoappointed Inner Mongolia’s Party secretary to notebook PCs in the world is manufactured there.spearhead its local development. This can be seen This suggests Kunshan’s annual output is alreadyas a sign that the region’s economy will continue around 85m units, based on our estimate ofto develop rapidly in the years ahead. worldwide supply of 171m for 2010. Kunshan focuses on relatively high-end manufacturing,There is a place where “Heaven on unlike the better-known city of Dongguan inearth” means “Business is booming” Guangdong province where the manufacturingYou could argue that Erdos is lucky because its base produces a wide range of goods.fortune has been “endowed” rather than created.Excluding cities lucky enough to be sitting on a Note that IT product manufacturing such asrich pile of natural resources, you might think notebook PCs ranks only second in Kunshan’sShanghai, Beijing or Shenzhen had the highest per booming industry; machinery and equipment is itscapita value-added or GDP. But you would be largest sector. Kunshan shows how much awrong. That title goes to the city of Suzhou in county-level city can contribute to the economy ofShanghai’s neighbouring Jiangsu province. a prefecture-level city (in this case, Suzhou) and thereby to the country overall.Suzhou, with a population of 6.3m people, had percapita GDP of RMB106,863 in 2008 (official data Suzhou’s achievements have caught the attentionis only available to 2008), by far the highest of China’s top leaders who are keen to replicateamong China’s large cities. This is 70% and 46% its success elsewhere. Among Suzhou’s recenthigher than Beijing and Shanghai, respectively. “exports” are its top officials. For example,Suzhou has 27 listed companies, more than any of China’s current Minister of Commerce CHENChina’s other 280 prefecture-level cities Deming (陈德铭), Party Secretary of Liaoning province WANG Min (王珉) and Party SecretarySuzhou is best known to outside investors for its of Shenzhen WANG Rong (王荣) were all PartySingapore-designed Suzhou Industrial Park (苏州 Secretaries of Suzhou at some point before rising工业园区). The park, which delivered to their current posts.RMB112bn GDP in 2009 or a 15.1% y-o-yincrease despite the financial crisis, is a Less than a year after Wang Rong moved toremarkable achievement. The city also has Shenzhen, Suzhou is poised to become a larger12

Inside the growth engine China Research abc December 2010economy than Shenzhen for the first time. In the of Wuxi, Suzhou and Nanjing. Nearly 80% of thefirst nine months of the year, Suzhou’s GDP of largest companies in Jiangsu are privately-owned.RMB679.8bn overtook Shenzhen’s RMB672.2bn. The city of Jiangyin (江阴), a county-level citySuzhou has a more broad-based economic growth under the city of Wuxi in Jiangsu province, ismodel, while Shenzhen faces more difficult home to nine of China’s top 500 companies.restructuring due to its high cost base, from wages Jiangyin is one of China’s richest county-levelto real estate, and its dependence on exports. cities with 2009 per capita GDP of RMB142,572Rising star in the Yangtze River Delta or USD21,472.Suzhou’s parent province of Jiangsu, situated in Although its administrative ranking is rather low,the Yangtze River Delta (YRD), also deserves or 2-notches below province level, Jiangyin is notspecial mention. It is a well-balanced economy, a small town by any means. It has a population ofone of the three RMB3trn economies (Guangdong more than 1.2m (as of 2008) with a 2009 GDP ofand Shandong are the other two) in China with RMB171.3bn or USD25.8bn.large agricultural, industrial and service sectors. Itis the only one of the larger provinces that is still From Jiangsu to the countrygrowing faster than the national average rate in Former Jiangsu Party Secretary LI Yuanchao (李both real and nominal GDP terms. Jiangsu’s GDP 源潮) led Nanjing, Jiangsu’s capital, and theis set to reach RMB4trn or USD602bn in 2010, a province for seven years during its most critical17.6% growth rate in nominal terms against its period of economic growth from 2001 to 2007. He2009 GDP of RMB3.4trn. then moved to Beijing to head the Party’s Central Organization Department in 2007. Among otherIn fact, if the projected growth rate set out in China’s initiatives, Mr. Li is known for his role in China’s12th Five-Year Plan proves accurate, Jiangsu will talent drive which aims to recruit and retain 1,000overtake Guangdong to become China’s largest top professionals (千人计划) from around theprovincial economy as early as 2012. world to hold senior positions in government,Jiangsu has many of the world’s leading business, science, education and other areas. Themanufacturers and exporters of solar power “1,000 Top Talent Program” will be rolled out atequipment, chemicals, electronic equipment, national as well as local level as part of a keytextiles, materials and other machinery. No strategic plan to cement China’s long-termwonder it is China’s most popular destination for success.FDI (USD25.3bn for 2009), a title it has held for Jiangsu topped all other provinces andfour consecutive years. municipalities in total R&D spending in 2009. MrThriving private enterprise Li has also pushed for more senior centralJiangsu had 59 companies with more than government officials to take on temporary orRMB10bn revenue in 2009, second only to long-term assignments at local government level,Beijing Municipality with 98. But unlike Beijing, in order to feel the real pulse of the country’swhere the leading companies are state-owned development.monopolies in strategic industries such as bankingand energy, companies in Jiangsu are mostlyprivately-owned. They cover a wide range ofbusinesses with most headquartered in the cities 13

Inside the growth engine China Research abc December 2010Two villages, two systems Jiansu Huaxicun Co Ltd (ticker 000936.SZ). TheNowhere are the contradictions and complexities company runs a wide-range of businesses thatof China more apparent than at village (村) level. include polyester chip manufacturing, commercialVillages are the lowest-ranked administrative trading and electricity generation and sales.units in China, but they are much bigger entities For a place with just 30,000 inhabitants, Huaxi’sthan many Western observers might imagine. For ambitions seem extraordinary. In addition to itsexample, a typical village in the West is usually a existing 328-meter building (ranked the world’sloosely organized community of a few hundred 15th tallest in 2010, see Fig. 4), it is planning topeople, while its China counterpart is a well- build a new 128-storey, 638 meter skyscraper,defined administrative unit with a population which when completed will be the second tallestranging from a few hundred to tens of thousands. building in the world. Moreover, the village plansTake the contrast between the villages of Huaxi to have a fleet of 20 airplanes by 2015, a primeand Nanjie. example of its continued ambition.Huaxi (华西村) is China’s richest village. It is Huaxi shows the extent of the inroads thattwo notches down from the county-level city of capitalism has made in China in the last 30 years.Jiangyin in administrative ranking or four notches It is a place where “to be rich is glorious,” tobelow its parent province of Jiangsu. See Fig.5 on quote the late reformist leader, Deng Xiaoping.page 16. Western lifestyles are celebrated by ex-farmers who are proud to boast that they “breakfast at theEvery family in Huaxi has had a net worth of more Arc de Triomphe, lunch at the White House andthan RMB1m since 2005. The village enterprise is dine on lobster in Australia” – these world-famousa company listed on the Shenzhen Stock Exchange locations being the names of local restaurants!with a current market cap of more than RMB7.3bnor USD1.1bn. Many of the former village farmersare large shareholders of the village enterprise, Figure 4: Huaxi vs. Nanjie: China’s model villages embody opposing ideologies, yet both are endorsed by Beijing’s top leaders Village of Huaxi (华西村) - Model village of capitalist pursuit where ”to be rich is glorious”. Every village ex-farmer is a millionaire, thanks to its A-share listing in 1999. 200 of the richest village residents put down RMB10mn each or RMB2bn to build the 328 meter tall tower, the world’s 15th tallest and home to hundreds of families. Village of Nanjie (南街村) - Model village of communism where the village mantra says: “want to develop, study the works of Mao; want to grow, follow the Party”. Wealth sharing or preserving common interests takes precedence o ver individual pursuits. Source: HSBC, Picture source: Village websites14

Inside the growth engine China Research abc December 2010Capitalism vs. communism Harking back to the old days is not a cynicalAt the other end of the spectrum from Huaxi is the exercise designed to boost tourism. It is part of avillage of Nanjie (南街村) in Henan province in continued Chinese experiment to produce a morecentral China. Here communism is alive and well, harmonious society that incorporates theand the works of Chairman Mao are still revered. principles of fairness.The village and its enterprise run on a long- Fig. 4 compares Huaxi and Nanjie. Both villagesforgotten salary plus supply or need system are frequently visited and endorsed by Beijing’s(instead of a cash bonus), where basic resources top leadership1. One might see the co-existence ofsuch as food, property, schools and healthcare are the two village models as a sign of China’sfirst allocated on a needs basis. Readers contradictions. Or one might take the view thatcan learn more about Nanjie at they show China to be a nation that is confidenthttp://www.nanjiecun.cn/homepage.asp. enough to be open-minded and explorative. 1 Guess who visited Nanjie, the communist model village? Former Premier Zhu Rongji and Executive Vice-Premier Li Keqiang are among the senior leaders who have paid tribute there. 15

Inside the growth engine China Research abc December 2010How the system worksLocal government hierarchy There are numerous ways to achieve a ranking upgrade. For example, being a member orIn this section, we explain how China’s local Standing Committee member of the Partyadministrative system works, as set out in Fig. 5. organization or deputy of the executive orThe dotted lines define clear ranking order from legislative branches at a higher level of localprovince (省) down to prefecture (地), county government. The heads, or Party secretaries, of(县), town (乡) and village (村). A government at Shenzhen and Suzhou, for example, are membersa lower level of hierarchy reports strictly to the of the Party Standing Committee of their parentone above with province-level governments provinces, Guangdong and Jiangsu.reporting directly to the State Council or theexecutive branch of Beijing’s central government. Urbanization and domestic consumption, the two main drivers of China’s continued growth, are allThe ranking of a local government, and especially about economic development at various cityits top officials who often may rank slightly above levels. Moreover, the inter-city competition thatthe corresponding local government they run, has propels fast growth at the national level is closelysignificant implications in terms of authority over associated with the administrative hierarchy of theresource allocation. The subtleties of this ranking cities. Given their importance, we take a momentsystem are usually ignored by or confusing to to examine China’s cities in more detail.outsiders since it is not common practice elsewhere. Figure 5: China’s local government hierarchy by administrative ranking Provincial-level: Municipalities (4) Provinces (22) Autonomous Regions (5) (省级) (e.g. Beijing, Shanghai) (e.g. Guangdong, Jiangsu) (e.g. Inner Mongolia, Tibet) Sub-provincial cities (副省级市, 10 provincial capitals and 5 large cities) (e.g. Guangzhou, Shenzhen) Prefecture- Other provincial capitals (其他省会, 17) Important cities (超大地级市, ~10) level: (e.g. Hefei, Shijiazhuang) (e.g. Suzhou, Wuxi) (地级) Other prefecture-level cities (一般地级市, 240+) (e.g. Erdos) County-level: County-level cities (2,000+) (县级) (e.g. Jiangyin, Kunshan) Town-level: Town (40,000+) (乡级) Village-level: Villages (1,000,000+) (村级) (e.g. Huaxi, Nanjie) Note: Only red blocks are covered in this report. Source: HSBC16

Inside the growth engine China Research abc December 2010Municipalities factor in our view is administrative ranking. AAt the top level of the administrative structure are city’s administrative ranking, even at a very lowthe four municipalities: Beijing, Shanghai, Tianjin level of the hierarchy, is carefully set by the Stateand Chongqing. They share the same Council, taking into account quantitative criteriaadministrative ranking as the 22 provinces and 5 such as population and size of the economy asautonomous regions2 (see Fig. 5). well as strategic criteria.A municipality typically has a high population Sub-provincial city: not necessarily a capitaldensity and higher proportion of urban population A half notch below province is the sub-provincialthan a province, hence it has characteristics city (副省级市) whose top four officials, the Partytypical of an urban city. In fact, there is no secretary, the mayor and the heads of the localdistinction between “municipality” and “city” in National Peoples Congress (NPC) and Chinesethe Chinese language as both share the same Peoples Political Consultative Conferencecharacter “市”. There is a subtle distinction in (CPPCC), are all ranked at deputy-ministerialterms of administrative power, in that a (provincial) level. There are 15 sub-provincialmunicipality shares the same ranking as a cities, only 10 of which are provincial capitals, andprovince, but since the late 1980s, coinciding with that leaves the remaining 17 provincial capitals at aChina’s urbanisation drive, the Party secretary of slightly lower ranking. Apparently, a combinationeach municipality has usually been a Politburo of political, economic and strategic concernsmember (the Party’s highest decision-making determines the choice of sub-provincial cities.body), and that puts the municipalities slightly Next, or less than a half-notch below, are theabove the ranking of most other provinces. remaining 17 provincial capital cities plus about aA municipality has more financial clout than other dozen economically important cities, where attypes of city. For example, the cities of Shanghai least one top official (e.g., the Party secretary) is(RMB1.3trn GDP) and Guangzhou (RMB900bn ranked at deputy-ministerial level. Our major cityGDP) have roughly the same level of fiscal list includes two of these cities, Suzhou and Wuxi,revenue, yet Shanghai has a third more disposable since both of them are among China’s 10 largestfinancial resources due to the favourable value- cities (including municipalities) by GDP.added tax distribution enjoyed by municipalities. These cities are followed by the ordinaryChongqing’s economic development jumped to a prefecture-level cities (地级市) which numbermuch higher level only after it became a more than 240, excluding the cities ranked above.municipality in 1997. More cities are vying for County-level cities: real growth enginesmunicipality status, but Beijing seems in no hurry At centre stage of China’s massive urbanisationto grant any new ones soon. drive are the more than 2,000 county-level orCities lowest-ranked cities that report to their respective prefecture-level cities. Unlike in the West whereThere are several ways to rank cities – for officials are elected and promoted by localexample, by population or size of economy. constituents, local officials in China are promotedHowever, the most important differentiating according to whether they outperform their peers in running their respective local economies, judged by measures such as the GDP growth rate.2 An autonomous region is a province-level region that typically has ahigh population of ethnic minorities, e.g., Tibet and Xinjiang. 17

Inside the growth engine China Research abc December 2010Consequently, the race for faster growth amongst five in the city of Suzhou and two in Wuxi.county-level cities and above has become a key These cities are still in rapid transition. Fordriver of China’s overall development for the last example, about half the city dwellers in Kunshanfew decades. are migrant workers or professionals. Based onFirst, large-scale fixed asset investment (FAI) or the registered population, Kunshan would have byinfrastructure build up, whose long-term far the highest per capita GDP of RMB253,256 orsustainability is often in question, is usually USD38,141 in 2009, higher than Hong Kong. Wedetermined at a higher level of government. In believe that the vitality of these cities will largelyaddition, the nation’s large, monopolistic state- determine China’s future competitiveness and theowned enterprises (SOEs) are usually beyond the success of its urbanisation programme.control or influence of county-level cities. According to the China Securities RegulatoryTherefore, successful county-level cities are Commission (CSRC), China led the world in termsforced to focus on nurturing private enterprises in of number of IPOs in every month in 2010 exceptaddition to the rapid property construction that has for October. Less known is the fact that privateprovided easy but probably unsustainable gains. SMEs account for a large share of China’s IPOs andSecond, many county-level cities are not really many are from county-level cities. For example, thesmall, measured either by population or GDP, top-ranked Jiangyin and 10th-ranked Jinjiang eachthanks to rapid expansion in recent decades. have 28 listed companies. Jinjiang will have at least two more IPOs by the end of 2010 and 10 more inKunshan and Jiangyin with their thriving private 2011. The development in the IPO space, from largebusinesses have pushed their respective parent SOEs to small SMEs, from main board to SMEcities of Suzhou and Wuxi to China’s top 10 city markets and growth enterprise markets (GEMs), haslist, raising the status of the parent, Jiangsu completely changed the landscape and ranking ofprovince, and thereby the country. These are just domestic investment banks and underwriters (seetwo examples of a large number of cities whose Appendix D). Some well-connected investmentsgrowth in real productivity is providing the driving banks – the banking system’s “emperors” – that usedforce behind provincial and country-level success. to dominate the IPO space are at risk of being edgedFig. 6 shows the top 10 county-level cities in out by small players which are closer to localChina based on their overall competitiveness. businesses and entrepreneurs.Seven of the top 10 are in Jiangsu province withFigure 6: China’s top 10 most competitive county-level cities in 2009 GDP (RMBbn) GDP per capita (RMB) Population (k) Parent city ProvinceJiangyin (江阴) 153 99,170 1,200 Wuxi JiangsuKunshan (昆山) 150 120,881 690 Suzhou JiangsuZhangjiagang (张家港) 125 105,156 898 Suzhou JiangsuChangshu (常熟) 115 79,263 1,065 Suzhou JiangsuWujiang (吴江) 75 68,434 795 Suzhou JiangsuCixi (慈溪) 60 58,437 1,031 Ningbo ZhejiangTaicang (太仓) 53 79,449 466 Suzhou JiangsuShaoxing (绍兴) 61 85,368 715 Shaoxing ZhejiangYixing (宜兴) 60 48,102 1,068 Wuxi JiangsuJinjiang (晋江) 70 43,813 1,050 Quanzhou FujianNote: Both permanent and temporary residents are included in the calculation of GDP per capita, while the population in the table only includes number of permanent residents.Source: China County-Level Economy Top 100, CEIC18

Inside the growth engine China Research abc December 2010Urbanisation andconsumptionContinued urbanisation and domestic Eight Chinese cities have a population of more thanconsumption are expected to be the key drivers of 10m, 93 are bigger than 5m and 177 larger than 3m.China’s growth in the next few years. Both centre To put this in perspective, only one city in the USaround city development. Fig 7 shows the size of (New York City) has a population of more than 5m.China’s cities and where they rank in the However, individual Chinese cities may still be“pyramid”. too small to justify the size of ongoing and Figure 7: City pyramid by population – 93 Chinese cities have a population larger than 5mn, and 177 cities above 3mn Tier 1: above 30mn, the sole leader Chongqing Shanghai Baoding Tier 2: 10mn – 15mn Beijing Chengdu Zhoukou Linyi Nanyang Harbin Handan Weifang Fuyang Heze Xinyang Tier 3: 8mn – 10mn Tianjin Shangqiu Wuhan Xuzhou Shenzhen Shijiazhuang Jining Ganzhou Zhumadian Yancheng Xi’an Zunyi Xingtai Yulin Guanzhou Huanggang Liuan Changsha Tier 4: 6mn – 8mn Wenzhou Hengyang Nanning Jieyang Shaoyang Tangshan Luoyang Fuzhou Zhanjiang Maoming Quanzhou Suzhou Changchun Zhengzhou Hangzhou Nanjing Jinan Qingdao Nanchong Shangrao Jingzhou Changde Yantai Nantong Cangzhou Shenyang Dazhou Anqing Qujing 5mn – 6mn 4mn – 5mn 3mn – 4mn Below 3mn Tier 5: below 6mn 32 cities: 32 cities: 52 cities: 108 cities: Dalian Wuxi Fuzhou Xiamen Ningbo Hefei Lanzhou Daqing …. …. …. …. Source: HSBC, CEIC 19

Inside the growth engine China Research abc December 2010planned infrastructure projects, such as River Delta had RMB6trn 2009 GDP or 17.5% ofexpressways, high-speed railways, light railways the nation’s total and RMB2trn in retail sales.and subways. Larger scale cities in the former of The Pearl River Delta is about half the Yangtzemega-metropolitan areas are needed to achieve River Delta in economic size with about 10% ofbetter economic and energy efficiency. China’s GDP (or RMB34trn) and RMB1trn inThe four Deltas retail sales.Fig. 8 shows the 11 largest metropolitan zones The West Delta or West Triangle (the three citiesunder development where the size of each circle of Chongqing-Chengdu-Xi’an) is the leastrefers to the rough geographical reach of each developed and fastest growing metropolitan area.metropolitan zone. It is representative of the current “race to bottom” growth model where less developed regions setThe four metropolitan areas coloured red, referred more aggressive growth targets. Fig. 9 shows theto as the four Deltas, have the highest strategic West Triangle’s GDP growth rates since 2005.importance. They are the Yangtze River Deltacentred around Shanghai, the Pearl River Delta Strong growth is accompanied by surging FDIcentred around Guangdong, the Jing-Jin-Ji Delta shown in Fig. 10, suggesting private capital is(Beijing-Tianjin-Hebei) centred around Beijingand the West Delta centred around Chongqing. Figure 9: The three West Triangle cities have recorded in excess of 20% CAGR in nominal GDP growth since 2005The two largest and best known Deltas are theYangtze River and Pearl River Delta. The Yangtze 800 600 Figure 8: China’s top metropolitan zones RMB (bn) 400 10 200 0 6 3 2005 2006 2007 2008 2009 5 Chengdu Chongqing Xian 9 4 Source: CEIC 1 7 11 8 Figure 10: FDI in the West Triangle has jumped several times since 2005 2 4 1. Yangtze River Delta 长三角 3 2. Pearl River Delta 珠三角 RMB (bn) 3. Jing-Jin-Ji Delta 京津冀 4. West Delta 西三角 2 5. Shandong Peninsula 山东半岛 6. Central-southern Liaoning 辽中南 1 7. Wuhan Urban Agglomeration 武汉城市群 8. West Strait Economic Zone: 海峡西岸城市群 0 9. Central Plains Urban Agglomeration 中原城市群 Chengdu Chongqing Xian 10. Harbin Urban Agglomeration 哈尔滨城市群 11. Changsha-Zhuzhou-Xiangtan 长株潭 2005 2009 * Size of circles is indicative of size of metro area. Source: HSBC Source: CEIC20

Inside the growth engine China Research abc December 2010joining the boom in the West Triangle above and world’s leading retail and luxury brands. Sobeyond the build-up in infrastructure. The where does the shopping power come from?momentum is likely to continue as regional It’s all about citiesrevitalisation is set to be one of the biggestinvestment themes in coming years. The perception of China as a Third World country is largely derived from its low per capita GDP.While inter-city expressways have been fairly well Indeed, Fig. 11 shows China’s per capita GDP atdeveloped over the last decade, inter-city high- the province level in 2009 and how that comparedspeed railway, light railway and subway links have to similar countries around the world. Despite itsjust started. Provinces and cities around the new unprecedented economic growth over the pastmetropolitan areas are betting on a continued surge three decades, China ranks 99th in the world within railway construction and connections as key per capita GDP of USD3,678, right behinddrivers of economic growth in the years ahead. Albania in 98th position.Cities and consumption As the colour of the map shows, nearly half theChina’s domestic consumption as a share of GDP country, mainly the provinces in the West andhas been notoriously low (around 35% or about inner part of China, still has GDP per capita ofhalf the US ratio). It has been on a declining path less than USD3,000. The rest of the country, apartover the last decade, despite rapid economic growth. from Beijing and Shanghai, is below USD10,000.Some observers find it difficult to reconcile the However, that is not the right way to assessfact that this is a Third World country with the China’s purchasing power nor its potential.fact that it is the fastest-growing consumer of the Figure 11: 2009 GDP per capita by province: China ranks 99 in the world, still behind Albania at 98, despite 30 years of rapid growth Samoa El Salvador Maldives Colombia Armenia South Africa Honduras Chile Tonga Uruguay a ng T ur kme Dominican To ur k Republic Guatem ala nista n Morocco Botswana ta Georgia Indonesia Poland Ukraine Cape Verde Fiji Mauritius Morocco Congo Dominica Above $30,000 M oldova Between $10,000 – $30,000 Sri Lanka Paraguay Bulgaria Between $3,000 – $10,000 Below $3,000 Vanuatu Source: HSBC, CEIC, IMF, CIA 21

Inside the growth engine China Research abc December 2010 Figure 12: It’s all about cities – China’s urban disposable income is about 3 times higher than that in rural areas 30,000 4.5 4.0 25,000 3.5 20,000 3.0 2.5 RMB 15,000 2.0 10,000 1.5 1.0 5,000 0.5 0 0.0 Shaanxi Shanxi Guangxi Ningxia Xinjiang Anhui Sichuan Shandong Jiangxi Shanghai Beijing Tibet Yunnan Guizhou Gansu Qinghai Chongqing Inner Mongolia Guangdong Hunan Henan Fujian Hainan Hebei Hubei Jilin Liaoning Jiangsu Tianjin Zhejiang Heilongjiang PDI - Urban (LHS) PDI - Rural (LHS) Urban / Rural (RHS) Source: HSBC, CEICFirst, it’s all about cities when it comes to capita wages or GDP, as shown in Fig. 13. Soshopping. Fig. 12 shows that, on average, personal what’s missing from this picture?disposable income in urban areas is about 3 times The Starbucks phenomenonhigher than in rural areas. In addition, given the The target clients for many of the Starbucksfact that almost 47 per cent of the population live outlets in China are high-income earners orin cities, any average figure should separate urban professionals. A cup of coffee that costs morefrom rural purchasing power in order to get a than US$4 is still deemed a luxury in China wheremore accurate picture. the starting salary of a college graduate is aboutTrue, shopping is all about cities, especially large US$400 pa, or 10% of their peers in thecities where shops, including high-end ones, are developed world. However, visitors can often findoften packed. However, some will argue that even that China’s Starbucks are frequented by studentsin the cities known to be China’s biggest shopping (including high school students).centres, such as Shanghai, per capita retail What this suggests is that average income orconsumption accounts for less than half of per income itself may be a misleading gauge of purchasing power, at least in today’s China. Figure 13: Shanghai retail sales vs. average wages and per capita GDP Hidden income or more importantly, a wide wealth 80 gap, may be the real reason. In our Starbucks 60 example, income does not play as big a role as it R MB (k) does elsewhere: those who can afford it don’t have 40 to earn and those who earn may not be able to 20 afford or choose to save instead. Youngsters from 0 wealthy families wield high purchasing power 2002 2003 2004 2005 2006 2007 2008 2009 without having a formal income. Meanwhile, the GDP per capita Av erage annual w age consumption power of many professionals, who Average retail consum ption would otherwise be typical middle-class Source: CEIC consumers, is being marginalized due to expected22

Inside the growth engine China Research abc December 2010high future expenditure on property, healthcare, The third-tier group is the most interesting andretirement and their child’s education – these potentially the fastest growing group. Each offamilies are forced to save what they earn. Rising these 20 cities had retail consumption of betweeninflation and inflation expectations are putting RMB100bn and RMB200bn in 2009. For the 10further pressure on wage earners to increase their cities on the left-hand side, the most importantdiscretionary savings. factor has been higher per capita income, as opposed to population size. Hence, these citiesThe spending pyramid could be targets for relatively high-end retailSo the problem is how to spot China’s best shopping businesses. For the 10 cities on the right-handlocations if neither average income nor population side, total population is a bigger driver, andsize alone is as helpful as it otherwise would be. therefore these are better candidates for massTotal end-spending is the best proxy, in our view. market retail sales.Fig. 14 shows one of our city pyramids that ranks Going where the businesses aretotal retail consumption by city. Another useful gauge of the prospects for futureIn the top tier are Beijing and Shanghai where city consumption is to look at where the majorannual retail spending totals more than businesses are headquartered. Apart from Beijing,RMB400bn. In the second tier – spending of more the choice of headquarters is usually indicative ofthan RMB200bn – are four cities. These are the future growth prospects, in addition to near-termcities where visitors can find the presence of business and visitor spending.virtually all global and local brands in high-end aswell as mass retail stores. Figure 14: City pyramid by retail consumption: decent retail sales, driven either by population or income Tier 1: above RMB400bn, national sho pping centre Beijing Shanghai Guangzhou Tier 2: RMB200-400bn Shenzh en Chongqing Tianjin Suzhou Chengdu Shenyang Qing dao Tier 3a: RMB100-200bn, income driven Wuxi Zhen gzhou Tier 3b: RMB100-200bn, population driven Jinan Changsha Wuhan Ningbo Harb in Wenzh ou Nan jing Dalian Xi’an Yantai Han gzhou Foshan Fuzhou Shijiazhuang Changchun Zib o Shaoxing Yancheng Nanto ng Jining Jiaxing Hohhot Tier 4: RMB50-100bn Quanzhou Taizhou Hefei Nanchang Don gguan Xuzhou Luoyang Yangzhou Weifang Jinhua Kunmin g Baotou Linyi Nanning Shantou Handan Tangshan Taiyuan Nanyang Maoming Cangzhou Baoding Changzh i Jiangmen Dezhou Xiamen Zhenjiang Lanzhou Jingzhou Tier 5: below RMB50bn Weihai Zhanjiang Urumqi Heze Yichang An shan Jilin Tai’an Cangzhou Liaocheng Huzhou Zh angzhou Zhongshan Huizhou Xiangfan Taizhou Daqing and other 206 cities …. Source: HSBC, CEIC 23

Inside the growth engine China Research abc December 2010Fig. 15 is another of our city pyramids that shows Figure 15: City pyramid by number of headquarters of top companies: it’s not all about being in Beijingwhere the major companies (2009 sales aboveRMB10bn) are headquartered. We further divide Tier 1: 98 top companiesthe cities with a heavier concentration of large BeijingSOEs (on the left) compared with large privately- Right half: cities with more non-SOE Tier 2: 20-40 Shanghai top compan iesowned businesses (on the right). Each type has T ianjin Hangzhoudifferent shopping implications. Tier 3: 10-20 Guangzhou Wuxi Shen zhen Su zhouFor example, with luxury purchases, it is well Chongqing Nanjin gknown that many purchases are made with gift Chengdu Wuhan Nin gbovouchers. Such spending tends to be related more Tier 4: 5-10 Jinan Xi’an Nantong Qingdao Binzhou Wenzhouto state-owned business activities. Zhengzhou Dalian Chan gchun Chan gsha Ch ang zhou Dongyin g ShenyangThere is therefore a correlation between the Harbin Xiam en Kunming Z ibo Taiyuannumber of SOE headquarters and the purchasingpower of luxury brands. We hope readers will find Note: Top companies defined as companies with more than RMB10bn sales in 2009. Source: HSBC, China Enterprise Confederation/China Enterprise Directors Association,this a useful way to track economic activity in All-China Federation of Industry & CommerceChina below national level.24

Inside the growth engine China Research abc December 2010The next five yearsSizzling growth to continue rates at the national level always ended up being a few percentage points higher than planned. BearAlthough Beijing and most local governments in mind that the majority of China’s provinceshave yet to spell out the full details of their plans have managed to outperform national growth ratesfor 2011-2015 – China’s 12th Five-Year Plan – the since 1980 as well.ambitions being set out at local level suggest thatthe country’s sizzling growth will continue. Infrastructure and new energyCurrent local target vs. historical record The sizzle is not just in the GDP growth rate. Fig. 18 compares the length of railway lines and installedFig. 16 provides a list of GDP growth targets for capacity for clean energy under the national planthe next five years as already disclosed by some compared with the aggregate of local plans.provinces. The rates vary from a minimum of 8%for the largest provincial economy of Guangdong Local governments are planning to build railwayto mostly double-digit growth for its smaller peers. networks by 2020 that in many cases are nearlyGuangdong probably faces the most challenging double the size of the national target for 2020 thattask of economic restructuring since it is by far the was set in 2008 by the State Council. For example,largest exporter in China with a more than 60% in the Xinjiang Autonomous region there are planstrade dependency ratio (or exports to GDP). for a total railway network of 12,000km, three times the State Council target. The 2020 target ofFig. 17 shows China’s GDP growth rates since 16,000km for passenger-only railways is expected1980 (the 6th Five-Year Plan) to the current 11th to be achieved by 2015 or earlier. Moreover, localFive-Year Plan. Without exception, actual GDP governments are pushing for an expansion of the 120,000km overall railway target.Figure 16: Announced target GDP growth rates for the 12th Five-Year Plan by province Figure 17: Target vs. actual GDP growth rate: Chinas pastProvince Planned annual growth Five-Year PlansLiaoning 19% (nominal)Guangxi 15% (nominal) 15%Anhui 15% (nominal) 12%Shanxi 15% (nominal) 9%Heilongjiang 15% (nominal)Guizhou 13% - 18% (nominal) 6%Chongqing 12.5% 3%Sichuan 12%Xinjiang 12% 0%Tibet 12% 6th 7th 8th 9th 10th 11thJiangsu 10%Henan 10% (1980- (1986- (1991- (1996- (2001- (2006-Gansu 10% 1985) 1990) 1995) 2000) 2005) 2010)Hubei 10% Target ActualGuangdong 8%Source: Local government reports Source: HSBC 25

Inside the growth engine China Research abc December 2010Target speed limits are also being lifted – from Figure 18: 2020 targets: National vs. sum of local government targets200km per hour to 250km per hour for the majority 250of the railways. If achieved, it would mean that 156-240China had more trains travelling at 250km per hour 160than the rest of the world combined. Some mixed 120 100 70-80passenger and freight railways have been changedto passenger only in anticipation of a continuedincrease in passenger demand and a peak in freight Railw ay Wind pow er Nucleardemand, in keeping with the expected success of (km k) (kW mn) (kW mn)economic restructuring. Central gov ernment Total of local gov ernmentNote, many inter-provincial railway networks are Source: China Business Newsstill being planned, and have yet to be included inthe overall railway figure. For example, the city of Plans to build out clean energy – wind, nuclearXi’an’s inter-provincial railway link to the cities and hydropower – also far exceed the target set byof Wuhan, Chongqing and Chengdu has yet to be the central government. The government target isincluded in its parent Shaanxi province’s five-year already very aggressive because Beijing wants toplan. develop new strategic industries. LocalRed flag for potential excesses governments are planning to install 250mn kW ofThe danger, of course, is that too much is built. wind power capacity and 160mn kW of nuclearIndeed, the potential for excess was raised as an power by 2020. This is more than double theissue in a recent report submitted by the China respective targets of 100mn kW and 70-80mn kWAcademy of Science (CAS) to the State Council set by the National Energy Bureau (see Fig. 18).and has already caught Beijing’s attention. The The huge gap may force Beijing to raise itsreport highlighted concerns over unsustainable national targets.debt levels (railroad borrowing accounts for a Homogeneous competitionsixth of China’s total debt) and the risk of Overcapacity could be a problem in other areas,unprofitable operations. too. For example, the municipality of ChongqingFor example, the 1,000km Wuhan to Guangzhou is aiming to develop its Xiyong Electronics Parkbullet train that opened earlier this year is into one of the world’s leading IT manufacturingoperating at less than half its capacity and will bases with an annual capacity for 80-100mnever make enough money to repay the huge bank notebook PCs by 2015. If the city of Kunshan (inloans taken out to finance it, according to the CAS Suzhou, Jiangsu province) maintains its currentreport. High prices are one reason for the poor market share – it produces about half the world’sdemand but another problem is the lack of notebooks – by 2015 China will supply more thanintegration and connections between highways, 80% of the world’s notebook PCs. Such inter-subways, train stations and airports, which make it regional competition raises the risk ofinconvenient for passengers, as local officials who overcapacity if demand fails to catch up. Equally,caught the high-speed train fever tended to focus corporate buyers may become concerned abouton the speed of the train. oversupply and concentration risks.26

Inside the growth engine China Research abc December 2010Another example comes from the foreign trade Summaries of 21 of the major cities with thearea. Chongqing aims to become an international largest locally-headquartered companiestrade centre despite its inland location. It will (including non-SOE and privately-owned) areleverage its Chongqing-New Europe International provided from page 177, followed by cross-cityRailway Transport Channel (渝新欧国际铁路联 statistics from page 225 to 229.运大通道) that will link Chongqing to Germany. Finally, in our Appendices, we highlight ourWhen completed this will halve the time needed China Maps, which offer simple snapshots ofto transport goods by sea, raising total trade different aspects of China’s local economies involume from USD6.2bn in 2009 to USD100bn by terms of how they compare with the rest of the2012, according to the Chongqing government. world.The astronomical jump in Chongqing’s target forinternational trade volume may at first appear Our City Pyramids provide quick intelligence tounrealistic. However, considering the efficiency readers to help navigate a vast number of largeprovided by the pending China-Europe railway Chinese cities.link and the vast manufacturing facilities that Our latest update on minimum wages acrossChongqing is building (including PC notebook Chinese provinces provides a snapshot of risingcapacity mentioned above plus more discussed in labour costs, a trend that may have only justthe Chongqing section on page 78), the target begun.appears achievable. The summary of local government-sponsoredSuch local programmes may increase China’s venture capital funds on page 236 shows theexports to new levels. However, this, in turn, impact of increasing local power in terms ofcould lead to increased trade tensions between nurturing local businesses. Meanwhile on pageChina and its Western trade partners, especially 237 a glimpse of the changing landscape inthe US. China’s domestic IPO underwriting marketsThe first stage of a long journey reveals that emerging capital-raising by smallWe regard this research as the first stage of a long local enterprises has already started to upset thejourney towards understanding China from the investment banking business of the big financialground level up. We divide the 31 provinces, institutions at the centre.municipalities and autonomous regions into four We wish you an enlightening journey.regions, defined by government convention,according to stages of economic development andstrategic importance as well as geographiclocation. We examine the basic facts, strengths,challenges and the five-year outlook for each ofChina’s four regions, and provide key statisticsfor each of the 31 provinces. A cross-provincestatistical comparison is provided separately frompage 167 to 176. 27

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Inside the growth engineChina Research abcDecember 2010 Provinces 29

Inside the growth engine China Research abc December 2010Eastern Region The Eastern Region includes China’s top 3 municipalities and 7 provinces; 4 of them are the nation’s largest Most developed area, accounting for 54% of national GDP, 60% of bank assets/loans, 70% of mortgages, 86% of imports and 89% of exports Home to 65% of the nation’s securities companies, 82% of insurers and 95% of investment funds Figure 19: Map of the Eastern Region total. Its population is about 1.5 times the US and its per capita GDP is similar to South Africa. Dominant leader, especially in finance, trade and technology 1 The size of its economy actually understates its 5 9 7 national importance. For example, on the financial 6 side, the region accounts for more than 60% of 8 10 total bank assets, deposits and loans outstanding 2 and nearly 70% of China’s mortgages. It is home 3 to over 65% of securities companies, nearly 95% 4 of investment funds and 82% of insurance 1. Beijing 5. Hebei 8. Shanghai companies. It accounts for nearly all of China’s 2. Fujian 6. Jiangsu 9. Tianjin 3. Guangdong 7. Shandong 10. Zhejiang securities trading that includes stocks, futures and 4. Hainan key commodities via the two largest Exchanges in Source: HSBC Shanghai and Shenzhen (the latter in Guangdong province).China’s Eastern Region comprises the 7 richcoastal provinces (including the top 4 largest Trade is another area where the Eastern Regioneconomies) and 3 municipalities. Thanks to its overwhelms the rest. It accounts for 89% ofcoastal connection to the world, this region was China’s exports and 86% of imports. Nine out offirst to develop an open and trade-driven economy 10 top provinces in trade volume are from thisand grew to be China’s wealthiest region. The area. However, some inland regions, such asregion’s economy is similar to the size of France, Chongqing municipality, are seeking to catch upor RMB19trn GDP and 54% of the country’s on the international trade front by building railway links to Europe, which could halve30

Inside the growth engine China Research abc December 2010Eastern region summary 2009 Ranking Comparable country Rank as a countryPopulation (mn) 484 1 US x 1.5 3Area (sq km) 933,448 3 Nigeria 34Density (per sq km) 519 1 Korea 10GDP (RMBbn) 19,467 1 France 6GDP per capita (RMB) 40,186 1 South Africa 74GDP density (RMB per sqm) 21 1 Spain 27Source: HSBC, CEIC, IMF, CIAdelivery time versus shipping by sea and enable Growth headwinds and restructuringthem to take away some market share. However, the Eastern Region faces growthThe region leads the country in all primary, headwinds, partly attributable to its own success.secondary and tertiary sectors of the economy. It Costs of labour and property have become muchaccounts for 61% of China’s secondary sector, but higher than in other regions, with some coastalmore importantly, it has built very advanced high- cities being among the world’s most expensive.end and high tech-focused manufacturing in Large scale migration of the manufacturing basetransportation and electronics equipment, solar is underway. For example, Foxconn, the world’senergy components and textile products that have largest handset manufacturer with nearly 1mnsignificant global market share. A FAI to GDP employees in China, is quietly cutting itsratio below 0.5 compares favourably to the 0.74 employees in Shenzhen from 400,000 in June offor the rest, also suggesting its more advanced 2010 to 100,000 in one or two years, whilestage of economic development. opening new plants in more inland places like Hunan and Chengdu. Labour costs may keepThe Eastern Region continues to widen its lead in rising in the region due to changingexports, R&D expenditure, post-secondary demographics, policy support for wage hikes andeducation resources, income and personal slowing new migrant flows as some return home.consumption (it accounts for 53.6% of China’sconsumption with 36% of total population) and Although the region has China’s best universitiesdraws in migrants that push up its population that produce a large number of its brightestgrowth despite the region’s much lower birth rate graduates, they still lag behind leadingthan other areas. Virtually all headquarters of universities in the developed world in terms ofmultinational firms are based in the Eastern generating original research and turning that toRegion, further widening its lead in talent practical use. As such, building up world-classconcentration. Consequently, its average property high-tech industries, especially in the sevenprices saw a much larger jump in 2009 relative to strategic industry areas highlighted by the 12thelsewhere in China, widening the gap further. Five-Year Plan remains a big challenge for China’s most developed region.The Eastern Region is home to many of China’sworld-leading, home-grown companies. For Beijing’s policy shift toward supporting lessexample, Huawei, ZTE and Legend in IT developed regions is another challenge for themanufacturing; Alibaba, Baidu and Tencent in Eastern Region. Foreign capital flows seem tofast-growing online services; and giants in new have responded already. The region’s annual FDIenergy industries, such as Suntech and BYD. share has dropped steadily, from 77% in 2005 to 68% in 2009. 31

Inside the growth engine China Research abc December 2010Beijing (北京) High-tech climate: Silicon Valley “Squared” The primary sector has almost disappeared asSize Beijing is highly dependent on Hebei provinceLocated at the heart of the northern region, and others for food supply. Yet its secondaryBeijing has 18 million residents, 85% of which sector is still substantial at RMB274bn GDP inlive in urban areas. It has an area the same size as 2009, mainly from high-tech manufacturing suchKuwait, the GDP of Singapore and the per capita as communication equipment, electronics andGDP of Chile, yet its GDP per square meter automobiles. In particular, after moving its iron &already matches Switzerland’s. steel plant (Shougang Group/首钢总公司) toStrengths Hebei in 2008, Beijing became the second bestCentre of gravity provincial region in China in terms of fossil fuelBeing the nation’s political, cultural and energy efficiency. Backed by China’s topeducational centre as well as home to nearly 100 academic and research institutions, Beijing’sof China’s Top 500 companies (mostly SOEs), Zhongguancun (中关村) area is considered to beBeijing is the place to go to seek policy direction China’s Silicon Valley, providing a high-techor interpretation, regulatory approvals, friendly climate where entrepreneurs thrive. Theconsultation on development and relationship area is also the most popular spot for manybuilding. venture capital funds. Legend Holdings (联想控股), Founder Group (北大方正集团) andConsumption base Tsinghua Holdings (清华控股) are China’s top ITBeijing has the highest share of tertiary GDP companies and the latter two were respectivelyamongst the 31 provinces/municipalities. The size founded in and named after Beijing Universityof the tertiary sector has reached RMB900bn, and Tsinghua University, two of China’s leadingmostly contributed by retail consumption universities.(RMB531bn), financial and IT services. Beijinghas the highest average annual retail consumption In fact, Zhongguancun has already becomein China, thanks to its second highest average Silicon Valley “Squared” in terms of high-techwage and large spending by travellers. China IPOs. For example, in 2009, 23 high-techResources (华润集团), Gome Electrical companies based in Zhongguancun went publicAppliances Holding (国美电器), Wumart Group while Silicon Valley had only one IPO. Moreover,(物美控股集团) and Yanjing Beer Group (燕京 Zhongguancun has launched another 35 IPOs啤酒集团) are some of the national brands in year-to-date and the trend looks likely to continueconsumer products and services that built their for years to come.brands from Beijing.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 18 26 Angola 58Area (sq km) 16,411 29 Kuwait 148Density (per sq km) 1,069 2 1/6 of HK 8GDP (RMBbn) 1,187 13 Singapore 44GDP per capita (RMB) 70,452 2 Chile 50GDP density (RMB per sqm) 72 2 Switzerland 9Source: CEIC, IMF, CIA, HSBC32

Inside the growth engine China Research abc December 2010Financial centre, Chinese-style Mega-metropolitan capitalWith all of the major regulators, especially the As a long-term solution, Beijing is planning toPBoC (People’s Bank of China), CSRC (China create a mega-metropolitan capital that integratesSecurities Regulatory Commission), CBRC Beijing, Tianjin and Hebei province as an(China Banking Regulatory Commission), CIRC Economic Cooperation Zone similar to China’s(China Insurance Regulatory Commission), SAFE other three Deltas, i.e., the Yangtze River Delta,(State Administration of Foreign Exchanges) and the Pearl River Delta and the newly emergingSASAC (“State-owned Assets Supervision and West Triangle (Chongqing, Chengdu and Xi’an).Administration Commission”) all in and near the As Tianjin and Beijing are already linked by aFinancial Street (金融街) area, Beijing will bullet train, Beijing will expand its subway byalways be a key financial centre. 1,100km (a length similar to all the tracks in New York City) to cover the eastern and southern partsChallenges of Hebei province.Crowded metropolitan areaBeijing’s urban population has been increasing at A total of 13 county level cities in Hebei will falla CAGR of 2.7% over the last decade, more than under Beijing’s telephone area code, suggestingfour times the national average rate. With more Beijing’s administrative reach may expand in themoving in by the day to chase higher income, a next five years.better education or modern urban life, the Map of Beijingpopulation may have exceeded the capital’scapacity. Consequently, Beijing already has theworst traffic congestion and highest real estateprices (city centre average price aroundRMB30,000 per sqm in 2009) amongst mainlandcities. PBoC, CSRC, CBRC, CIRC, SAFE, SASACFive-year outlook Central gov ernmentEasing metropolitan congestion HQs of 98 ChinaBeijing aims to ease city congestion by reducing Top 500 companies Zhongguancunthe concentration of government institutions and Downtown areacommercial activity in certain areas whilecontaining population growth. Beijing plans toincrease the supply of public rental housing fromthe current 1.3mn sqm to 6.6mn sqm, starting in Source: HSBC2011. Top officials Party Secretary: Liu Qi (刘淇) Mayor: Guo Jinlong (郭金龙) 33

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Beijing Urban and rural population 2009 - Beijing Total Total Primary Urban Secondary Rural Tertiary 0 5 10 15 20 0 500 1,000 1,500 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Beijing Annual fixed asset investment 2008 - Beijing Total Urban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 20,000 25,000 30,000 Others RMB 0 100 200 300 400 500 600 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Beijing Government income and expenditure 2009 - Beijing Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit) -60 -40 -20 0 20 40 -300 -200 -100 0 100 200 300 USD (bn) RMB (bn) Source: CEIC Source: CEIC34

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Beijing Annual fixed asset investment - Beijing 80 1,500 100% 60 80% 1,000 RMB (k) 60% RMB (bn) 40 40% 500 20 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2003 Source: CEIC Source: CEIC, HSBC Exports/imports – Beijing Commodity building volume and price - Beijing 60 40 15 RMB (k) per sqm 30 10 sqm (mn) 40 USD (bn) 20 5 20 10 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Beijing Beijing 300 80 120 900 250 60 90 200 600 RMB (bn) kwh (bn) RMB (bn) km 150 40 60 100 300 20 30 50 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC 35

Inside the growth engine China Research abc December 2010Fujian (福建) to develop into a main tourist attraction. Mountainous areas also provide some rich metalSize reserves. Although Fujian is not China’s majorLocated in the southeast of mainland China and mining hot spot, Zijin Mining Group (紫金矿业)alongside the Taiwan Strait, Fujian has the same is still one of China’s largest mining companies.area as Greece, is 63% covered by forests (thehighest in the country), has a population of 36mn Fujian has an even rural and urban population split,(similar to Kenya), the GDP of Nigeria and GDP with rich agricultural output. Although Fujian has itsper capita of RMB33,840, similar to Dominica. own manufacturing base in machinery, electronicsFujian’s total retail consumption (RMB448bn) is and petrochemicals contributing RMB157bn to itscomparable to Beijing and Shanghai, or about half RMB1.2trn GDP in 2009, it is far less dependent onof the latter on a per capita basis. manufacturing than its rich peers, such as Guangdong and Zhejiang. There is still room forStrengths Fujian to expand its service sector, especially inCross-Strait entry point tourism, revenue from which still grows at 18% pa.As a point of entry between Taiwan and the Already, Fujian ranks third, behind Guangdong andmainland, Fujian’s fortunes and importance have Beijing, in terms of energy efficiency.been tied to the changing cross-Strait relationship.Before the 80s, concerns about potential military Challengesconflict dominated and that raised Fujian’s strategic No longer a check pointimportance in the country. Over the past 20 years, Fujian enjoyed its unique role as the sole hub for allFujian thrived as political tensions eased and as air and sea transportation between Taiwan and thecloser economic cooperation across the Strait mainland until a few years ago when direct linksbrought in Taiwanese investment, boosting trade at with the rest of the country were permitted.the same time. During this period, companies like Already, the province has fallen behind GuangdongXiamen C&D (厦门建发集团) and Xiamen ITG and Jiangsu in terms of attracting investment fromGroup (厦门国贸集团) grew to join China’s Top Taiwan, and the trend may continue.500 list on the back of trade, investment and Meanwhile, Fujian remains dependent on FAI,construction in the province’s port city. However, which accounts for more than 50% of its latestgrowth has slowed during the last few years as GDP. For example, in 2009, Fujian extended thedirect links between other provinces and Taiwan length of its railways and highways by 31% andreduced Fujian’s role as a critical entry point. 14%, respectively. It expanded its port handlingGreen province with natural beauty and power generation capacity by 27% and 15%,Fujian has the biggest forest coverage in China respectively. A new growth model is needed aswith plenty of natural assets that have enabled it more traffic could pass through Fujian.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 36 18 Kenya 34Area (sq km) 124,016 23 Greece 92Density (per sq km) 292 14 Burundi 23GDP (RMBbn) 1,195 12 Nigeria 44GDP per capita (RMB) 33,840 10 Dominica 82GDP density (RMB per sqm) 10 10 United States 42Source: CEIC, IMF, CIA, HSBC36

Inside the growth engine China Research abc December 2010Five-year outlook Major cities (by GDP)Accelerating industrial growth Quanzhou (泉州), Fuzhou (福州, capital),Fujian believes its industrial sector still has a long Xiamen (厦门), Zhangzhou (漳州), Longyan (龙way to go with room to nurture more enterprises 岩), Sanming (三明), Putian (莆田), Nanping (南with annual sales above RMB10bn. 平), Ningde (宁德)The main targets of Fujian’s 12th Five-Year Plan Top officialsare in the industrial sector. For example, 40% of Party Secretary: Sun Chunlan (孙春兰)FAI must be in the industrial sector, growth in Governor: Huang Xiaojing (黄小晶)secondary industries must account for at least55% of GDP growth, and 50 enterprises are tohave annual sales of RMB10bn by 2015, with afew above RMB100bn. It also sets a target to raiseR&D spending to the national average. Map of Fujian Ningde Nanping Fuzhou Sanming Putian Longyan Quanzhou Xiamen Zhangzhou Source: HSBC 37

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Fujian Urban and rural population 2009 - Fujian Total Total Primary Urban Secondary Rural Tertiary 0 10 20 30 40 0 200 400 600 800 1,000 1,200 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Fujian Annual fixed asset investment 2008 - Fujian Total Urban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 20,000 Others RMB 0 100 200 300 400 500 600 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Fujian Government income and expenditure 2009 - Fujian Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit) -40 -20 0 20 40 60 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC38

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Fujian Annual fixed asset investment - Fujian 40 1,200 100% 30 80% 800 RMB (k) 60% RMB (bn) 20 40% 400 10 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Fujian Commodity building volume and price - Fujian 60 30 6 RMB (k) per sqm 20 4 sqm (mn) 40 USD (bn) 10 2 20 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Fujian Auto sales and expressway growth - Fujian 600 120 30 2,000 1,500 400 80 20 RMB (bn) kwh (bn) RMB (bn) km 1,000 200 40 10 500 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC 39

Inside the growth engine China Research abc December 2010Guangdong (广东) Leader in growth quality Compared to other wealthy provinces,Size Guangdong’s GDP is least dependent on FAI,Located in the southeast corner of mainland which only accounted for 33% of its 2009 GDP,China, north of Hong Kong and Macau, much lower than the national average of 60%. TheGuangdong is the largest province in terms of province led the country in moving to focus onpopulation (96mn or equivalent to Mexico) and technology upgrades and value-added industriesGDP (RMB3.9trn or equivalent to Turkey) and and services.would rank 17th in the world if it were a country.It has the land area of Uruguay (180,000 sq km) Manufacturing hub attracts migrant workersand GDP per capita of Bulgaria (or South Africa). Traditionally, Guangdong is a major manufacturer of light industries such as textiles, food, beveragesStrengths and toys. However, the major industries have nowNational leader in foreign trade shifted to IT products and services, electronics, andGuangdong is the largest exporter and importer in machinery used in power generation andthe country, with international business transportation. Many of them have become nationaltransactions worth USD632bn in 2009, more than and global leaders in their respective industries.a quarter of the country’s total. The annual Canton Examples include China Southern Power Grid (中Fair, hosted in Guangzhou, is the largest trade fair 国南方电网, China’s second largest electricityin China, attracting more than 150,000 visitors distributor), Huawei Technologies (华为技术, thefrom around 200 countries and regions every year. world’s No.2 telecommunications equipmentThanks to its proximity to Hong Kong, Macau and provider), Ping An Insurance (中国平安保险, theTaiwan, Guangdong is the largest counterparty for third largest insurance company in China), Chinatheir trade with China. However, compared to Merchants Bank (招商银行) and household names2000, Guangdong’s share of China’s total trade in home appliances such as Midea (美的), TCL andvolume has dropped from 37% to 29%, losing Gree (格力).ground to faster-growing Jiangsu, Zhejiang andShandong provinces. Guangdong Foreign Trade The surge in Guangdong’s manufacturingGroup (广东省广新外贸集团), Guangdong Silk- capability attracted 30 million migrants fromTex Group (广东省丝绸纺织集团) and China across the country to live in this province,International Marine Containers (中国国际海运 providing abundant cheap labour since the early集装箱) are the leading service providers for 80s that has underpinned the province’s strengthGuangdong’s foreign trade sector. in manufacturing. However, the growth has tapered off as local costs rose faster than elsewhere in the country.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 96 1 Mexico 11Area (sq km) 179,813 15 Uruguay 86Density (per sq km) 536 7 Korea 10GDP (RMBbn) 3,908 1 Turkey 17GDP per capita (RMB) 41,166 6 Bulgaria 74GDP density (RMB per sqm) 22 5 Lebanon 26Source: CEIC, IMF, CIA, HSBC40

Inside the growth engine China Research abc December 2010Financial hub for growth enterprises Five-year outlookGuangdong has an active multi-tier capital market, Lower GDP targetsthe Shenzhen Stock Exchange that comprises the Guangdong will lower its growth targets for GDPmain board, SME board and ChiNext market with and per capita GDP to minimums of 8% and 7%,total market capitalisation of RMB5.6trn as at June respectively, to become less export-dependent and30, 2010. Although ranked second behind the more service-oriented in the coming five years.Shanghai Stock Exchange, the Shenzhen Stock This shows Guangdong’s determination toExchange is best known as a national leader in restructure as the lower growth target may resultfunding growth enterprises, especially high-tech in the loss of its status as the largest provincialand SMEs. Household names and global leaders economy to Jiangsu or others.listed in Shenzhen include Wuliangye (五粮液),Vanke (万科) and Suning (苏宁). However, actual growth may still be higher than targeted, since the province has a GDP CAGR ofPromising high-tech centre 11.7% for the current Five-Year Plan, way aheadIn many ways, China’s growth story over the last of its target of 9%.30 years started from Shenzhen, the secondlargest city in Guangdong. The city has been at Pearl River Delta ambitionsthe forefront of China’s technology development The “Reform and Development Plan for the Pearldrive since the 1980s. Many of the world’s high- River Delta” will be at the heart of Guangdong’stech leaders such as Huawei, Tencent (腾讯, next Five-Year Plan with its main targets being:which holds a monopoly in China’s internet Modern service industry to account for 62%communication market and is a major content of value added services;provider with the largest market cap amongChinese IT companies) and ZTE (中兴通讯) were Per capita GDP to reach RMB80,000;founded here. Service industry to account for 53% of GDPChallenges from current 45%;Painful restructuring ahead 81% urbanization rate; andGuangdong’s rapid economic growth over the last R&D to account for 2.5% of GDPthree decades has pushed up its cost base,including wages and land prices, far above the Map of Guangdongnational average. Meanwhile, much of inlandChina still enjoys plenty of cheap labour and land Shaoguan Meizhousupply that is increasingly causing the migration Qingyuan Heyuan Chaozhouof manufacturing businesses away from rich Guangzhou Jieyangcoastal provinces such as Guangdong. This recent Zhaoqing Huizhou Shantou Foshanmovement will only continue as China’s supply of Jiangmen Shenzhen Shanwei Zhuhaiyoung workers starts to peak as the population Yangjiang Maomingages. This has a negative impact on Guangdong’s Zhongs hansecondary industry near term, but is good for its Zhanjiangservices industry and could expedite Guangdong’stransition toward high value-added industries. Source: HSBC 41

Inside the growth engine China Research abc December 2010Major cities (by GDP)Guangzhou (广州, capital), Shenzhen (深圳),Foshan (佛山), Dongguan (东莞), Zhongshan (中山), Huizhou (惠州), Jiangmen (江门), Maoming(茂名), Zhanjiang (湛江), Zhuhai (珠海), Shantou(汕头), Qingyuan (清远), Jieyang (揭阳),Zhaoqing (肇庆), Shaoguan (韶关), Yangjiang(阳江), Meizhou (梅州), Chaozhou (潮州),Heyuan (河源), Shanwei (汕尾), Yunfu (云浮)Top officialsParty Secretary: Wang Yang (汪洋)Governor: Huang Huahua (黄华华)42

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Guangdong Urban and rural population 2009 - Guangdong Total Total Primary UrbanSecondary Rural Tertiary 0 20 40 60 80 100 0 1,000 2,000 3,000 4,000 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Annual fixed asset investment 2008 - Guangdong Guangdong TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 20,000 25,000 Others RMB 0 500 1,000 1,500 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Guangdong Government income and expenditure 2009 - Guangdong Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-400 -200 0 200 400 -400 -200 0 200 400 USD (bn) RMB (bn) Source: CEIC Source: CEIC 43

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Guangdong Annual fixed asset investment - Guangdong 40 4,000 100% 30 80% 3,000 RMB (k) 60% RMB (bn) 20 2,000 40% 10 1,000 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Source: CEIC Source: CEIC, HSBC Exports/imports - Guangdong Commodity building volume and price - Guangdong 400 80 8 RMB (k) per sqm 300 60 6 sqm (mn) USD (bn) 40 4 200 20 2 100 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Guangdong Guangdong 2,000 400 300 4,500 1,500 300 240 3,600 RMB (bn) kwh (bn) RMB (bn) 180 2,700 km 1,000 200 120 1,800 500 100 60 900 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC44

Inside the growth engine China Research abc December 2010Hainan (海南) Therefore, Hainan’s tourism and its overall economy can be expected to elevate to a new level.SizeLocated in the South China Sea and comprising Agricultural baseHainan Island plus over 200 small islands, Hainan With the agricultural sector accounting for theis China’s southern-most province. It has the same largest share of its GDP (close to 30%), Hainan island area as Moldova (or Taiwan) and the traditionally focused on agriculture. Because of itspopulation of Austria; it is the fourth least tropical climate, Hainan is an important source ofpopulous province in China. Hainan was paddy rice, coconuts, palm oil, tropical fruit andestablished as a new province and a Special fisheries. Other than automobile equipment,Economic Zone in 1988 after spinning off from Hainan’s secondary industry is small, makingGuangdong province. tourist-related services and agriculture the main drivers of growth in this economy ranked 28th inStrengths China in terms of GDP.Tourist attractionWith a coastline stretching for 1,580 kilometres Offshore oil and gas reservesand a tropical climate, Hainan has the unique Hainan may benefit from the recent discovery ofadvantage of natural beauty and green ecology. large oil and gas reserves in the South China Sea.Geographically, it has the same latitude as the Some industry experts think Hainan might be oneworld’s best resorts such as Hawaii, Bali and of the richest provinces in terms of oil and naturalPhuket. The quality of its beaches, sunshine, gas deposits, suggesting it could gain more fromclimate and natural tropical forest coverage (more future exploration. However, risks involved inthan 58% of the land) is also on par with Monaco, exploring far away and using deep sea resourcesNice and the Hawaiian Islands. It has world-class and the rumbling dispute with neighbouringtourist facilities that include the largest number of countries over ownership of islands near the South5-star hotels per capita. Total traveller visits to the China Sea could hold back Hainan’s offshoreprovince hit 22mn in 2009, bringing RMB21bn in drilling prospects.revenue, a 10% year-on-year increase despite the Gaming industry potentialoverhang of the financial crisis in 1H2010. The State Council’s strategic plan also leaves theThanks to its booming tourism industry, Hainan door open for Hainan to explore the potential ofAirlines (海航集团) is in China’s Top 500 the gaming industry. The development of “large-company list, the only one from the province. scale international sports lottery and other lotteryIn December 2009, the State Council announced events” is explicitly mentioned while other formsits strategic plan to make Hainan a world-class of gaming are not explicitly prohibited.“International Tourist Destination” by 2020.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 9 28 Austria 88Area (sq km) 35,354 28 Moldova 131Density (per sq km) 244 17 Jamaica 30GDP (RMBbn) 165 28 Panama 90GDP per capita (RMB) 19,254 23 Vanuatu 107GDP density (RMB per sqm) 5 17 Romania 53Source: CEIC, IMF, CIA, HSBC 45

Inside the growth engine China Research abc December 2010Challenges Major cities (by GDP)Risk of another property market crash Haikou (海口, capital), Sanya (三亚)Hainan went through China’s biggest property Top officialsbust in its modern history in the 1990s. Its realestate market, mostly in the city of Sanya, was Party Secretary: Wei Liucheng (卫留成)extraordinarily active entering 2010 after the Governor: Luo Baoming (罗保铭)government announced its plan to develop Hainaninto a leading tourist destination. The price indexfor commodity buildings jumped 50% during thefirst 8 months of 2010, despite a nationwidecrackdown on the property sector that began inApril. Property sales, most of which were luxuryunits bought by people from other provinces forinvestment, exploded by 73% to RMB35bnrevenue in 2009, raising the spectre of anotherproperty bubble.Five-year outlookConstruction of rural roadsHainan plans to build 10,000km of rural roads ontop of 15,588km to be completed at the end of thecurrent Five-Year Plan. Map of Hainan Haikou Sanya Source: HSBC46

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Hainan Urban and rural population 2009 - Hainan Total Total Primary UrbanSecondary Rural Tertiary 0 2 4 6 8 10 0 50 100 150 200 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Hainan Annual fixed asset investment 2008 - Hainan TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 Others RMB 0 20 40 60 80 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Hainan Government income and expenditure 2009 - Hainan Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-8 -6 -4 -2 0 2 4 -60 -40 -20 0 20 40 USD (bn) RMB (bn) Source: CEIC Source: CEIC 47

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Hainan Annual fixed asset investment - Hainan 25 200 100% 20 80% 150 RMB (k) 15 60% RMB (bn) 100 10 40% 5 50 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Hainan Commodity building volume and price - Hainan 8 6 8 RMB (k) per sqm 5 6 6 4 sqm (mn) USD (bn) 3 4 4 2 2 1 2 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Hainan Hainan 50 15 12 800 40 600 10 8 RMB (bn) kwh (bn) RMB (bn) 30 km 400 20 5 4 10 200 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC48

Inside the growth engine China Research abc December 2010Hebei (河北) raise Hebei’s strategic importance as it becomes a leading supplier of agricultural products (withSize 58% rural population, one of the highest in China)Located in north China and surrounding Beijing in addition to being a heavy industrial base andand Tianjin, Hebei is the 6th most populous railway/expressway hub. Hebei may enjoy moreprovince in China (70mn people, equivalent to employment gains in mid- to low-end industriesTurkey). It has a land area the size of Syria, the as both Beijing and Tianjin are seeking toGDP of Thailand, GDP per capita of El Salvador restructure to high tech or tertiary sectors.(or Fiji) and GDP per sqm of Poland. ChallengesStrengths Largest polluterKingdom of iron and steel The flip side of the ongoing industry migration isHeavy industry accounts for the lion’s share of that Hebei has become one of most seriouslyHebei’s GDP, led by iron and steel. Hebei is polluted areas in China. To ensure sustainableChina’s largest producer of crude steel with nearly growth and to meet the low-carbon intensity target25% of market share in China. Most of Hebei’s set by the State Council, the province needs tolargest companies are iron and steel related, such find a solution to maintain its strength in the ironas Hebei Iron and Steel Group (河北钢铁集团), and steel industry whilst upgrading its technologyHebei Jinxi Iron & Steel (河北津西钢铁集团), and improving production efficiency.Tangshan Ruifeng Iron and Steel Group (唐山瑞丰钢铁), Hebei Wenfeng Iron and Steel (河北文 Pending iron and steel consolidation丰钢铁) and the other three companies all have In addition to seven large iron and steelannual revenues above RMB10bn. Therefore, companies with a combined RMB10trn annualHebei is the largest consumer of coking coal (20% sales, there are over 80 small-to-medium sizedof the nation’s total). The growth will continue as companies in this industry. To meet Beijing’sthe relocation of Shougang Group (首钢集团), aggressive energy efficiency targets, large scaleChina’s sixth largest steel company in terms of industry consolidation or M&A is inevitable in thesales, has yet to complete. Hebei’s leading coming years, and presents a great challenge toposition in the steel industry is expected to local governments (but a great opportunity forstrengthen once the relocation is completed. investment banking advisory services).Entry point to Beijing/Tianjin Five-year outlookHebei has the third longest railway and fifth Development around Beijing-Tianjin arealongest expressway amongst all provinces since it Geographically, Hebei will focus on developmentconnects the two leading municipalities, Beijing in the area surrounding Beijing and Tianjin, an areaand Tianjin, with the rest of China. These linksGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 70 6 Turkey 18Area (sq km) 188,434 13 Syrian Arab Republic 84Density (per sq km) 373 10 Lebanon 13GDP (RMBbn) 1,703 6 Thailand 33GDP per capita (RMB) 24,581 12 El Salvador 101GDP density (RMB per sqm) 9 11 Poland 44Source: CEIC, IMF, CIA, HSBC 49

Inside the growth engine China Research abc December 2010the size of Greece, with the population of Poland Major cities (by GDP)and a GDP slightly below that of the Philippines. Tangshan (唐山), Shijiazhuang (石家庄, capital),The State Council aims to turn Hebei into: Handan (邯郸), Cangzhou (沧州), Baoding (保 An advanced manufacturing base in the north; 定), Langfang (廊坊), Xingtai (邢台), Qinhuangdao (秦皇岛), Zhangjiakou (张家口), A modern logistics base; Chengde (承德), Hengshui (衡水) A central area for strategic resource reserves; Top officials An industrial base for transforming Party Secretary: Zhang Yunchuan (张云川) technological advances in the Beijing-Tianjin Governor: Chen Quanguo (陈全国) area; Green and healthy food and secondary energy base; and A centre for high-end leisure travel that complements Beijing and Tianjin. Map of Hebei Zhangjiakou Chengde Qinhuangdao Langfang Tangshan Baoding Shijiazhuang Cangzhou Hengshui Xingtai Handan Source: HSBC50

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Hebei Urban and rural population 2009 - Hebei Total Total Primary UrbanSecondary Rural Tertiary 0 20 40 60 80 0 500 1,000 1,500 2,000 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Hebei Annual fixed asset investment 2008 - Hebei TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 Others RMB 0 200 400 600 800 1,000 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Hebei Government income and expenditure 2009 - Hebei Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-25 -15 -5 5 15 25 -300 -200 -100 0 100 200 USD (bn) RMB (bn) Source: CEIC Source: CEIC 51

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Hebei Annual fixed asset investment - Hebei 30 2,000 100% 25 80% 1,500 20 RMB (k) 60% RMB (bn) 15 1,000 10 40% 500 5 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Hebei Commodity building volume and price - Hebei 30 30 4 RMB (k) per sqm 3 20 sqm (mn) 20 USD (bn) 2 10 10 1 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Hebei Auto sales and expressway growth - Hebei 900 250 60 4,000 200 45 3,000 RMB (bn) 600 kwh (bn) RMB (bn) 150 km 30 2,000 100 300 15 1,000 50 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC52

Inside the growth engine China Research abc December 2010Jiangsu (江苏) strategic industries such as banking and energy, companies in Jiangsu are mostly privately-ownedSize (nearly 80% of the largest ones), covering a wideLocated in the middle of China’s coastline and range of businesses with most headquartered inbordering the north of Shanghai, Jiangsu has the the cities of Wuxi, Suzhou and Nanjing.land area of Iceland, a population the size of Egypt(it is China’s fourth most populous province), GDP In addition to the list of companies in the Citiesof Indonesia, GDP per capita of Botswana and section (see p.194, p.207 and p.213 for Nanjing,GDP per sqm that has already surpassed Austria. Suzhou and Wuxi, respectively), other household names in Jiangsu include Yueda Group (江苏悦Strength 达集团), Xuzhou Construction Machinery GroupBalanced behemoth and still growing (徐州工程机械集团), Zenith Steel Group (中天Jiangsu, the second largest local economy behind 钢铁集团), Macalline (红星家具) and ChinaGuangdong province in terms of GDP and trade Baixing Group (百兴集团).(with exports and imports worth USD207bn and Thriving private enterprisesUSD159bn, respectively), has been growing from What sets Jiangsu apart from other provinces is itsa traditional agriculture plus light industry success in nurturing private entrepreneurship.economy into a balanced and diversified one. It is: Among the Top 500 Chinese Private Enterprises or the world’s leading manufacturer and non-SOEs, 129 are based in Jiangsu (an increase exporter of solar power equipment, from 109 in 2008, despite the global financial chemicals, electronic equipment, textiles, crisis) and include the first-ranked Shagang Group materials and other machinery; and (沙钢集团) and the second-ranked Suning the most popular destination for FDI Appliance Corporation (苏宁电器集团). (USD25.3bn for 2009) and led the nation for In addition, the city of Nantong in Jiangsu is the fourth consecutive year in 2009, home to China’s best known non-state-owned suggesting strong growth ahead. construction teams, competing and thriving in aAmongst the “big-four” provinces in China, crowded space usually dominated by state-ownedGuangdong, Jiangsu, Shandong and Zhejiang, construction conglomerates. Among them areJiangsu has the fastest growth rate. Nantong No.3 Construction Group (南通三建集团), Zhongnan Group (中南控股集团), JiangsuJiangsu had 59 companies with more than Suzhong Construction Group (江苏省苏中建设RMB10bn revenue in 2009, second only to 集团) and Nantong No.2 Construction Group (江Beijing with 98 (thanks to its capital city status). 苏南通二建集团). All are leading constructionMore importantly, unlike Beijing where the players ranked in China’s Top 500 list.leading companies are state-owned monopolies inGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 77 5 Egypt 16Area (sq km) 106,742 24 Iceland 101Density (per sq km) 724 4 Barbados 8GDP (RMBbn) 3,406 2 Indonesia 19GDP per capita (RMB) 44,744 5 Botswana 70GDP density (RMB per sqm) 32 4 Austria 21Source: CEIC, IMF, CIA, HSBC 53

Inside the growth engine China Research abc December 2010Leader in securitization Speed Railway, which is expected to startMany of the county-level cities in Jiangsu, such as operating in summer 2011.Jiangyin, Changshu, Zhangjiagang and Kunshan, Five-year outlooklead the nation in the level of securitisation with Slowing from 14% to 10% annual GDP growth128 listed companies in total. The province leadsthe country in fund-raising via capital markets Jiangsu aims to switch its growth model frominstead of bank loans. quantity to quality with a 4 percentage point cut in its annual growth rate, or from a CAGR in its GDPNational leader in R&D of 14% to 10%. That is a nearly 30% slowdown, aIn 2008, Jiangsu passed Beijing for the first time gigantic commitment to growth quality. At the endto become the nation’s top spender on R&D. of 2015, GDP per capita is expected to exceedUnlike Beijing which is a centre for institutional USD10,000, compared with approximatelyresearch, Jiangsu’s R&D has been driven more by USD7,000 at the end of 2010. Jiangsu iscorporations seeking to advance their technology determined to focus more on high tech, emergingand move up the value chain with a strong focus new industries and service industries. It willon the corporate bottom line. Consequently, R&D significantly increase its R&D expenditure fromis the main force behind the success of Jiangsu’s RMB58bn in 2008 to RMB161bn in 2015, despiteprivate enterprises. already having led the country in R&D spending.Strategic location Railway expansionThe Yangtze River, Asia’s longest (6,300km) and Given Jiangsu is China’s second largest economythe world’s third largest river, second only to the and may surpass Guangdong in terms of GDP inNile in northeast Africa and the Amazon in South 2012, it is imperative to expand its intra and inter-America, cuts through Jiangsu. With five giant provincial railway links for passengers and cargo.bridges completed and three more underway Jiangsu plans to more than double its railway(prior to which there was only the Nanjing- coverage from 1,678km in 2008 to 3,700km by 2015.Yangtze bridge), Jiangsu will become a key Map of Jiangsutransit port connecting the north and south. It isalso a key transit place for the pending Beijing-Shanghai High-Speed Railway. Lianyungang XuzhouChallenge Suqian Huaian YanchengNarrowing the wealth divideThe Yangtze River not only divides Jiangsugeographically, it also sets apart the northern and Taizhousouthern parts economically. GDP per capita in Yangzhouthe south (about RMB80,000) is more than triple Zhenjiang Nantong Nanjingthat in the north (about RMB23,000). However, Changzhou Wuxi Suzhoulying geographically below Shandong, anotherwell-developed province, northern Jiangsu hasgreat potential to reduce the gap with its southern Source: HSBCarea by increasing cross-province transactions andtaking advantage of the Beijing-Shanghai High-54

Inside the growth engine China Research abc December 2010Major cities (by GDP)Suzhou (苏州), Wuxi (无锡), Nanjing (南京,capital), Nantong (南通), Changzhou (常州),Xuzhou (徐州), Yancheng (盐城), Yangzhou (扬州), Zhenjiang (镇江), Taizhou (泰州), Huaian(淮安), Lianyungang (连云港) and Suqian (宿迁)Top officialsParty Secretary: Luo Zhijun (罗志军)Governor: Li Xueyong (李学勇) 55

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Jiangsu Urban and rural population 2009 - Jiangsu Total Total Primary Urban Secondary Rural Tertiary 0 20 40 60 80 0 1,000 2,000 3,000 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Jiangsu Annual fixed asset investment 2008 - Jiangsu Total Urban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 20,000 25,000 Others RMB 0 500 1,000 1,500 2,000 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Jiangsu Government income and expenditure 2009 - Jiangsu Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit) -200 -100 0 100 200 300 -400 -200 0 200 400 USD (bn) RMB (bn) Source: CEIC Source: CEIC56

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Jiangsu Annual fixed asset investment - Jiangsu 50 100% 3,000 40 80% RMB (k) 30 2,000 60% RMB (bn) 20 40% 1,000 10 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: Average retail consumption is not available until 2005. Source: CEIC Source: CEIC, HSBC Exports/imports - Jiangsu Commodity building volume and price - Jiangsu 250 100 6 RMB (k) per sqm 80 5 200 4 sqm (mn) 60 USD (bn) 150 3 40 100 2 20 1 50 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Jiangsu Jiangsu 2,000 400 120 4,000 1,500 300 90 3,000 RMB (bn) kwn (bn) km RMB (bn) 1,000 200 60 2,000 500 100 30 1,000 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC 57

Inside the growth engine China Research abc December 2010Shandong (山东) trade and technological upgrade) and registered a nominal 18.1% average annual growth for the lastSize decade to reach RMB1.9trn in 2009. A total of 56Located at the upper part of China’s coast line and of China’s Top 500 companies wereacross the Yellow Sea to South Korea, Shandong is headquartered in Shandong in 2009, a significantthe third most populous province in China with a pick up from 37 in 2005. The large ones includepopulation of 95mn or similar to the Philippines. It Haier Group (海尔集团), Shandong Iron andhas a land area the same size as Tunisia, the GDP Steel Group (山东钢铁集团), Shandong Weiqiaoof Switzerland (also third largest in the country) Pioneering Group (山东魏桥创业集团), Hisenseand GDP per capita of the Dominican Republic. Group (海信集团) and China National HeavyStrengths Duty Truck Group (中国重型汽车集团).Largest agricultural base Major port on the Pacific OceanShandong is China’s largest provider of The Shandong Peninsula, stretching out into theagricultural products and related services that Pacific Ocean, has two of the largest economies ininclude a wide range of wheat, corn, vegetables, the province, the cities of Qingdao (青岛) andfruit, seafood and animal husbandry. Total Yantai (烟台), where this year the busy Qingdaoinvestment in the agricultural sector reached port will open the world’s largest iron oreRMB114bn in 2009, or 3.4% of its GDP, which terminal. Qingdao has been a foreign investmentfurther strengthened its leadership position. Linyi destination since the late 1970s due to itsXincheng Jinluo Meat Products Co. (临沂新程金 proximity to Japan and Korea and its cultural锣肉制品集团), yet to go public, is Shandong’s roots as a former German colony.largest company in this sector. Tourist destinationSignificant infrastructure upgrade Tourism is the largest contributor to Shandong’sShandong led the nation in infrastructure spending services sector with RMB245bn in 2009. Thein 2009 at more than RMB1.9trn, or 56% of the province’s main attraction is its natural beauty andprovince’s GDP. The dependence of its GDP cultural heritage (e.g., it is the birthplace ofgrowth on FAI has been rising steadily in recent Confucianism). Shandong, especially Shandongyears as Shandong makes significant investments Peninsula is the South Koreans’ first choice forin restructuring its 10 major industries and both investment and travel destination in China,expands railway and highway coverage rapidly largely due to its proximity. The city of Qingdaoacross the province. is also well known for its annual beer festival andSecondary industry in Shandong has benefited the yachting culture. More recently, Koreanmost from rising FAI (plus growth in international companies have started to expand their business and investment from eastern Shandong to theGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 95 3 Philippines 12Area (sq km) 157,126 19 Tunisia 88Density (per sq km) 603 5 Mauritius 9GDP (RMBbn) 3,381 3 Switzerland 19GDP per capita (RMB) 35,894 8 Dominican Republic 79GDP density (RMB per sqm) 22 7 Spain 27Source: CEIC, IMF, CIA, HSBC58

Inside the growth engine China Research abc December 2010inner western part, further benefiting the Five-year outlookprovince’s economy. Technology upgradeChallenges The focus for the coming five years is on technology upgrade to improve energy efficiency.Worst in energy efficiency Six industries and 1,000 technology upgradeDespite the closure and upgrade of a large number programs have been identified.of inefficient producing and energy-consumingfacilities in the last decade, Shandong remains the Map of Shandongnumber one fossil energy consuming province in DongyingChina. It consumed 246mn tonnes of coal Binzhou Dezhou Yantai Weihaiequivalent energy in 2009, 21% more than the Zibo Weifangsecond-ranked Shanxi province, or 2.6 times more Jinan Qingdao Liaochengthan Guangdong province which has a larger Taian Liaochengsecondary industry. Jining Rizhao Heze Linyi ZaozhuangGrowth stalled under energy conservationShandong is “big but not strong” relative to its Source: HSBCpeer industrial giants, Jiangsu and Guangdong. Itsindustrial value-added to GDP ratio of 54% is 2% Major cities (by GDP)and 4% higher than Jiangsu and Guangdong’s, Qingdao (青岛), Yantai (烟台), Jinan (济南,respectively, but its contribution to tax revenue is capital), Weifang (潍坊), Zibo (淄博), Jining (济only 10-20% less than peers. Already, m-o-m 宁), Linyi (临沂), Dongying (东营), Weihai (威industrial growth from July to September 2010 is 海), Taian (泰安), Dezhou (德州), Liaocheng (聊slowing by more than 1% every month to meet 城), Binzhou (滨州), Zaozhuang (枣庄), Heze (荷energy-saving targets, while its peers are still 泽), Rizhao (日照), Laiwu (莱芜)growing. Top officials Party Secretary: Jiang Yikang (姜异康) Governor: Jiang Daming (姜大明) 59

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Shandong Urban and rural population 2009 - Shandong Total Total Primary Urban Secondary Rural Tertiary 0 20 40 60 80 100 0 1,000 2,000 3,000 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Shandong Annual fixed asset investment 2008 - Shandong Total Urban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 20,000 Others RMB 0 500 1,000 1,500 2,000 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Shandong Government income and expenditure 2009 - Shandong Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit) -100 -50 0 50 100 -300 -200 -100 0 100 200 300 USD (bn) RMB (bn) Source: CEIC Source: CEIC60

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Shandong Annual fixed asset investment - Shandong 40 100% 3,000 30 80% RMB (k) 2,000 60% RMB (bn) 20 40% 10 1,000 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2004 Source: CEIC Source: CEIC, HSBC Exports/imports - Shandong Commodity building volume and price - Shandong 100 80 4 RMB (k) per sqm 80 60 3 sqm (mn) USD (bn) 60 40 2 40 20 1 20 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Shandong Shandong 2,000 300 250 5,000 1,500 225 200 4,000 RMB (bn) kwh (bn) RMB (bn) 150 3,000 km 1,000 150 100 2,000 500 75 50 1,000 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC 61

Inside the growth engine China Research abc December 2010Shanghai (上海) With a FAI to GDP ratio of 0.35, Shanghai’s growth is least investment-dependent at the provincial levelSize (second only to Guangdong) as 90% of its peersLocated in the centre of China’s coastline and have a dependency ratio above 50%. Shanghai hasconnecting the Pacific Ocean and Yangtze River, at the highest average wage and disposable income and19mn, Shanghai’s population equals Cameroon’s, the lowest urban to rural income gap, all of whichits area matches Lebanon, it has a population help it secure the second highest ranking (behinddensity one-third of Hong Kong’s (highest in the Beijing) in per capita retail consumption.nation), the GDP of Ireland or the city of Seattleand GDP per capita to match Poland. Most promising financial centre Shanghai is mainland China’s financial centre byStrengths any measure and is poised to become a worldNational leader in growth quality financial centre by 2020 with the support of theShanghai has a GDP of RMB1.5trn, highest central government and according to the target setamongst all cities, and ranks 8th at the provincial by the State Council. There are 787 financiallevel. However, it is a clear leader in terms of the institutions (FIs) in the city with133 in bankingquality of its growth – more than 60% of GDP services, 307 related to insurance, 93 securitiesderives from the service sector. Local leaders in the companies and 170 foreign-owned FIs.service sector include Bailian Group (百联集团),China United Network Communications Limited Major capital markets in Shanghai include the(中国联通), Bank of Communications (交通银行) Shanghai Stock Exchange (SSE), the Shanghaiand China Pacific Insurance (中国太平洋保险). Futures Exchange (SHFE) and the Shanghai Gold Exchange (SGE). As of 2009, SSE is China’sThe remaining 39.3% of GDP is from the largest stock market with 870 listed companies,relatively high end of the automobiles, electronics, 1,351 tradable securities and a total market valuepetrochemicals, iron & steel and equipment of RMB18trn; it ranks 6th in the world and abovemanufacturing industries. Shanghai Automotive the HKSE. SHFE is one of four futures exchangesIndustry Corporation (上海汽车工业集团), in China that trade copper, aluminium, zinc, steelShanghai Baosteel Group (宝钢集团) and wire rod, rebar, natural rubber, fuel oil and gold,Aviation Industry Corporation of China (中国航 with turnovers of many of the corresponding空工业集团公司) are the top industrial commodities already exceeding Chicago Board ofcompanies. Consequently, Shanghai is one of the Trade (CBOT) levels. SGE is China’s largest goldleaders in fossil fuel energy efficiency (measured spot market. Members of SGE account for 80% ofin coal equivalent kg per unit of GDP), despite gold production and 90% of gold consumption inhaving the highest population density and China.urbanisation ratio.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 19 25 Cameroon 56Area (sq km) 8,239 31 Lebanon 158Density (per sq km) 2,332 1 1/3 of HK 3GDP (RMBbn) 1,490 8 Ireland 38GDP per capita (RMB) 78,989 1 Poland 50GDP density (RMB per sqm) 181 1 Bahrain 3Source: CEIC, IMF, CIA, HSBC62

Inside the growth engine China Research abc December 2010Trade and port hub population, whereas in other financial centres theShanghai is also the largest port city in China, ratio is usually above 10%.with total container throughput of 22.6mn TEUs, In contrast, the cost of living in Shanghai hasby far the largest in China, and a freight surged at a much faster pace, quickly catching upthroughput of 495mn tonnes, second only to with global peers. For example, the average priceNingbo in Zhejiang province. Shanghai has the of floor space in Shanghai increased by 57% inthird and fourth highest rankings in foreign trade 2009 and hit RMB13,000 per sqm.(USD273bn) and FDI (USD10.5bn), respectively,at the provincial level in 2009. Hongqiao (虹桥) Fastest aging societyForeign Trade Centre in the Puxi area (or the west Shanghai is becoming one of the world’s oldestside of the Bund) will be built as a world trade cities with its population aged 60 and above tocentre as well as an air and expressway hub, rise 21% during the next five years to 4mn or 30%named Shanghai Hongqiao Linkong Economic of the total population.Zone (上海虹桥领空经济园区) to further secure Five-year outlookShanghai’s leading position in trade. For the next five years, Shanghai will focus onShanghai’s world trade hub position is further high-tech manufacturing, innovation, brand-enhanced by the build up of Yangshan Port (洋山 building and meeting low carbon intensity targets.港), one of the world’s largest and best quality Additional RMB50bn investment in nine keydeep-water container ports with annual throughputof about 25mn TEUs. RMB8.2bn has already industriesbeen spent on phase one of construction, and Shanghai aims to increase the scale of nineShanghai International Port Group (上港集团) is strategic industries to RMB840bn combined inraising funds in the A share market and via private 2015, doubling their current scale. They are: newplacement for new construction. energy, civil aviation manufacturing, advanced material and equipment, bio-medicine, electronicHigh-tech potential information industry, new energy vehicles, marineShanghai has a concentration of top research engineering equipment, new materials, softwareinstitutions led by Fudan University and Shanghai and information services.Jiao Tong University and high-tech/industrial Focusing on peripheral districtszones such as Zhangjiang Hi-tech Park andWaigaoqiao (外高桥) Free Trade Zone that are With growth in the 600sq km city centrehome to many local and foreign high-tech approaching a bottleneck, Shanghai aims to focuscompanies, both listed and private. on its peripheral districts as the growth driver for the next five years. A city-level committee isChallenges being planned to coordinate activities involving“Soft” environment and rising costs major industry, infrastructure and socialShanghai still lags far behind global financial restructuring.centres, such as London, New York or Tokyo, Disney theme park to open by 2015especially in terms of “soft” environment such as Shanghai aims to start and complete constructionfinancial innovation and products, rules and laws, of its Disney Park with 1sq km core area (4sq kmfree capital flows and human capital. For example, surrounding area) in the coming five years, afterfinancial professionals only account for 1% of the more than a decade of negotiation and planning. 63

Inside the growth engine China Research abc December 2010Increase the size of creative industry More railwaysShanghai aims to increase the size of its creative Shanghai will strengthen its core position in theindustry, which mainly includes R&D and design, Yangtze River Delta by increasing railway lengthculture and media, architecture, consulting by 86% relative to an earlier proposal for the 12thservices and fashion from a current 7.7% of GDP Five-Year Plan, even though its currentto above 10%. completion rate is already 32% above the 11th Five-Year Plan. The Shanghai Railway Bureau,Low-carbon and energy-saving targets which oversees railway construction in ShanghaiAt the current pace, Shanghai will need 145mn and three neighbouring provinces, will lead thetonnes of coal-equivalent energy in 2015 to effort to more than double the railway coverageachieve its target of 8-9% annual GDP growth from 1.5km to 3.1km per sq km. The race is on.until 2015. However, the city’s energy-savingtarget is now 130mn tonnes of coal equivalent Map of Shanghaienergy which means at least a 10% reduction inenergy usage. Shanghai plans to 1) push for Cho ngmemissions trading, 2) increase environmental in g Is l astandards for construction, and 3) develop its ndservices industry to meet the target.Mega-city “sickness” and restructuring Downtown AreaWith its GDP growth rate likely to be lowered to Pudong8% for the next 5 years, Shanghai still faces New Areadaunting challenges in traffic congestion,affordable housing, pollution control andpopulation growth, all of which will be addressedwith specific targets in the 12th Five-Year Plan. Inparticular, amongst the 130mn sqm new Source: HSBCresidential properties to be built in the comingfive years, subsidized or affordable housing will Top officialsaccount for 50% and 60% of total area and units,respectively. Party Secretary: Yu Zhengshen (俞正声) Governor: Han Zheng (韩正)64

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Shanghai Urban and rural population 2009 - Shanghai Total Total Primary UrbanSecondary Rural Tertiary 0 5 10 15 20 0 500 1,000 1,500 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Shanghai Annual fixed asset investment 2008 - Shanghai TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget Others 0 5,000 10,000 15,000 20,000 25,000 30,000 RMB 0 100 200 300 400 500 600 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Shanghai Government income and expenditure 2009 - Shanghai Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-200 -100 0 100 200 -400 -200 0 200 400 USD (bn) RMB (bn) Source: CEIC Source: CEIC 65

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Shanghai Annual fixed asset investment - Shanghai 80 1,500 100% 60 80% 1,000 RMB (k) 60% RMB (bn) 40 40% 500 20 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Source: CEIC Source: CEIC, HSBC Exports/imports - Shanghai Commodity building volume and price - Shanghai 200 40 15 RMB (k) per sqm 150 30 10 sqm (mn) USD (bn) 20 100 5 10 50 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Shanghai Auto sales and expressway growth - Shanghai 700 150 250 1,000 600 200 800 500 100 RMB (bn) kwh (bn) RMB (bn) 400 150 600 km 300 100 400 200 50 50 200 100 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC66

Inside the growth engine China Research abc December 2010Tianjin (天津) 新区) in Chongqing Municipality. So far, the main industries in Binhai are aviation and aircraft,Size petro chemicals and new energy.Located in the west corner of Bohai Gulf and only137km east of Beijing, Tianjin has a population of Binhai’s GDP is set to surpass the better-known12 million, three quarters of which are urban Shanghai Pudong this year based on its first threeresidents. It has the same area as Qatar, the GDP quarter GDP of RMB355bn vs. Pudong’sof Kazakhstan and GDP per capita of Uruguay, RMB330bn and an expected GDP growth rate ofwhich ranks the third highest in China. 25% vs. Pudong’s 14%, despite Tianjin’s economy being about half the size of Shanghai.StrengthsStrategic location and port hub ChallengesTianjin is the most important port in north China Dependence on FAIwith a total freight throughput of 381mn tonnes Tianjin had a six-fold increase in its nominal GDP(ranked 3rd in the nation) and total container over the last decade from RMB130bn in 2000 tothroughput of 8.7mn TEUs. RMB750bn in 2009. However, unlike Beijing and Shanghai, Tianjin’s growth is still heavily drivenIts strategic position between Beijing and the by FAI. For example, its 2009 FAI spending,Pacific Ocean provides considerable advantages for mainly in manufacturing and infrastructuretransportation services and transportation equipment construction, is RMB474mn vs. GDP ofmanufacturing that extend to aeronautics and RMB750mn.astronautics manufacturing, petrochemicals,telecommunications, electronics and equipment Financial centre yet to add valuemanufacturing, all of which combined lead to the The Tianjin Equity Exchange (TEE for thesecondary sector being Tianjin’s largest GDP driver financing and trading of non-public high-techand still developing fast. companies) and Bohai Commodity Exchange (BCE for commodity futures trading that includesBinhai New Area crude oil, coking coal, rebar and hot-rolled coils)Located in the eastern part of Tianjin, Binhai New were established in 2009. However, Tianjin hasArea (滨海新区) was set up by the State Council yet to identify differentiating financial productsas a special economic zone and the centre of and services that offer high value-added.economic development in Northern China. Itserves as a key financial and transportation hub. Dancing with BeijingBinhai is one of three deputy-ministerial level Tianjin has yet to find a way to minimize thedevelopment zones along with Shanghai Pudong drawbacks that result from its proximity toand the Two-River or Liangjiang New Zone (两江 Beijing. For example, how to preserve its ownGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 12 27 Zambia 70Area (sq km) 11,917 30 Qatar 154Density (per sq km) 1,030 3 1/6 of HK 9GDP (RMBbn) 750 20 Kazakhstan 56GDP per capita (RMB) 62,574 3 Uruguay 56GDP density (RMB per sqm) 63 3 Germany 11Source: CEIC, IMF, CIA, HSBC 67

Inside the growth engine China Research abc December 2010high-end services, such as entertainment, retail Map of Tianjinsales, high-tech industry and consulting,leveraging its top research universities (e.g.,Nankai University).Five-year outlookLargest oil refining and processing baseTianjin aims to become the country’s largest oilrefining and processing base with an annualcapacity of 31mn tonnes by the end of 2015, Downtown areasurpassing the current leader, Dalian of Liaoningprovince. Completion of the Sino-Russia refinery Binhai New Areaproject would be the key driver for achieving thattarget. Source: HSBC Top officials Party Secretary: Zhang Gaoli (张高丽) Governor: Huang Xingguo (黄兴国)68

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Tianjin Urban and rural population 2009 - Tianjin Total Total Primary UrbanSecondary Rural Tertiary 0 5 10 15 0 200 400 600 800 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Tianjin Annual fixed asset investment 2008 - Tianjin TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 20,000 25,000 Others RMB 0 100 200 300 400 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Tianjin Government income and expenditure 2009 - Tianjin Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-50 -30 -10 10 30 50 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 69

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Tianjin Annual fixed asset investment - Tianjin 800 100% 60 80% 600 RMB (k) 40 60% RMB (bn) 400 40% 20 200 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Tianjin Commodity building volume and price - Tianjin 50 20 8 RMB (k) per sqm 40 15 6 sqm (mn) USD (bn) 30 10 4 20 5 2 10 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Tianjin Auto sales and expressway growth - Tianjin 500 60 120 1,000 400 50 90 750 40 RMB (bn) kwh (bn) RMB (bn) 300 km 30 60 500 200 20 100 30 250 10 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC70

Inside the growth engine China Research abc December 2010Zhejiang (浙江) Although FAI (about RMB1trn) remains a main engine for growth post crisis, its FAI to GDP ratioSize was only 0.43 in 2009 or 4th lowest, well belowLocated in the centre of East China and south of the national average of 0.6.Shanghai, Zhejiang has a population similar toSouth Africa, a land area the size of Iceland, the Zhejiang, the 4th largest economy in China, hasGDP of Venezuela and GDP per capita of successfully become an important manufacturer ofMauritius (or Malaysia). electronics and other equipment, a large proportion of which are sold abroad. This makesStrengths Zhejiang the country’s third largest exporter,Dominant leader in private enterprises while strengthening its traditional base inInvestors who had a glimpse of Alibaba and its fisheries, agriculture and textiles.founder Jack Ma in Hangzhou of Zhejiang mightconclude that people there carry entrepreneurship Largest port cityDNA. Indeed, people in Zhejiang are more likely The city of Ningbo in Zhejiang has China’s andto start their own business than anywhere else in the world’s largest port by freight throughput,China and the local government’s business- mainly for raw material, crude oil and liquidfriendly policies push this regional tradition to natural gas, while the second-ranked Shanghaianother level. As a result, the province has the leads in container shipment. Port-related activitiesmost seats (180) in the Top 500 Chinese Private contributed RMB250bn to Ningbo’s 2009 GDP.Enterprises 2009, 51 more than the runner-up, Ningbo’s position as a transportation hub has beenJiangsu. Among the top 10 privately-owned strengthened further after over RMB10bn hascompanies are Guangsha Group (广厦控股) and been invested to improve its connection with otherHangzhou Wahaha Group (杭州娃哈哈集团). cities. For example, completion of the HangzhouRole model in SME-led growth Bay Bridge, the world’s longest trans-oceanicZhejiang led the nation with the success of bridge, cuts commuting time between Shanghaithousands of SMEs that created millions of jobs in and Ningbo from 4 to 2.5 hours.both urban and rural areas, making Zhejiang one Challengesof the provinces with the smallest urban-rural High property priceincome gap. Zhejiang leads all the provinces in High income and lack of investment alternativesthe rankings of GDP per capita and average have driven the demand for commodity buildingpersonal disposable income (PDI) in both urban with annual floor space sold expanded nearly five-and rural areas. Rising income led ten-fold growth fold in 2009, pushing the average price, whichin auto sales in Zhejiang for the last decade from grew at a 16.7% CAGR for the last 10 yearsRMB13bn in 2000 to RMB129bn in 2009.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 52 10 South Africa 25Area (sq km) 105,397 25 Iceland 101Density (per sq km) 491 8 Korea 10GDP (RMBbn) 2,283 4 Venezuela 27GDP per capita (RMB) 44,641 4 Mauritius 70GDP density (RMB per sqm) 22 6 Lebanon 26Source: CEIC, IMF, CIA, HSBC 71

Inside the growth engine China Research abc December 2010(fastest in the nation) to RMB7,788 per sqm, third Map of Zhejianghighest in China. HuzhouStructural reform needed Jiaxing ZhoushanA large proportion of manufacturers in Zhejiang Hangzhoucompeted in the past based on cheap price, low Xiaoshan Ningbolabour and resource cost and high volume. Such astrategy lacks durable competitive advantage longterm, and there are signs of growth momentum Jinhuatapering off. Zhejiang’s 8.9% GDP growth in 2009 Quzhou Taizhoufalls below its average rate of 12.4% for the recent Lishuidecade and ranked the bottom 4th in the nation. WenzhouFive-year outlookFocus on growth of the service sectorService sector to grow faster than a CAGR of Source: HSBC12%, moving the services to GDP ratio up from44% (2010) to 47% and to 55% by 2020. Major cities (by GDP)Financial centre for small enterprises Hangzhou (杭州, capital), Ningbo (宁波),Leveraging its thriving private enterprises, Wenzhou (温州), Shaoxing (绍兴), Taizhou (台Zhejiang aims to become the SME Financial 州), Jiaxing (嘉兴), Jinhua (金华), Huzhou (湖州),Centre and Private Investment Management Quzhou (衢州), Lishui (丽水), Zhoushan (舟山)Centre, building around Hangzhou, Ningbo andWenzhou, three of China’s private enterprise hubs. Top officials Party Secretary: Zhao Hongzhu (赵洪祝)Industrial development plan Governor: Lu Zushan (吕祖善)A modern industrial zone that showcaseseconomic transformation and scientificdevelopment will also be built around Hangzhou,Ningbo, Wenzhou and the surrounding area.More railwayJoining the inter-provincial race for more railways,Zhejiang aims to more than double its railwaycoverage of 1,200km to 3,085km, and themajority are expected to be completed by 2015.72

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Zhejiang Urban and rural population 2009 - Zhejiang Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 40 50 60 0 500 1,000 1,500 2,000 2,500 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Zhejiang Annual fixed asset investment 2008 - Zhejiang TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 20,000 25,000 Others RMB 0 200 400 600 800 1,000 1,200 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Zhejiang Government income and expenditure 2009 - Zhejiang Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-100 -50 0 50 100 150 -300 -200 -100 0 100 200 300 USD (bn) RMB (bn) Source: CEIC Source: CEIC 73

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Zhejiang Annual fixed asset investment - Zhejiang 50 2,500 100% 40 2,000 80% RMB (th) 30 1,500 60% RMB (bn) 20 1,000 40% 10 500 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Zhejiang Commodity building volume and price - Zhejiang 60 8 150 RMB (k) per sqm 6 40 sqm (mn) USD (bn) 100 4 20 2 50 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Zhejiang Auto sales and expressway growth - Zhejiang 1,200 250 150 4,000 900 200 120 3,000 RMB (bn) kwh (bn) RMB (bn) 150 90 km 600 2,000 100 60 300 50 30 1,000 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC74

Inside the growth engine China Research abc December 2010Western Region Poorest in GDP terms with income dependent on fiscal transfer China’s “gas tank” with two-thirds of coal, 60% of natural gas and 40% of crude oil reserves; best region for wind and solar power Fastest growing since 2005, with Beijing pumping in RMB5.2trn since 2000 Figure 20: Map of the Western Region Poor economy but rich in resources The biggest and second-most populous region, the Western Region only accounts for 20% of the nation’s GDP. An average province in the region 11 has about RMB560bn GDP, which is a quarter of 5 its peer provinces in the east of the country. The 6 7 2 region has the lowest per capita GDP or less than 8 10 half of the Eastern Region, and its residents’ 9 1 wages are highly dependent on the central 4 government’s fiscal transfer payments. 12 3 However, the Western Region holds strategic 1. Chongqing 5. Inner Mongolia 9. Sichuan importance in terms of energy reserves. Two- 2. Gansu 6. Ningxia 10. Tibet thirds of China’s proven coal reserves, over 60% 3. Guangxi 7. Qinghai 11. Xinjiang 4. Guizhou 8. Shaanxi 12. Yunnan of proven natural gas and 40% of estimated crude Source: HSBC oil have been discovered in this area. Thanks to its environmental conditions, the region is also theThe Western Region has a vast land size similar to most important area for developing renewableAustralia (or 71% of China’s total area) and a energy. Its northwest provinces have the bestpopulation twice the size of Brazil. That makes its wind and solar power base in China. 77% of thepopulation density similar to Mexico (vs. Korea estimated total usable hydro capacity (or 378GW)for the Eastern Region). Most of this region has a in China is in the Western Region with moremountainous plateau landscape with more desert potential yet to be explored. It is no exaggerationand grassland in the north and more forests in the to say that the Western Region is China’s gassouth. The region’s economy is also similar in tank.size to Australia, but on a per capita basis it’smore like Armenia. 75

Inside the growth engine China Research abc December 2010Western region summary 2009 Ranking Comparable country Rank as a countryPopulation (mn) 367 2 Brazil x 2 4Area (sq km) 6,754,640 1 Australia 8Density (per sq km) 54 4 Mexico 111GDP (RMBbn) 6,687 3 Australia 17GDP per capita (RMB) 18,206 4 Armenia 112GDP density (RMB per sqm) 1 4 Iraq 118Source: HSBC, CEIC, IMF, CIAGrowing fastest with massive FAI payment has been made during the same period,However, the region has had the highest GDP which largely served to increase the region’s wagegrowth rate of all China’s regions since 2005 with level. According to Beijing’s plan, the first 10a CAGR of 13.7%. Two of its top growth areas years of the Western Development plan is to buildwithin the Region, Inner Mongolia and Shaanxi, the basics, and 2010 to 2030 will see “growthhave had GDP CAGRs of 19.3% and 14.7%, acceleration” with more support from the centralrespectively, for the last five years, pushing up the government expected.region’s share of GDP in China from 16.9% in Is the widening fiscal deficit a concern?2005 to 20% currently. Investors have already begun to examine localThe main driver of the region’s growth is FAI – governments’ fiscal condition as concerns aboutthe FAI to GDP ratio in the region reached 0.74 in the post-stimulus overhang have grown. Unlike2009. Provincial governments in the region have their counterparts in the US, local governments inlaunched massive construction, aiming to double China have never assumed complete fiscalthe length of railways and/or expressways in the independence.next 3-5 years. Huge build-up of power Figure 21: Govt. expenditure/revenue ratio by regiongeneration plants and hydro projects, exploration 3.0 Westof metal and energy resources and rising propertydevelopment also add fuel to growth. FDI in the 2.5 CentralWestern Region grew at a CAGR of 40% from 2.0 NE2005, increasing its national share from 5.4% in2005 to 8.5% now. 1.5 EastBank funding has played a key role; the region 1.0has the fastest growth rate for bank deposits (only 2005 2006 2007 2008 2009region over 30%) and loans outstanding (only East West Central NEregion over 35%). Source: CEIC, HSBCPolicy support from Beijing Fig. 21 shows that governments in the WesternBeijing has pumped in RMB2.2trn since the Region have always been running much higherlaunch of its China Western Development (西部 fiscal deficits than in the rich Eastern Region,大开发) plan in 2000, most of which was invested reflecting persistent fiscal transfer or commitmentin major infrastructure construction, energy and from Beijing to support less developed regions.petrochemicals, basic metal mining and animal As such, a pickup in deficit across the regions, buthusbandry. A total of RMB3trn fiscal transfer especially in the poor West post the stimulus,76

Inside the growth engine China Research abc December 2010shown in Fig. 22, merely shows increasedpotential burden on the central government.It’s the lack of transparency and the potentialknock-on impact of local government debt that isof greater concern, in our view. Figure 22: Western Region government budget (total for all 12 provinces) 2,000 3.00 1,500 2.00 1,000 RMB (bn) 1.00 500 0 - 2005 2006 2007 2008 2009 Ex penditure Rev enue Ex p./Rev . ratio Source: CEIC, HSBC 77

Inside the growth engine China Research abc December 2010Chongqing (重庆) FAI which in 2009 totalled RMB521bn, 31% more than in the previous year. ChongqingSize Construction Engineering Group (重庆建工集团)Chongqing is located in the southwest central part and Chongqing Iron and Steel (重庆钢铁) are theof China, where a population the size of Nepal’s leading local companies that have benefited fromlives equally in urban and rural areas. The city’s the recent surge in growth.land area is similar to the UAE. Its GDP is similarto Morocco’s and its GDP per capita is close to Transportation hub and auto/motor centreFiji’s. Chongqing easily connects with external markets through the Yangtze River that has a waterwayStrength capacity 20 times that of the Jing-Guang (BeijingNational focus in the West to Guangdong) railway (京广铁路, China’s mainChongqing is at the forefront of China’s drive to railway). Its position as a key transportation hub isdevelop its less-developed interior provinces. It further enhanced by air, rail and road connectionswas spun off from Sichuan province and became while the completion of the Three Gorges DamChina’s 4th municipality directly under the State should lower its shipping costs.Council in 1997. The purpose of upgrading the Naturally, Chongqing has become the mostadministrative level of Chongqing is to set it apart important transportation equipment manufacturingas a core development zone that leads China’s base in Western China. It leads the nation inWestern Development (西部大开发) plan. With motorcycle production with 29.4% market share inthe goal of developing into a world-class and terms of units produced as of 2008. It is the secondhighly liveable metropolis, Chongqing is to largest automobile producer in China with 2.5mnbecome the financial, industrial and commercial cars produced in 2009. Many private transportationcapital of inland China. equipment manufacturers were born here and haveImpressive growth become national players, such as Lifan Group (力Chongqing’s GDP has increased rapidly in recent 帆集团), Loncin Holdings (隆鑫控股), andyears at a CAGR of nearly 12% since 2000, to Zongshen Industrial Group (宗申产业集团).reach RMB653bn in 2009, and momentum is Towards a new industrial basegrowing. Its GDP per capita increased to In addition to auto/motor manufacturing,RMB23,000, still below China’s average but on a Chongqing has a traditional heavy industrial base,very fast track. The wage growth rate in for example, metallurgy due to demand fromChongqing was also among the highest in China manufacturing and abundant reserves. Besides, itsbut the gap between urban and rural PDI is still natural gas production accounts for 10% ofrelatively large compared to most provinces. The China’s total production.economy’s growth was mainly lifted by massiveGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 29 20 Nepal 43Area (sq km) 82,269 26 United Arab Emirates 108Density (per sq km) 348 11 Belgium 15GDP (RMBbn) 653 23 Morocco 58GDP per capita (RMB) 22,920 13 Fiji 101GDP density (RMB per sqm) 8 12 Norway 45Source: CEIC, IMF, CIA, HSBC78

Inside the growth engine China Research abc December 2010To move up the value chain and improve energy Chongqing aims to become China’s inlandefficiency, Chongqing made a strategic move in offshore financial settlement centre, for example,2009 to become a high-tech manufacturing base settlement for processing trade (加工贸易) andand reached several agreements with the world’s international e-commerce is expected to increaseleading IT companies to build plants in from the current USD100bn and USD10bn toChongqing with significant production capacity. USD200bn and USD50bn, respectively in theThe most noteworthy example is the coming three to five years.establishment of Hewlett Packard’s laptop Environmental challengemanufacturing base with annual capacity of 20 Chongqing’s beautiful, mountainous scenery ismillion units, followed by large contracts with often obscured by polluted air, partly attributableFoxconn. to heavy industry and construction activity. TheHealthcare is another high value-added growth Three Gorges Dam is a mixed blessing and addsarea where Chongqing has shown early success. uncertainty to the area’s environmental future.Already, Chongqing Biochemical Holding (重庆 The creation of the dam and associated reservoir化医控股) and Taiji Group (太极集团), two may affect species in the area (some areleading players in healthcare, have joined the endangered), reduce water quality in thecity’s top 5 largest companies. surrounding areas, and may increase the likelihood of earthquakes and mudslides as well.Potential as an international trade centreAlthough it is a deep inland city (at least 2,000km Five-year outlookfrom the coast), Chongqing aims to become an Continued fast growthinternational trade hub via railway link to Europe. In its 12th Five-Year Plan, Chongqing yet againFor example, it will take only 13 days from set a very aggressive annual real GDP growthChongqing to Germany via the Chongqing-New target of 12.5%. Nominal GDP is expected toEurope International Railway Transport Channel reach RMB1trn and RMB1.5trn by 2012 and 2015,(渝新欧国际铁路联运大通道) which when respectively. Heavy FAI remains a key growthcompleted will halve the normal shipping time. driver and Chongqing plans to spend a total ofChongqing will simultaneously focus on normal RMB4trn in the next 5 years.trade, processing trade and trade services and To stimulate local private consumption,aims to increase its trade volume from USD12bn Chongqing aims to raise annual per capita urbanthis year (USD6.2bn in 2009) to USD100bn by income to RMB31,000, or a CAGR of 12%.2012, 3 years ahead of 2015 (end of the next Five- Income growth will continue to lag GDP growthYear Plan), a goal set in March this year. for the coming five years.Challenges Five strategic industrial sectorsFinancial centre – a challenging goal Chongqing has identified the following five areasChongqing has made it clear that it wants to be a as its strategic industrial growth sectors: railway,world-class financial centre, an ambitious goal power generating equipment (including nuclearthat may compete head-on with the other three and wind power), new energy-sourced cars,municipalities (Shanghai, Beijing and Tianjin) information technology and energy-savingand a few other big cities such as Shenzhen and materials. A total of RMB1.5trn is ear-marked forXi’an. To differentiate its role from competitors, 79

Inside the growth engine China Research abc December 2010industrial investments, more than double the Map of ChongqingRMB700bn spending in the previous five years.Xiyong Micro-Electronics Park (西永微电子产业园) and Free Trade ZoneEstablished in 2005 to the west of centralChongqing, Xiyong Micro-Electronics Park hasalready attracted significant investment from thelikes of Hewlett Packard and Foxconn. By 2015, Liangjiang80-100mn notebook PCs are expected to be New Area Downtown areamanufactured there, bringing total production inXiyong Park to RMB700bn in revenue terms. Ifthe city of Kunshan (of Suzhou, Jiangsu province)maintains its current half of global market share,China by 2015 will provide more than 80% of theworld’s notebook PCs. Source: HSBCXiyong is also expected to become China’s largest Top officialsFree Trade Zone with total trade volume of Party Secretary: Bo Xilai (薄熙来)USD100bn, mainly in the IT industry. Governor: Huang Qifan (黄奇帆)Xiyong Park has already become the city’s keydriver of business activities and urbanization, andit has already attracted at least 16 leading globalbanks.Liangjiang New Area (两江新区)Similar to Shanghai’s Pudong (浦东) or Tianjin’sBinhai (滨海), Liangjiang New Area is thecountry’s third deputy-ministerial leveldevelopment zone, set up to spearhead growth inChina’s vast inland provinces. Jiangbeizui CDB inLiangjiang is designed to become Pudong’sLujiazui, the financial district in Shanghai. All ofChina’s largest banks have already set up officesthere.A new Liangjiang bank is expected to be set up tofund growth in the New Area. The Liangjianggovernment under Chongqing municipality willinject RMB5bn and aims to raise anotherRMB20bn to set up a RMB25bn private equityfund. TPG, a top US private equity fund hasalready signed on with Liangjiang government fora RMB5bn venture capital fund.80

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Chongqing Urban and rural population 2009 - Chongqing Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 0 200 400 600 800 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Annual fixed asset investment 2008 - Chongqing Chongqing TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 100 200 300 400 500 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Chongqing Government income and expenditure 2009 - Chongqing Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-4 -2 0 2 4 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 81

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Chongqing Annual fixed asset investment - Chongqing 45 600 100% 80% 30 400 RMB (k) 60% RMB (bn) 15 40% 200 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Chongqing Commodity building volume and price - Chongqing 6 40 4 RMB (k) per sqm 5 30 3 sqm (mn) 4 USD (bn) 20 2 3 2 10 1 1 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Chongqing Chongqing 350 60 150 1,600 300 50 120 1,200 250 40 RMB (bn) kwh (bn) RMB (bn) 200 90 km 30 800 150 60 100 20 30 400 50 10 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC82

Inside the growth engine China Research abc December 2010Gansu (甘肃) Road since it provides a long, narrow and flat pathway through western China’s plateaus andSize deserts before reaching Central Asia and theLocated in the west of central China, Gansu has Middle East. Currently, the longest and only two-the population of Malaysia (26mn), the land area way railway in western China runs through theof Paraguay (7th largest in China), the GDP of Hexi Corridor, connecting Xinjiang with the restSlovenia and GDP per capita of Honduras (also of China. The Lanzhou Railway Administrationsecond poorest province in China). Bureau, a state-owned enterprise, is one of theStrengths province’s top three companies in terms ofRenewable energy potential revenue.The province has great potential to develop solar Challengesand wind power generation plants. The Hexi Still largely desertedCorridor is a narrow, lower land path through the The province is one of the most deserted in China.province that provides significant wind resources. Unfavourable weather conditions and a harshReportedly, a massive wind turbine construction environment discourage people from living thereplan is in process with estimated capacity of and companies from setting up business. The5,000MW at the end of 2010. Solar power weakness of most industries leads to low GDP perresources in Gansu are also substantial due to its capita, low wages and a large income gap thatstrong solar radiation. Along with Tibet and results in very low consumption.Xinjiang, Gansu is one of the top provinces forsolar energy potential. Five-year outlook Continued double-digit growthCapital of nickel Gansu aims to achieve above 10% annual GDPThe city of Jinchang, located in the middle of the growth for the next five years via significant FAIprovince, is China’s largest nickel production into five pillar industries and infrastructure build-base. It has about 5.5mn tonnes of proven nickel out. These industries include: renewable energy,reserves, the third largest in the world, and coal, chemicals, non-ferrous metal materials,accounts for over 90% of the country’s total. pharmaceuticals and services. Gansu also plans toJinchuan Group (金川集团) is the sole operator of extend its transportation capacity significantly byall nickel mining, refining and processing activity increasing its expressway length to 3,600km fromin the city. 1,665km in 2009 and its railway to 7,000kmStrategic path to Xinjiang (nearly half of Spain’s total) from 2,435km inHistorically, the Hexi Corridor in Gansu has been 2008.one of the most important sections of the SilkGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 26 22 Malaysia 45Area (sq km) 404,091 7 Paraguay 56Density (per sq km) 65 27 Senegal 98GDP (RMBbn) 338 27 Slovenia 70GDP per capita (RMB) 12,872 30 Honduras 120GDP density (RMB per sqm) 1 28 Iceland 118Source: CEIC, IMF, CIA, HSBC 83

Inside the growth engine China Research abc December 2010 Map of Gansu Major cities (by GDP) Lanzhou (兰州, capital), Qingyang (庆阳), Jiuquan (酒泉), Baiyin (白银), Tianshui (天水), Wuwei (武威), Jinchang (金昌), Pingliang (平凉), Zhangye (张掖), Jiayuguan (嘉峪关), Anxi Jiayuguan Gaotai Longnan (陇南), Dingxi (定西) Jiuquan Jinchang Zhangye Top officials Wuwei Qingyan Party Secretary: Lu Hao (陆浩) Baiyin Lanzhou Governor (acting): Liu Weiping (刘伟平) Dingxi Tianshui Longnan Source: HSBC84

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Gansu Urban and rural population 2009 - Gansu Total Total Primary UrbanSecondary Rural Tertiary 0 5 10 15 20 25 30 0 80 160 240 320 400 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Gansu Annual fixed asset investment 2008 - Gansu TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 3,000 6,000 9,000 12,000 Others RMB 0 50 100 150 200 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Gansu Government income and expenditure 2009 - Gansu Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-4 -3 -2 -1 0 1 2 -150 -100 -50 0 50 USD (bn) RMB (bn) Source: CEIC Source: CEIC 85

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Gansu Annual fixed asset investment - Gansu 30 400 100% 80% 300 20 RMB (k) 60% RMB (bn) 200 10 40% 100 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Gansu Commodity building volume and price - Gansu 5 8 3 RMB (k) per sqm 4 6 2 sqm (mn) USD (bn) 3 4 2 1 2 1 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Gansu Auto sales and expressway growth - Gansu 160 80 3 2,000 120 60 1,500 2 RMB (bn) kwh (bn) RMB (bn) km 80 40 1,000 1 40 20 500 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC86

Inside the growth engine China Research abc December 2010Guangxi Zhuang Autonomous output protect its environment and furtherRegion (广西) enhance its natural beauty. Naturally, Guangxi consumes one of the smallest amounts of fossilSize energy in China, making it the fourth most energyLocated in the south of China, connecting efficient economy among all the provinces.Guangdong and three other provinces and linkedto Vietnam’s north, Guangxi has 49mn people, the Strategic port to south Asiasame population as Korea, most of whom live in Guangxi is the only province in China that hasrural areas. 38.5% of its population are the both land and water connections with South Asia.Zhuang ethnic minority, making Guangxi one of In 2008, the central government upgraded themost ethnically diverse provinces in China. It has Beibu Gulf Economic Zone in the south ofthe land size of Romania (mainly mountainous), Guangxi as a national level strategic internationaland GDP and GDP per capita similar to Ukraine cooperation zone to strengthen China’sand Paraguay, respectively. relationship with ASEAN (Association of Southeast Asian Nations). Beijing has providedStrengths significant funding to Guangxi, especially toAgricultural base develop the southern part of the province.Thanks to its weather and landscape conditions, It is worth noting that Guangxi is also aGuangxi thrives on agricultural products and leads strategically important military post, especially inthe country in sugarcane and silkworm products. the event that China’s access to the Pacific OceanLeveraging its high production of agricultural is blocked.goods, Guangxi has developed a strong foodprocessing industry. Infrastructure boom A 40% increase in FAI to RMB524bn liftedUnlike its agriculture sector, Guangxi’s industrial Guangxi’s economy in 2009. Most of this wasdevelopment is at a primitive stage. Most spent on infrastructure construction, especially forcompanies in this sector are small players, with transportation to connect the Beibu Gulf Zonethe exception of Yuchai Group (广西玉柴机器), with the provincial capital and other areas. Forthe province’s largest company with RMB27.2bn example, a 3,000km new railway project wasrevenue and one of China’s top machinery launched that will cost RMB222bn, or more thanmanufacturers. the sum of spending over the last ten years, toTourist destination more than double the length of its existing railway.Guangxi’s beautiful mountains and lakes make it Highway construction of a similar scale was alsoan attractive tourist destination. The primitive launched in 2009. Guangxi Constructionnature of its economy and little heavy industrial Engineering Group (广西建工集团) and GuangxiGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 49 11 Korea 26Area (sq km) 237,558 9 Romania 78Density (per sq km) 204 20 Pakistan 33GDP (RMBbn) 770 18 Ukraine 55GDP per capita (RMB) 16,045 27 Paraguay 117GDP density (RMB per sqm) 3 21 Dominica 66Source: CEIC, IMF, CIA, HSBC 87

Inside the growth engine China Research abc December 2010Investment Group (广西投资集团) are the Map of Guangxiprovince’s leading companies benefiting from theinfrastructure boom. GuilinChallenges Hechi Liuzhou HezhouLow value-added and brain drain BaiseLeading its western peers, Guangxi lacks any Laibing Wuzhoumeaningful high value-added industries and Guigang Nanningservices and relies too heavily on agriculture and Yulintourism. This results in low wages and the fourth Qinzhou Chongzuolargest rural and urban gap in personal disposableincome (PDI). Consequently, Guangxi has a Fangchenggang Beihai Source: HSBCdifficult time attracting and retaining talent andprofessionals, losing its own talent to more Major cities (by GDP)advanced provinces. Nanning (南宁, capital), Liuzhou (柳州),Five-year outlook Guilin (桂林), Yulin (玉林), Baise (百色),GDP growth still the paramount objective Wuzhou (梧州), Guigang (贵港),Guangxi aims to raise its nominal GDP from Qinzhou (钦州), Hechi (河池), Beihai (北海),RMB900bn (expected for 2010) to RMB1.8trn by Laibin (来宾), Chongzuo (崇左), Hezhou (贺州),the end of 2015 – about half the current GDP for Fangchenggang (防城港)top-ranked Guangdong province – and at least Top officialsdouble its fiscal revenue in five years (2011-2015).Guangxi more than doubled its GDP in the current Party Secretary: Guo Shengkun (郭声琨)or 11th Five-Year Plan period (2006-2010) when Governor: Ma Biao (马飚)GDP jumped from RMB390bn to RMB900bn.Officials in Guangxi believe that to narrow thegap with the developed regions, Guangxi has toset aggressive growth targets and cannot afford tomerely emphasize growth quality.Massive FAI and industrial developmentGuangxi aims to raise its FAI from RMB800bn in2010 (vs. GDP of RMB900bn) to RMB1trn everyyear during the next five-year period and todevelop 14 industrial sectors with RMB100bn inannual sales in five of them, i.e., steel,petrochemicals, aluminium processing, food andmachinery, to reach annual sales of RMB300bn.88

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Guangxi Urban and rural population 2009 - Guangxi Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 40 50 0 200 400 600 800 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Guangxi Annual fixed asset investment 2008 - Guangxi TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 100 200 300 400 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Guangxi Government income and expenditure 2009 - Guangxi Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-10 -5 0 5 10 -200 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 89

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Guangxi Annual fixed asset investment - Guangxi 30 800 100% 80% 600 20 RMB (k) 60% RMB (bn) 400 10 40% 200 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Guangxi Commodity building volume and price - Guangxi 10 25 4 RMB (k) per sqm 8 20 3 sqm (mn) 15 USD (bn) 6 2 10 4 1 5 2 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Guangxi Guangxi 350 100 80 2,500 300 80 60 2,000 250 RMB (bn) kwh (bn) RMB (bn) 200 60 1,500 km 40 150 40 1,000 100 20 20 500 50 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC90

Inside the growth engine China Research abc December 2010Guizhou (贵州) ChallengeSize Poorest province awaits investment push Guizhou is one of the poorest provinces in China.Located in the southwest of China, bordering Its GDP in 2009 was RMB389bn; GDP per capitaGuangxi, Sichuan and three other provinces, is only RMB10,258, the lowest in China. Its ruralGuizhou’s population is the same size as Poland’s, and urban personal disposable income (PDI) gapand only 29% live in urban areas. Its land area also ties with Yunnan as the largest in the country.matches Uruguay’s with 92.5% covered bymountains and hills, making Guizhou home to a The province had RMB240bn FAI in 2009, a verylarge number of species. Guizhou’s GDP is the low level among China’s provinces. Thesize of Ecuador’s (or Libya’s) and its GDP per investments are mainly focused on infrastructure,capita is less than Moldova’s. improving systems for using water, power generation and real estate. For example, as ofStrength 2009 the province had 1,983km of expressways,Tourist destination with great environment which ranks third lowest in the country on perGuizhou is rich in natural plants thanks to its capita expressway length. But soon that will besubtropical humid climate and wide coverage of greatly increased since about 1,200km ofmountains. This great environment, one of the expressway is currently under construction.least polluted in China, makes Guizhou a naturaltourist destination. However, transportation and Five-year outlookaccommodation bottlenecks due to poor facilities Growth, growth, growthhold back the size and potential of its tourism Guizhou’s GDP and GDP per capita are expectedindustry. to hit RMB430bn and USD1,700, respectively, in 2010, according to its official 12th Five-Year Plan.Agricultural base and white wine It plans to increase its GDP and GDP per capita toThe humid tropical climate supports Guizhou’s RMB800-1,000bn and USD3,000, respectively,agricultural output that mainly includes rice, corn, by 2015, implying a 13-18% CAGR for thetobacco and herbs. Its tobacco production is third coming five years.highest in China. Leveraging these resources,Guizhou developed its light industry in tobacco, Sending electricity from West to East (西电东送)pharmaceuticals and food processing with two Guizhou is rich in coal and has large coal power-leading household names, China Kweichou generating capacity. In addition, it has hugeMoutai Distillery (中国贵州茅台) and China hydroelectricity potential. It is an important powerTobacco Guizhou (贵州中烟). In addition to base in China’s “Electricity from West to East”tobacco and wine, Guizhou’s clean environment campaign. Already, about 12.2% of electricity inenhances its image as a capital of “green foods”. Guangdong, China’s richest province, comes fromGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 38 16 Poland 33Area (sq km) 176,152 16 Uruguay 86Density (per sq km) 216 19 Germany 31GDP (RMBbn) 389 26 Ecuador 66GDP per capita (RMB) 10,309 31 Moldova 126GDP density (RMB per sqm) 2 24 Panama 81Source: CEIC, IMF, CIA, HSBC 91

Inside the growth engine China Research abc December 2010Guizhou, and in five years’ time, that capacity Major cities (by GDP)will increase by 50% to 250bn kW. Guiyang (贵阳, capital), Zunyi (遵义),The Guizhou subsidiary of China Southern Power Liupanshui (六盘水), Anshun (安顺)Grid Corporation alone will invest RMB50bn in Top officialsthe next 5 years, making electric power the most Party Secretary: Li Zhanshu (栗战书)important pillar industry in Guizhou. Governor: Zhao Kezhi (赵克志)Industrial output to hit RMB1trnGuizhou aims to become a strong industrial basewith annual industrial growth of 11.6% (vs. 10.2%in 2009) over the next five years to reachRMB1trn. Growth will be accompanied bystructural changes as well that include arebalancing of heavy and light industry from thecurrent 70% and 30% to a more even level, and anincrease in share of private enterprises from lessthan 33% (vs. the national average of 65%) to 50%. Map of Guizhou Zunyi Guiyang Liupans hui Anshun Source: HSBC92

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Guizhou Urban and rural population 2009 - Guizhou Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 40 0 100 200 300 400 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Guizhou Annual fixed asset investment 2008 - Guizhou TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 50 100 150 200 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Guizhou Government income and expenditure 2009 - Guizhou Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-2 -1 0 1 2 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 93

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Guizhou Annual fixed asset investment - Guizhou 30 400 100% 80% 300 20 RMB (k) 60% RMB (bn) 200 10 40% 100 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Guizhou Commodity building volume and price - Guizhou 3 15 3 RMB (k) per sqm 12 2 sqm (mn) 2 9 USD (bn) 6 1 1 3 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Guizhou Guizhou 150 100 8 1,200 120 80 6 900 RMB (bn) kwh (bn) RMB (bn) 90 60 km 4 600 60 40 30 20 2 300 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC94

Inside the growth engine China Research abc December 2010Inner Mongolia Autonomous 2009 was 600m tonnes, overtaking the long termRegion (内蒙古) national champion, Shanxi, for the first time. In addition to coal, large natural gas and rare earthSize reserves have been discovered in the region. InnerSpread across northeast and northwest China, Mongolia also has the largest usable wind powerInner Mongolia is the country’s third largest capacity of 5,000MW in China. For the last fiveprovince, similar in size to Colombia. It has the years, it has been the country’s largest supplier ofpopulation of Saudi Arabia, the GDP of Algeria electricity to the rest of the country.and GDP per capita similar to South Africa. Fastest FDI and GDP growth for a decadeStrength An abundance of natural resources and the localVast grasslands government’s liberal investment policies haveHistorically, Inner Mongolia’s economy was created a powerful magnet for domestic andbased entirely on its grasslands. Although the total international funds. The FDI growth rate is thearea has shrunk after hundreds of years of raising fastest in China – the 2000-08 CAGR of 50%animals, Inner Mongolia still has a quarter of represents an increase of 25 times over the period.China’s animal husbandry acreage and is the The region also has the fastest GDP growth overcountry’s largest livestock producer (including the last decade, with its national ranking risingcashmere, milk and meat). Inner Mongolia’s from 24th in 2000 to 15th in 2009, the biggestMengniu Dairy Group (蒙牛) and Yili Industrial improvement in China.Group (伊利) are China’s two largest dairy With so many natural resources, Inner Mongoliaproduct companies and Erdos Group (鄂尔多斯羊 also has impressive transport infrastructure. It has绒集团) is the leading producer of cashmere. the longest railway network in the countryCoal and energy: strong momentum (8,074km as of 2009), which is also No.1 on a perCoal and massive discoveries of other energy and capita basis. Another 1,300km of track are undermetal resources are the main reasons Inner construction. Inner Mongolia is also rankedMongolia’s economic growth has been more rapid second on per capita expressways.than other provinces in recent years. Top leadership supportAccording to the 2007 National Mineral Reserves In November 2009, one of China’s youngest andReport (2007 年全国矿产资源储量通报), the most promising political stars, Hu Chunhua (胡春region had 298bn tonnes of proven coal reserves, 华), was appointed as Inner Mongolia’s partyby far the most of any province. According to the secretary, a sign that the region’s economy mayEIA, in 2005 Inner Mongolia had almost a quarter experience further rapid development in comingof the world’s total reserves. Its coal production in years.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (m) 24 23 Saudi Arabia 46Area (sq km) 1,145,121 3 Colombia 25Density (per sq km) 21 28 Sweden 143GDP (RMBbn) 973 15 Algeria 50GDP per capita (RMB) 40,282 7 South Africa 74GDP density (RMB per sqm) 1 27 Australia 116Source: CEIC, IMF, CIA, HSBC 95

Inside the growth engine China Research abc December 2010Per capita GDP poised to pass Hong Kong Five-year outlookErdos (鄂尔多斯), population 1.5m, is the second National energy priority development arealargest city in Inner Mongolia and the richest Inner Mongolia has the potential to develop an(measured in per capita GDP) in mainland China impressive new energy industry based on its richamongst cities at prefecture-level and above. natural resources and low development costs. LedErdos is rich in coal and natural gas. Some 80% of by the NDRC, a national research group with staffits 87,000 sq km of land contains coal and 50% from 42 ministries is investigating this potentialcontains natural gas reserves. Its per capita GDP and preparing a report for the State Council. Inin 2009 reached RMB134,361 (USD20,000) and addition to energy, the pharmaceutical,at the current pace it will surpass Hong Kong in 3 biotechnology, food and beverage, and materialsyears. Erdos has also become China’s luxury car industries should benefit significantly.capital, with the highest number per capita of Map of Inner MongoliaRolls-Royces, Ferraris, Jaguars and Mercedes-Benz.Erdos has the vast majority of Inner Mongolia’s Hulunbeier298bn tonnes of proven coal reserves (accordingto the National Mineral Reserves Report of 2007),or about one quarter of the world’s total according Tongliaoto an estimate by the Energy Information Chifeng Bayannaoer Baotou HohhotAdministration. The latest local government Wuhai Wulanchabufigure is as high as 702bn tonnes. ErdosChallenge Source: HSBCOver-dependence on coalThe region’s economy relies too heavily on coal Major cities (by GDP)and other energy and metal resources. The lack of Baotou (包头), Erdos (鄂尔多斯), Hohhot (呼和diversification makes the region vulnerable to 浩特, capital), Tongliao (通辽), Chifeng (赤峰),economy slowdowns and falls in demand. Hulunbeier (呼伦贝尔), Bayannaoer (巴彦淖尔), Wulanchabu (乌兰察布), Wuhai (乌海)Energy efficiency and environmentAll its major industries are energy intensive and Top officialsenvironmentally unfriendly. The region is the Party Secretary: Hu Chunhua (胡春华)third least energy efficient province in terms of Governor: Bagatur (巴特尔)fossil fuel consumption per unit of GDP.96

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Inner Mongolia Urban and rural population 2009 - Inner Mongolia Total Total Primary UrbanSecondary Rural Tertiary 0 5 10 15 20 25 0 250 500 750 1,000 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Inner Annual fixed asset investment 2008 - Inner Mongolia Mongolia TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 150 300 450 600 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Inner Mongolia Government income and expenditure 2009 - Inner Mongolia Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-6 -4 -2 0 2 4 -200 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 97

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Inner Mongolia Annual fixed asset investment - Inner Mongolia 45 1,000 100% 800 80% 30 RMB (k) 600 60% RMB (bn) 15 400 40% 200 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Inner Mongolia Commodity building volume and price - Inner Mongolia 6 25 4 RMB (k) per sqm 20 3 sqm (mn) 4 15 USD (bn) 2 10 2 5 1 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Inner Auto sales and expressway growth - Inner Mongolia Mongolia 600 150 12 2,500 500 2,000 9 400 100 RMB (bn) kwh (bn) RMB (bn) 1,500 km 300 6 1,000 200 50 3 500 100 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC98

Inside the growth engine China Research abc December 2010Ningxia Hui Autonomous In contrast, Ningxia has to invest heavily toRegion (宁夏) maintain its agricultural activities in the face of natural adversities such as a dry climate, aSize shortage of water, and sand storms. Unlike someLocated in central western China, Ningxia has the poor regions with cheap labour, the average wagesame population as Paraguay, the land area of in Ningxia is higher than two-thirds of otherCroatia and a population density similar to provinces, making it less attractive for externalIndonesia, a GDP of Estonia (or Bolivia) and a manufacturers to relocate. At the same time,GDP per capita of RMB21,475 or USD3,250. Ningxia does not have the population size to be aStrengths consumption hub.Small player in a fast-growing zone Low energy efficiencyNingxia is located between Inner Mongolia and Ningxia’s main industries, such as powerShaanxi, two of the fastest growing provinces in generation, mining and related downstreamChina during last five years with CAGRs of industries like chemical material manufacturing19.3% and 14.7%, respectively. This has created and metal smelting, all consume large amounts ofmore opportunities for Ningxia. FAI increased energy. This problem is further magnified by30% in 2009 and has become the major driver of outdated equipment and technology that make thelocal growth. The rest of the economy also picked province the least energy efficient in China inup, with the average wage rising 10% and average terms of fossil fuel consumed for each RMB ofproperty prices 27%. GDP generated.Challenges Five-year outlookPoor organic growth due to lack of resource Another jump in FAIand talent The 30% annual growth rate in FAI will remainUp to this point, much of Ningxia’s economic the key growth driver for the next 5 years,growth has been derived from its booming reaching RMB1.44trn, or more than 3 times theneighbours. Its own fundamentals are still very equivalent spending over the last 5 yearsweak. Ningxia has neither the rich natural (RMB451bn).resources of Inner Mongolia nor the talent thatdrives high value-added industries and services inShaanxi, which has a large number of qualityuniversities.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 6 29 Paraguay 102Area (sq km) 51,954 27 Croatia 119Density (per sq km) 120 24 Indonesia 55GDP (RMBbn) 133 29 Estonia 99GDP per capita (RMB) 21,777 18 Tonga 103GDP density (RMB per sqm) 3 23 India 76Source: CEIC, IMF, CIA, HSBC 99

Inside the growth engine China Research abc December 2010 Map of Ningxia Major cities (by GDP) Yinchuan (银川, capital), Shizuishan (石嘴山), Shizuishan Wuzhong (吴忠), Zhongwei (中卫), Guyuan (固原) Yinchuan Top officials Party Secretary: Zhang Yi (张毅) Wuzhong Governor: Wang Zhengwei (王正伟) Zhongwei Guyuan Source: HSBC100

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Ningxia Urban and rural population 2009 - Ningxia Total Total Primary UrbanSecondary Rural Tertiary 0 2 4 6 8 0 30 60 90 120 150 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Ningxia Annual fixed asset investment 2008 - Ningxia TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 20 40 60 80 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Ningxia Government income and expenditure 2009 - Ningxia Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-1.0 -0.5 0.0 0.5 1.0 -50 -40 -30 -20 -10 0 10 20 USD (bn) RMB (bn) Source: CEIC Source: CEIC 101

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Ningxia Annual fixed asset investment - Ningxia 40 150 100% 30 120 80% RMB (k) 90 60% RMB (bn) 20 60 40% 10 30 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Ningxia Commodity building volume and price - Ningxia 2.0 8 4 RMB (k) per sqm 1.5 6 3 sqm (mn) USD (bn) 4 2 1.0 2 1 0.5 0 0 0.0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Ningxia Ningxia 80 50 0.10 1,200 40 0.08 1,000 60 800 RMB (bn) kwh (bn) RMB (bn) 30 0.06 km 40 600 20 0.04 400 20 10 0.02 200 0 0 0.00 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Note: automobile sales data are not available for 2005 – 2008 Source: CEIC Source: CEIC102

Inside the growth engine China Research abc December 2010Qinghai (青海) abundance of water resources makes Qinghai one of the largest grasslands in China, producing millionsSize of livestock for other provinces.Located in northwest China, Qinghai is thenation’s fourth largest province with an area the Railway entry to Tibetsize of France. It has a population similar to In 2006, the Qingzang (青藏) railway opened,Denmark and one of the lowest population making Qinghai the only province to be linkeddensities in the country. Qinghai’s GDP is similar with Tibet by railway. In the future, as economicto Uganda, the second smallest in China, with a development and mining industry progress in bothper capita GDP the size of Guatemala (or Qinghai and Tibet, the route will be a significantMorocco). asset for Qinghai to draw in investment and resources.StrengthsSalt lakes ChallengesQinghai has around 38 salt lakes, including China’s Primitive stage of developmentlargest, Qinghai Lake (青海湖), after which the Qinghai is at the bottom end of provincial rankingprovince is named. They contain large quantities of across most categories: it ranks second lowest inlithium, potassium and magnesium and account for population, GDP, FAI, property price and lengthmore than 90% of China’s total reserves. of expressways. The province needs significant investment in infrastructure to capitalise on its saltAccording to a report published in China’s 21st lakes, hydropower and other natural resources.Century Economic Report, the Chai-Da-Mu or Despite all these natural resources, WesternQaidam Basin (柴达木盆地) alone has an Mining Group (西部矿业集团 Qinghai) is onlyestimated RMB16.27trn worth of a wide range of ranked 337th in China’s Top 500 list.natural resources. Apart from the capital, Xining, where 40% of theThe lakes also offer spectacular views, making total population lives, producing 46% of GDP, thetourism a pillar industry in Qinghai’s tertiary sector. rest of the province is largely undeveloped.Source of major rivers Five-year outlookQinghai is the source of three major rivers in China Green focus– the Yangtze River (长江), Yellow River (黄河) Qinghai will focus on a number of solar, wind andand Lancang River (澜沧江). In theory, its total other low-carbon energy projects, taking advantagehydropower capacity of 21.8GW could almost of its natural resources. In the coming years it willmatch the Three Gorges Dam project. Twelve dam also seek to develop its metal resources as well ashydro plants have been completed or are under non-metal and building materials technology.construction, with total capacity of 11.5GW. TheGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 6 30 Denmark 106Area (sq km) 717,481 4 France 40Density (per sq km) 8 30 Russia 166GDP (RMBbn) 108 30 Uganda 102GDP per capita (RMB) 19,454 22 Guatemala 107GDP density (RMB per sqm) 0.15 30 Zambia 165Source: CEIC, IMF, CIA, HSBC 103

Inside the growth engine China Research abc December 2010 Map of Qinghai Major cities (by GDP) Xining (西宁, capital) Top officials Xining Party Secretary: Qiang Wei (强卫) Governor: Luo Huining (骆惠宁) Source: HSBC104

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Qinghai Urban and rural population 2009 - Qinghai Total Total Primary UrbanSecondary Rural Tertiary 0 2 4 6 0 30 60 90 120 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Qinghai Annual fixed asset investment 2008 - Qinghai TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 15 30 45 60 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Qinghai Government income and expenditure 2009 - Qinghai Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-0.6 -0.4 -0.2 0.0 0.2 0.4 -50 -40 -30 -20 -10 0 10 USD (bn) RMB (bn) Source: CEIC Source: CEIC 105

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Qinghai Annual fixed asset investment - Qinghai 40 120 100% 30 80% 90 RMB (k) 60% RMB (bn) 20 60 40% 10 30 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Qinghai Commodity building volume and price - Qinghai 0.6 3 3 RMB (k) per sqm 0.5 2 2 sqm (mn) 0.4 USD (bn) 0.3 1 1 0.2 0.1 0 0 0.0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Qinghai Auto sales and expressway growth - Qinghai 60 40 0.8 250 45 30 0.6 200 RMB (bn) kwh (bn) RMB (bn) 150 km 30 20 0.4 100 15 10 0.2 50 0 0 0.0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC106

Inside the growth engine China Research abc December 2010Shaanxi (陕西) High-tech zone in the West Shaanxi is promoting itself as a high tech leader inSize western China. Its capital, Xi’an, produces a thirdLocated in the heart of central China and of the province’s GDP and has a high-techneighbouring eight other provinces, Shaanxi has a industrial zone that is supported by several of thepopulation the size of Poland, with 58% living in best universities and research institutions inthe countryside. It has a land size close to western China. Xi’an has a tradition of academicSenegal, a GDP similar to New Zealand and a excellence dating back 60 years when theGDP per capita that is in line with the national government relocated some of the bestaverage. universities there during war-time.Strengths The high-tech zone focuses on softwareEnergy giant development, aerospace technology, newShaanxi is a major producer of three basic fossil materials and aircraft technology, all of which arefuels. In 2009, it produced 296m tonnes of coal, among China’s new priority industries in the new27m tonnes of crude oil, and 18,950m cubic 12th Five-Year Plan. The province is home tometres of natural gas, all ranked third in China. more than 700 software development companiesThe reserves of these resources are still large and and aerospace technology and manufacturingare yet to be fully explored. Leading companies companies. Shaanxi also provides nearly 50% ofbased in the province include Shaanxi Yanchang the R&D and equipment manufacturing forPetroleum Group (陕西延长石油集团) and China’s ambitious commercial aircraft project,Shaanxi Coal and Chemical Industry Group (陕西 even though Shanghai grabs most of the headlines煤业化工集团). for being the home base for the CommercialThe province’s power generating and Aircraft Corporation of China (中国商用飞机有petrochemical industries are also well developed, 限责任公司).contributing nearly 50% of total industrial output. Growth momentum from infrastructureChina XD Group (中国西电集团) is one of the upgradelargest power-generating equipment During the last 5 years, Shaanxi is highly rankedmanufacturers in the Western Region. nationally in both GDP growth (2nd) and perBesides conventional energy, Shaanxi has made capita GDP growth (3rd). Although the mainsignificant investments in solar energy and has drivers remain FAI, energy, the transportationalso upgraded its coal power generating plants, system, and equipment manufacturing, many newwhich should pay dividends in coming years. industries that include solar energy and aircraft R&D and manufacturing are poised to take aGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 38 17 Poland 33Area (sq km) 205,795 11 Senegal 83Density (per sq km) 183 21 Dominican Republic 40GDP (RMBbn) 819 17 New Zealand 53GDP per capita (RMB) 21,688 15 Turkmenistan 103GDP density (RMB per sqm) 4 19 Malaysia 56Source: CEIC, IMF, CIA, HSBC 107

Inside the growth engine China Research abc December 2010larger share of growth, especially after a Map of Shaanxisignificant upgrade in infrastructure. As of 2009,there were 2,779km of expressway with a further2,300km under construction and 3,320km of Yulinrailway lines with 2,600km being built. This,combined with the strong pool of local talent,points to further strong growth for the province. YananChallenges TongchuanSpeeding up commercialization Xianyang WeinanTransforming Shaanxi’s high tech advantages into Baojiactual production will be a challenge. Some areas, Xi’an Shangluosuch as space technology where Shaanxi leads the Hanzhongcountry, may take longer to commercialize. AnkangOverall, the province needs to find a way tomaximize its advantages in software and new Source: HSBCmaterials.Five-year outlook Major cities (by GDP)Doubling up to achieve national average Xi’an (西安, capital), Yulin (榆林), Xianyang (咸Shaanxi aims to double most of its major 阳), Baoji (宝鸡), Yanan (延安), Weinan (渭南),economic targets, including GDP and income Hanzhong (汉中), Ankang (安康), Shangluo (商levels, in the next 5 years in order to move its 洛), Tongchuan (铜川)overall ranking to around the national average. Top officialsLonger term, the plan is to double per capita GDPagain by 2020 to reach USD10,000. Party Secretary: Zhao Leji (赵乐际) Governor (acting): Zhao Zhengyong (赵正永)Key part of the Western TriangleThe Western Triangle is a new economic zonebuilt around three cities, Chongqing, Chengdu andXi’an, the capital of Shaanxi. Chongqing andChengdu were designated as a “new specialeconomic zone” by the State Council in June 2007.The addition of Xi’an to create the WesternTriangle will be a key driver of Shaanxi’s growth.108

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Shaanxi Urban and rural population 2009 - Shaanxi Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 40 0 300 600 900 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Shaanxi Annual fixed asset investment 2008 - Shaanxi TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 100 200 300 400 500 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Shaanxi Government income and expenditure 2009 - Shaanxi Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-6 -4 -2 0 2 4 6 -200 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 109

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Shaanxi Annual fixed asset investment - Shaanxi 30 900 100% 80% 20 600 RMB (k) 60% RMB (bn) 10 40% 300 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Shaanxi Commodity building volume and price - Shaanxi 8 25 4 RMB (k) per sqm 20 3 6 sqm (mn) 15 USD (bn) 2 4 10 5 1 2 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Shaanxi Auto sales and expressway growth - Shaanxi 450 80 75 3,000 2,500 60 300 50 2,000 RMB (bn) kwh (bn) RMB (bn) km 40 1,500 150 25 1,000 20 500 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC110

Inside the growth engine China Research abc December 2010Sichuan (四川) Sichuan’s energy consumption is more natural gas driven than other provinces. Sichuan has theSize largest amount of CNG (compressed natural gas)Located in southwest China, neighbouring six stations and CNG vehicles. Natural gas alsoother provinces, Sichuan has a population the size supports the province’s chemical fibre and powerof Germany, the 4th biggest in China. It has a land generating industry. Dongfang Electricarea the size of Spain, the country’s 5th largest, Corporation (中国东方电气集团) is the largestand its GDP and GDP per capita are similar to the local utilities company in Sichuan.Czech Republic and Ukraine, respectively. Tourism centre in the WestStrengths The diversity of geographic features and historicalLargest agriculture base in the West sites has helped Sichuan become a leading touristSichuan has a RMB224bn primary sector, the third destination (the Jiuzhai Valley National Park (九largest in China. It is rich in rice, wheat, rapeseed 寨沟) is China’s premier national park). Chengduand many other crops that also provide feed for is regarded as one of the most liveable cities in thelivestock. Sichuan is the largest base for pork country.production in western China. The New Hope Group(新希望集团) is China’s leading manufacturer of Second largest reserves of iron oreanimal feed, whose founder regularly appears on With the second largest domestic reserves of ironChina’s rich list. Wuliangye Group (五粮液集团) ore (behind Liaoning), Sichuan companies such asleads China’s white wine industry and produces the the Pangang Group (攀钢集团), benefit fromfamous Baijiu brand of traditional distilled alcohol. China’s insatiable demand (the country consumes about 60% of the world’s iron ore output).Kingdom of natural gasSichuan has the largest proven reserves of natural Challengesgas in China. Consequently, it is the country’s Natural gas: double-edged swordlargest consumer and second largest producer of Ironically, natural gas is increasingly becomingnatural gas, with a total production of 19bn cubic Sichuan’s growth bottleneck. Despite its abundantmetres, or 22% of the nation’s total. Thanks to production and reserves, the province is facingaggressive exploration and adoption of shortages for its own use. This is because naturalunconventional technology, Sichuan’s proven gas supply is administrated by the centralreserves are expected to expand rapidly. Heavy government and is controlled through Sinopec andinvestment in building natural gas purifying plants CNPC, two large SOEs. A large portion of SOEnear the major gas fields plus an increase in FAI natural gas production is transported to easternfor pipeline building will also ensure that supply provinces. Local downstream companies’ demandwill continue to grow. is much higher than supply, so Sichuan needs toGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 82 4 Germany 15Area (sq km) 484,056 5 Spain 48Density (per sq km) 169 22 Switzerland 41GDP (RMBbn) 1,415 9 Czech Republic 40GDP per capita (RMB) 17,339 24 Ukraine 113GDP density (RMB per sqm) 3 22 Bulgaria 71Source: CEIC, IMF, CIA, HSBC 111

Inside the growth engine China Research abc December 2010seek either more gas supply or more value-added Map of Sichuanproducts to grow its natural gas related industry.End of earthquake recovery stimulus GuangyuanThe province’s FAI in 2009 increased by 60%, Mianyang Bazhongmuch higher than other provinces thanks to the Deyang Dazhou NanchongSichuan Earthquake recovery program. The Chengdu Suining Guangan Meishancentral government alone has committed Yaan Ziyang NeijiangRMB1trn in spending from 2008 to 2011 to help Leshan Zigong Luzhouthe recovery. This commitment, along with Yibinfunding from other sources, has fuelled Sichuan’srecent growth, but this stimulus will end soon. PanzhihuaChengdu-centric Source: HSBCSichuan’s growth needs to become less Chengdu-centric. The city accounts for nearly 32% of the Major cities (by GDP)province’s GDP but the rest of the province lacksgood transport infrastructure. For example, the Chengdu (成都, capital), Mianyang (绵阳),expressway system does not link many of the Deyang (德阳), Yibin (宜宾), Dazhou (达州),other cities to each other. Consequently, Nanchong (南充), Leshan (乐山), Luzhou (泸州),Sichuan’s per capita length for both expressways Neijiang (内江), Zigong (自贡), Ziyang (资阳),and railways is among the lowest in the country. Panzhihua (攀枝花), Meishan (眉山), Guangan (广安), Suining (遂宁), Guangyuan (广元),Five-year outlook Bazhong (巴中), Yaan (雅安)Focusing on the peripherals Top officialsFor the coming 5 years, Sichuan will developcities in the south by improving expressway links. Party Secretary: Liu Qibao (刘奇葆)For its Northeast Economic Zone, Sichuan will Governor: Jiang Jufeng (蒋巨峰)expedite infrastructure building with a focus ontransportation and water conservation.Joining the RMB3trn clubSichuan is aiming for 12% annual GDP growthuntil 2015 so it can join provinces likeGuangdong, Jiangsu and Shandong that haveRMB3trn GDP economies.112

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Sichuan Urban and rural population 2009 - Sichuan Total Total Primary UrbanSecondary Rural Tertiary 0 30 60 90 0 300 600 900 1,200 1,500 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Sichuan Annual fixed asset investment 2008 - Sichuan TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 200 400 600 800 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Sichuan Government income and expenditure 2009 - Sichuan Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-15 -10 -5 0 5 10 15 -400 -300 -200 -100 0 100 200 USD (bn) RMB (bn) Source: CEIC Source: CEIC 113

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Sichuan Annual fixed asset investment - Sichuan 30 1,500 100% 1,200 80% 20 RMB (k) 900 60% RMB (bn) 10 600 40% 300 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Sichuan Commodity building volume and price - Sichuan 12 60 4 RMB (k) per sqm 9 3 40 sqm (mn) USD (bn) 2 6 20 1 3 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Sichuan Sichuan 800 150 50 2,500 600 40 2,000 100 RMB (bn) kwh (bn) RMB (bn) 30 1,500 km 400 20 1,000 50 200 10 500 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC114

Inside the growth engine China Research abc December 2010Tibet Autonomous Region The completion of the Qingzang (青藏) railway in(西藏) July 2006 has made Tibet a must-see destination for more and more Chinese. As of October 2010,Size Tibet has five airports for civilian use. Growth inLocated at the western end of China, bordering tourism will continue along with the developmentNepal, India and Bhutan, Tibet has a population of the transportation network, accommodation andof 3m, the smallest in China, slightly less than public security.Oman. More than two thirds of the people live inrural areas, making Tibet the least urbanized Challengesregion in China. However, Tibet’s land size is the Still at a primitive stagesecond largest, similar to South Africa. Tibet has Tibet has the lowest population density and this isa GDP and a per capita GDP similar to Haiti and holding back economic development. ForIndonesia, respectively. example, although Tibet could be a potentially large producer of natural resources and rawStrengths materials given its proven reserves, exploration isStrong central government support still at a primitive stage and transportation andCentral government financial support is the main exploration costs are still prohibitively high.driver of Tibet’s economy. For example, 58.7% ofits RMB38bn worth of FAI came directly from As well as the railway connection, Tibet now alsoBeijing in 2009 (vs GDP of RMB44bn). This is has an expressway that links the capital, Lhasa,much higher than other provinces, where FAI with Chengdu in Sichuan. But there is still a longfrom the national budget is only in single digits. way to go before Tibet can effectively harness the potential of its natural resources.In addition, Beijing also provides the highest percapita transfer payments or fiscal subsidies to Five-year outlookTibetan residents. The average wage is Developing secondary industryRMB48,750, the third highest in China and more Tibet aims to achieve a minimum GDP growththan triple the GDP per capita of RMB15,295. rate of 12% for the next five years. The focus for the coming 5 years is the development of itsBooming tourism and transport upgrade secondary industry, with a goal of reachingTibet’s tertiary sector makes the biggest contribution RMB45.8bn by end of 2015, or 40% of Tibet’s(55% or RMB24bn in 2009) to GDP thanks to its GDP (from the current 28%). Energy, mining andbooming tourism industry. Tourism added new building materials are expected to expand atRMB5.2bn in direct revenue, with other indirect a CAGR of 30% over the next 5 years.contributions coming from Tibetan traditionalmedicine, finance and telecommunication.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 3 31 Oman 133Area (sq km) 1,202,072 2 South Africa 24Density (per sq km) 2 31 Mongolia 180GDP (RMBbn) 44 31 Haiti 134GDP per capita (RMB) 15,295 28 Indonesia 118GDP density (RMB per sqm) 0.04 31 Mali 175Source: CEIC, IMF, CIA, HSBC 115

Inside the growth engine China Research abc December 2010Transport upgrade Major cities (by GDP)Tibet will spend RMB50bn on transportation in Lhasa (拉萨, capital)the next 5 years, including the expansion of theexpressway network to 70,000km. Top officials Party Secretary: Zhang Qingli (张庆黎) Map of Tibet Governor: Padma Choling (白玛赤林) Lhasa Source: HSBC116

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Tibet Urban and rural population 2009 - Tibet Total Total Primary UrbanSecondary Rural Tertiary 0 1 2 3 0 10 20 30 40 50 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Tibet Annual fixed asset investment 2008 - Tibet TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 10 20 30 40 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Tibet Government income and expenditure 2009 - Tibet Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-0.4 -0.2 0.0 0.2 0.4 -50 -40 -30 -20 -10 0 10 USD (bn) RMB (bn) Source: CEIC Source: CEIC 117

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Tibet Annual fixed asset investment - Tibet 50 50 100% 40 40 80% RMB (k) 30 30 60% RMB (bn) 20 20 40% 10 10 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2007 Source: CEIC Source: CEIC, HSBC Exports/imports - Tibet Commodity building volume and price - Tibet 0.4 0.8 4 RMB (k) per sqm 0.3 0.6 3 sqm (mn) USD (bn) 0.4 2 0.2 0.2 1 0.1 0.0 0 0.0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production - Tibet 15 12 RMB (bn) 9 6 3 0 2000 2002 2004 2006 2008 Secondary industry production (LHS) Source: CEIC118

Inside the growth engine China Research abc December 2010Xinjiang Uygur Autonomous which most municipalities and provinces areRegion (新疆) mandated to provide “counterparty support” (对口支援) all the way down to individual counties inSize Xinjiang. A total of RMB13bn or 30% ofLocated in the far northwest of China, Xinjiang is Xinjiang’s own fiscal revenue has already beenthe largest provincial region, similar in size to Iran. committed from Beijing and the rest of theIt has a population of 22m, the same as Australia, country to support Xinjiang’s development. Inthe GDP of Croatia and the per capita GDP of addition, major SOEs such as PetroChina,Armenia (or Morocco). Sinopec, State Grid Corporation and ShenhuaStrengths Group have also pledged financial and technical support to ensure Xinjiang’s economic success.Energy resourcesAfter significant discoveries in recent years, ChallengesXinjiang has become one of the most important Harsh terrainhubs for energy resources in China. In 2009, Much of Xinjiang’s natural resources are scatteredXinjiang produced 24.5bn cubic metres of natural around the area’s vast hinterland. This meansgas, 28.8% of China’s total and more than any significant initial investment is required to supportother province, 25m tonnes of crude oil (ranked production and transport.4th in China) and large quantities of coal. Thereserves of natural gas, oil and coal each account Ethnic tensionfor over 25% of the national total. The region borders Russia, India and six other countries. Historically, the area has always beenXinjiang’s industry centres on oil and gas, troubled by ethnic conflict and the turmoilpetrochemicals and building materials. experienced in 2009 is the latest example.Special climate for agriculture Five-year outlookAlthough most of Xinjiang is uninhabited, Minimum 12% GDP growth targetagriculture thrives because of the region’s oases. Xinjiang has a target of 12% annual GDP growthIt is China’s largest supplier of cotton and tomato for the next 5 years. Beijing has reached theprocessing and is famous for its quality fruit. conclusion that the region’s long-term stabilityUnprecedented national support depends heavily on its economic wellbeing, andSince the outbreak of ethnic unrest in 2009, the that means growth and quality of living.CCP has committed unprecedented amounts of Massive infrastructure build-up just startedpolitical and economic support to Xinjiang. A With financial and technical support from Beijinghigh-level committee chaired by a member of the and other rich provinces, Xinjiang will buildPolitburo Standing Committee was set up underGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 22 24 Australia 50Area (sq km) 1,664,897 1 Iran 17Density (per sq km) 13 29 Saudi Arabia 159GDP (RMBbn) 427 25 Croatia 64GDP per capita (RMB) 19,942 21 Armenia 105GDP density (RMB per sqm) 0.26 29 Paraguay 147Source: CEIC, IMF, CIA, HSBC 119

Inside the growth engine China Research abc December 2010seven new expressways and 11 railways with total Major cities (by GDP)investment of RMB145bn, with more expected all Urumqi (乌鲁木齐, capital), Karamay (克拉玛依)in the coming five years. Top officials Map of Xinjiang Party Secretary: Zhang Chunxian (张春贤) Governor: Nur Bekri (努尔·白克力) Karamay Urumqi Source: HSBC120

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Xinjiang Urban and rural population 2009 - Xinjiang Total Total Primary UrbanSecondary Rural Tertiary 0 5 10 15 20 25 0 100 200 300 400 500 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Xinjiang Annual fixed asset investment 2008 - Xinjiang TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 3,000 6,000 9,000 12,000 15,000 Others RMB 0 50 100 150 200 250 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Xinjiang Government income and expenditure 2009 - Xinjiang Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-10 -5 0 5 10 15 -150 -100 -50 0 50 USD (bn) RMB (bn) Source: CEIC Source: CEIC 121

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Xinjiang Annual fixed asset investment - Xinjiang 30 500 100% 400 80% 20 RMB (k) 300 60% RMB (bn) 10 200 40% 100 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Xinjiang Commodity building volume and price - Xinjiang 20 15 3 RMB (k) per sqm 12 3 15 2 sqm (mn) 9 USD (bn) 2 10 6 1 3 1 5 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Xinjiang Xinjiang 240 60 1.2 1,000 50 800 180 0.9 40 RMB (bn) kwh (bn) RMB (bn) 600 km 120 30 0.6 400 20 60 0.3 200 10 0 0 0.0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC122

Inside the growth engine China Research abc December 2010Yunnan (云南) provinces have beautiful scenery and rich ethnic cultures, Yunnan stands out from the rest as theSize leading tourism destination thanks to its betterLocated in the southwest corner of China and transport system.bordering Burma, Laos and Vietnam, Yunnan hasa population the size of Spain. Most residents live Yunnan continues to invest in transportin the rural eastern part of the province. It has a infrastructure to further enhance its tourismland area slightly larger than Japan, GDP and industry and benefit less developed counties.GDP per capita similar to the Slovak Republic Rich reserves of zinc, lead and copperand Sri Lanka, respectively. Yunnan leads the country in zinc and leadStrengths reserves and is ranked third in copper. MajorTobacco king companies in the sector include Kunsteel HoldingTobacco has been the key driver of Yunnan’s (昆明钢铁控股), Yunnan Coal Chemical Industryeconomic growth since early last century. It Group (云南煤化工集团), Yunnan Metallurgicaldominates the primary sector, with half of annual Group (云南冶金集团) and Yunnan Tin Groupproduction (35% of China’s total) exported to the (云南锡业集团). However, its refiningrest of the country. technology is yet to be upgraded.Not surprisingly, Yunnan is China’s largest Challengescigarette maker, and this is its most important Dependence on tobacco industrysecondary industry. Hongta Group (红塔烟草集 Growth in tobacco is peaking as China imposes团) and Hongyun Honghe Tobacco Group (红云 stricter smoking regulations. Consequently,红河烟草集团) are the province’s two largest Yunnan is falling behind other provinces and itscompanies and two of the top three tobacco GDP ranking dropped from 17th in 2000 to 24th inindustry leaders in China. To fend off external 2009. Yunnan needs to identify a new growthcompetitive pressure, the regulator in Yunnan driver.restricts the export of tobacco leaves to protect Still poorlocal cigarette manufacturing industry. Yunnan is a poor province with per capita GDPTransportation network and tourism ranked in the bottom third in China and averageThanks to its tobacco revenue, Yunnan’s transport wages in the bottom fifth. The urban and ruralsystem is much better than its poorer neighbours. income gap is – along with Guizhou – the largestThe total and per capita length of its railways and in China.expressways are both ranked higher than thenational average. Although most southwestGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 46 12 Spain 27Area (sq km) 383,194 8 Japan 58Density (per sq km) 119 25 Indonesia 55GDP (RMBbn) 617 24 Slovak Republic 59GDP per capita (RMB) 13,539 29 Sri Lanka 120GDP density (RMB per sqm) 2 26 South Africa 92Source: CEIC, IMF, CIA, HSBC 123

Inside the growth engine China Research abc December 2010Five-year outlook Major cities (by GDP)RMB190bn expressway drive Kunming (昆明, capital), Qujing (曲靖), Yuxi (玉RMB190bn (31% of its 2009 GDP) will be 溪), Zhaotong (昭通), Baoshan (保山), Puer (普invested in expanding the expressway network 洱), Lincang (临沧), Lijiang (丽江)over the next 5 years. The program will start in Top officialsthe capital city of Kunming, with the aim ofconnecting all neighbouring counties. Yunnan Party Secretary: Bai Enpei (白恩培)also aims to expand its railway coverage to Governor: Qin Guangrong (秦光荣)5,000km by 2015.Greater Mekong sub-region co-operationAs China’s world influence increases, the MekongRiver basin that includes Cambodia, Laos,Myanmar, Thailand, Vietnam, and China’sYunnan province, has become ever moreimportant to China’s strategic interests. Yunnanwill spend more than RMB10bn on railwayconstruction to ensure China will have railconnections with its southern neighbours by 2020,a move that will benefit Yunnan’s growth and thetourism industry. Map of Yunnan Zhaotong Lijiang Qujing Baoshan Kunming Yuxi Lincang Puer Source: HSBC124

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Yunnan Urban and rural population 2009 - Yunnan Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 40 50 0 250 500 750 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Yunnan Annual fixed asset investment 2008 - Yunnan TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 100 200 300 400 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Yunnan Government income and expenditure 2009 - Yunnan Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-6 -4 -2 0 2 4 6 -200 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 125

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Yunnan Annual fixed asset investment - Yunnan 30 750 100% 80% 20 500 RMB (k) 60% RMB (bn) 10 40% 250 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Yunnan Commodity building volume and price - Yunnan 5 25 4 RMB (k) per sqm 4 20 3 sqm (mn) 15 USD (bn) 3 2 10 2 1 5 1 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Yunnan Auto sales and expressway growth - Yunnan 300 100 12 3,000 250 80 2,500 9 200 2,000 RMB (bn) kwh (bn) RMB (bn) 60 km 150 6 1,500 40 100 1,000 20 3 50 500 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC126

Inside the growth engine China Research abc December 2010Central Region No hot growth theme, yet benefits from being between the rich East and the resource-rich West Indirect policy dividend from the China Western Development (西部大开发) program Emerging manufacturing hub thanks to rising costs in the East Figure 23: Map of the Central Region western peer. However, the region benefits from exporting food, raw materials, basic equipment and cheap labour to the rich Eastern Region while serving as a major channel for technology and fund inflows to the West and energy and materials outflows to the East, taking advantage of the 6 China Western Development initiative. 2 3 1 Agriculture base and food processing 4 5 centre The region is China’s most important agriculture base and food processing centre. Thanks to the 1. Anhui 3. Hubei 5. Jiangxi fertile soil, temperate climate and natural 2. Henan 4. Hunan 6. Shanxi irrigation system, the region (except Shanxi Source: HSBC province) is rich in rice, wheat, tea, freshwater fish and many other agricultural products. ThreeLike the Western Region, the Central Region has of China’s six agriculture net export provinces area GDP similar to Australia and a population twice in this region. Its total agriculture outputthat of Brazil. However, it is as crowded as Japan accounted for 31.3% of the national total in 2009,(vs. Mexico for the Western Region) and as rich up from 30.5% in 2005. Its primary sectoras Morocco in terms of per capita GDP. The six accounted for more than 27% of the national totalprovinces in the region churned out an average in 2009, much higher than its 19% total GDPGDP of RMB1.2trn in 2009. share in 2009.Piggybacking on the rich East and theresource rich West Coal and metals The Central Region is rich in coal, copper, goldWith moderate growth over the last decade, the and many other resources, which helps its fast-Central Region has neither a “hot theme for growing secondary sector (national share grewgrowth” nor the kind of state support as its 127

Inside the growth engine China Research abc December 2010Central region summary 2009 Ranking Comparable country Rank as a countryPopulation (mn) 356 3 Brazil x 2 5Area (sq km) 1,027,011 2 Mauritania 31Density (per sq km) 347 2 Japan 17GDP (RMBbn) 7,014 2 Australia 15GDP per capita (RMB) 19,700 3 Morocco 109GDP density (RMB per sqm) 7 2 Jamaica 50Source: HSBC, CEIC, IMF, CIAnearly 2 percentage points in the last five years) Reverse “brain drain” emergingthat focuses on mining, metallurgy, iron and steel, Like less-developed regions elsewhere, thechemicals and heavy equipment manufacturing. Central Region has suffered a serious brain drainAll of the largest companies in the Central Region that saw local talent and professionals moving toare from these heavy industry sectors, including rich coastal cities for better opportunities.national leaders such as Dongfeng Motor (东风汽车), Henan Coal Chemical Industry Group (河南 However, since 2008 there are signs that the煤业化工集团), Wuhan Iron and Steel (武钢) and process might be going into reverse, at least inJiangxi Copper (江西铜业). relatively well developed cities. For example, in Nanchang in Jiangxi province, for everyEmerging manufacturing hub professional leaving the city, there are 1.4 movingMany of the low-end manufacturers in the rich in. The trend is likely to accelerate as rising costsEastern Region are being forced to restructure and in the East and growing opportunities at homemove into high value-added production and magnify the push and pull effect, paving the wayservices for cost and energy efficiency reasons. for sustained growth in the region.The Central Region is best positioned to absorbmuch of the migration of low-end manufacturingplants due to its convenient location, goodtransportation system and abundance of cheaplabour.128

Inside the growth engine China Research abc December 2010Anhui (安徽) With its abundance of cheap labour, Anhui could become a new manufacturing hub. It is quicklySize developing its automobile industry with CheryLocated in eastern central China and bordering six Automobile (奇瑞汽车), which is rapidlyprovinces, Anhui has a population the size of the becoming a national brand. Its secondary industryUnited Kingdom and is ranked 8th in China. It has has increased at a CAGR of 16% since 2000 andthe land mass of Greece, the GDP of the reached RMB490bn in 2009.Philippines and GDP per capita of Georgia. More importantly, Anhui has become a magnetStrengths for FDI. Between 2006 and 2008, it attracted FDIFertile land and rich copper reserve at an astounding CAGR of 71%, laying theHistorically, Anhui has been a populous region due foundation for further industrial growth.to its fertile land and moderate climate. Its primaryindustry accounts for 15% of GDP, 50% higher Challengesthan the national average of 10%, with major crops Unsustainable pace of FAIincluding rice, wheat and sweet potato. Anhui’s RMB1trn GDP in 2009 was largely driven by fixed asset investment. The FAI to GDPAnhui is rich in copper, has a well developed copper ratio of 0.89 is the highest in China, and perhaps arefining industry and is one of the nation’s largest world record, which is clearly unsustainable.producers of refined copper products. Tongling Moreover, Anhui’s economy is not balanced withNonferrous Metals Group (铜陵有色金属集团) is the area along the Yangtze River developingthe leading producer of cathode copper in China. much faster than elsewhere in the province.Other large companies in the mining and metallurgyindustry are Magang (Group) Holding (马钢集团控 Five-year outlook股) and Huainan Mining Group (淮南矿业集团). Doubling its 2009 GDP Anhui’s GDP hit RMB1trn in 2009 and theCheap labour and rapid rise in FDI province plans to add another RMB1trn by theDespite a 17% rise in average wages in 2009, end of its new Five-Year Plan.driven by an increase in minimum wages, Anhuistill leads the country in the supply of cheap Hefei export processing zonelabour. For example, the minimum monthly wage An export processing zone will start to operate in thein Anhui after the recent 20% rise is still just city of Hefei, with export tax exemptions, tax rebatesRMB720 per month, only a touch higher than the and other incentives. With the help of the vastlowest-ranked Ningxia at RMB710. However, amount of cheap labour available, the export zonewith more than 61m people, Anhui’s population is looks destined to succeed, largely taking export-more than 10 times that of Ningxia. related employment away from rich coastal cities.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 61 8 United Kingdom 22Area (sq km) 140,126 22 Greece 92Density (per sq km) 438 9 Netherlands 11GDP (RMBbn) 1,005 14 Philippines 50GDP per capita (RMB) 16,408 26 Georgia 116GDP density (RMB per sqm) 7 13 Jamaica 47Source: CEIC, IMF, CIA, HSBC 129

Inside the growth engine China Research abc December 2010 Map of Anhui Major cities (by GDP) Hefei (合肥, capital), Wuhu (芜湖), Anqing (安庆), Maanshan (马鞍山), Fuyang (阜阳), Liuan (六安), Huaibei Chuzhou (滁州), Suzhou (宿州), Bengbu (蚌埠), Haozhou Suzhou Chaohu (巢湖), Huainan (淮南), Xuancheng (宣城), Bozhou (亳州), Huaibei (淮北), Tongling (铜陵), Benqbu Huangshan (黄山), Chizhou (池州) F uyang Huainan Chuzhou Top officials Party Secretary: Zhang Baoshun (张宝顺) Hefei Maanshan Liuan Governor: Wang Sanyun (王三运) Chaohu Wuhu Tongling Xuancheng Anqing Chizhou Huangshan Source: HSBC130

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Anhui Urban and rural population 2009 - Anhui Total Total Primary UrbanSecondary Rural Tertiary 0 20 40 60 80 0 200 400 600 800 1,000 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Anhui Annual fixed asset investment 2008 - Anhui TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 Others RMB 0 200 400 600 800 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Anhui Government income and expenditure 2009 - Anhui Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-10 -5 0 5 10 -200 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC, Anhui Provincial Department of Finance 131

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Anhui Annual fixed asset investment - Anhui 30 1,000 100% 800 80% 20 RMB (k) 600 60% RMB (bn) 10 400 40% 200 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Anhui Commodity building volume and price - Anhui 12 40 4 RMB (k) per sqm 10 30 3 sqm (mn) 8 USD (bn) 20 2 6 4 10 1 2 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Anhui Auto sales and expressway growth - Anhui 500 100 120 3,000 400 80 90 2,400 RMB (bn) kwh (bn) RMB (bn) 300 60 1,800 km 60 200 40 1,200 100 20 30 600 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC132

Inside the growth engine China Research abc December 2010Henan (河南) Transportation hub Henan, especially the capital Zhengzhou, is aSize transportation hub due to its central position inLocated in eastern central China, Henan has the China. It has the country’s longest expresswaysecond largest population among the country’s system and fifth longest railway network. Theprovinces (95m), almost equal to that of the Zhengzhou Railway Bureau (郑州铁路局) is onePhilippines. Despite this, it is relatively small of the largest and oldest railway administrative(ranked 18th in China) yet its GDP is similar to bodies in China. The rapid build out of highwaysSouth Africa (ranked 5th), with a GDP per capita continues, with approximately 2,700 kilometres ofthat only matches Morocco. expressways under construction, which willStrengths increase the length of the current system by moreLarge agriculture base and food industry than 50%.Henan is traditionally agriculture-based. It is one Being a transport hub has a positive impact onof the leading provinces in grain and wheat output Henan’s other major industries that includeand tops production of oil seeds such as wheat and equipment manufacturing, construction materialssesame. The fact that the Zhengzhou Commodity and metallurgy. Nearly half of aluminium oxideExchange, China’s first futures exchange for output of China is produced in Henan.agriculture products including wheat, cotton, whitesugar, pure terephthalic acid, rapeseed oil and Giant coal playerearly long-grain nonglutinous rice, was set up in Henan is ranked fourth in coal production withthe early 1990s in Zhengzhou, the provincial 230m tonnes in 2009 and has one of the largestcapital, certifies its leading position in agriculture. coal reserves in China. Henan Coal ChemicalHenan’s primary industry contributed RMB277bn Industry Group (河南煤业化工) is the nation’sto its 2009 GDP, the second largest in China second largest coal company and there are fivebehind Shandong province. other coal companies in Henan that have annual sales of more than RMB10bn.Food processing, which accounts for more than Large pool of cheap labour14% of secondary industry, is Henan’s leadingindustry, leveraging its strong agriculture base, Its critical mass of cheap labour and low landand also ranks second to Shandong. Henan prices add to Henan’s advantage of being aShuanghui Group (双汇实业集团) is China’s transport hub and give it the potential to developlargest meat processor with a strong consumer into a large manufacturing hub.brand in meat products that has helped push thecompany into the China Top 100 list.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 95 2 Philippines 12Area (sq km) 165,536 18 Suriname 87Density (per sq km) 573 6 Mauritius 9GDP (RMBbn) 1,937 5 South Africa 32GDP per capita (RMB) 20,597 19 Morocco 105GDP density (RMB per sqm) 12 8 Slovak Republic 37Source: CEIC, IMF, CIA, HSBC 133

Inside the growth engine China Research abc December 2010Challenges Major cities (by GDP)Dependence on FAI Zhengzhou (郑州, capital), Luoyang (洛阳),Similar to its underdeveloped peers in the region, Nanyang (南阳), Xuchang (许昌), PingdingshanHenan’s economic growth remains highly FAI- (平顶山), Jiaozuo (焦作), Zhoukou (周口),dependent. In 2009, FAI reached RMB1.37trn, the Anyang (安阳), Xinxiang (新乡), Shangqiu (商third largest in China, and equal to almost 70% of 丘), Xinyang (信阳), Zhumadian (驻马店),its total GDP. Kaifeng (开封), Sanmenxia (三门峡), Puyang (濮阳), Luohe (漯河), Hebi (鹤壁)Five-year outlookExpediting urbanization Top officialsHenan aims to maintain its fast economic growth Party Secretary: Lu Zhangong (卢展工)by expediting urbanization in the next 5 years. Governor: Guo Gengmao (郭庚茂)Building around the capital city of Zhengzhou,Henan will target an annual urbanization rate of atleast 1.7% to reach a minimum of 48% by 2015.Railway expansionHenan aims to expand its railway coverage from4,000km as of 2009 to 8,000km by 2020, with thebulk of construction to be completed by the end of2015. Map of Henan Anyang Hebi Puyang Xinxiang Jiaozuo Luoyang Kaifeng Sanmenxia Zhengzhou Shangqiu Xuchang Pingdingshan Luohe Zhoukou Nanyang Zhumadian Xingyang Source: HSBC134

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Henan Urban and rural population 2009 - Henan Total Total Primary UrbanSecondary Rural Tertiary 0 20 40 60 80 100 0 500 1,000 1,500 2,000 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Henan Annual fixed asset investment 2008 - Henan TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 Others RMB 0 300 600 900 1,200 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Henan Government income and expenditure 2009 - Henan Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-10 -5 0 5 10 -300 -200 -100 0 100 200 USD (bn) RMB (bn) Source: CEIC Source: CEIC 135

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Henan Annual fixed asset investment - Henan 30 2,000 100% 80% 1,500 20 RMB (k) 60% RMB (bn) 1,000 10 40% 500 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Henan Commodity building volume and price - Henan 12 50 3 RMB (k) per sqm 40 2 sqm (mn) 8 30 USD (bn) 20 1 4 10 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Henan Auto sales and expressway growth - Henan 1,200 250 75 5,000 900 200 4,000 50 RMB (bn) kwh (bn) RMB (bn) 150 3,000 km 600 100 2,000 25 300 50 1,000 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC136

Inside the growth engine China Research abc December 2010Hubei (湖北) hydroelectricity and food processing.Size Three Gorges Dam: a mixed blessingLocated in central China, Hubei is the only As one of the largest construction projects inprovince in the area that doesn’t have a direct history, the TGD is expected to have a capacity ofconnection to any coastal provinces. Hubei has a 22.5GW, the largest in the world. Hubei andpopulation size of Italy, the land size of Syria, Chongqing share the TGD project, with half inwith plains in the east rising to mountains in the each region. The project not only provides powerwest. The Yangtze River runs through the for each region but also significantly reducesprovince, including part of the Three Gorges Dam (mainly for Hubei) the risk of potential losses(TGD) project. Hubei has GDP and GDP per from Yangtze River floods. However, thecapita similar to Egypt and Cape Verde (or negative environmental impact of the project hasTurkmenistan), respectively. become increasingly noticeable since its completion. Therefore, it’s too early to say ifStrengths Hubei will actually benefit from TGD in the longAgriculture base term.Similar to neighbouring Henan, Hubei is also animportant agricultural province, particularly for Challengesrice, rapeseed and freshwater products. Its Growth momentum still FAI dependentproduction volumes of rapeseed and freshwater Hubei had a GDP of RMB1.3trn in 2009, andproducts have led the country for the last 14 years. ranks 11th in China. The province has grown at aHubei is also a big player in tobacco, with China CAGR of 11.4% since 2000, thanks to theTobacco Hubei (湖北中烟) as a leading brand. continued surge in fixed asset investment. In 2009, total FAI grew to RMB787bn (vs. GDP ofLeveraging the strength of Wuhan RMB1.28trn), 40% more than in 2008. Hubei hasHubei’s economy is centralized around the to show that its large economy can maintaincapital, Wuhan, which produces nearly 35.5% of growth momentum without having to rely onthe province’s GDP. The Wuhan area is surges in FAI.traditionally an industrial region, includingautomobile manufacturing and metallurgy. Five-year outlookIndustry leaders in China such as Dongfeng Motor Building around greater WuhanCorporation (东风汽车公司), Wuhan Iron and Hubei aims to maintain 10% GDP growth, wellSteel (Group) Corporation (武汉钢铁集团公司) above the national target of 8% or less, and toand Daye Nonferrous (大冶有色金属) are based double its per capita GDP by 2020. Newthere. Other major industries include industries and transportation networks with aGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 57 9 Italy 24Area (sq km) 185,888 14 Syrian Arab Republic 84Density (per sq km) 308 12 Philippines 20GDP (RMBbn) 1,283 11 Egypt 43GDP per capita (RMB) 22,677 14 Cape Verde 101GDP density (RMB per sqm) 7 14 Jamaica 47Source: CEIC, IMF, CIA, HSBC 137

Inside the growth engine China Research abc December 2010focus on high-speed railways will be built around Major cities (by GDP)the city of Wuhan, leveraging the concentration of Wuhan (武汉, capital), Yichang (宜昌), Xiangfanindustry base, human capital and infrastructure. (襄樊), Jingzhou (荆州), Huanggang (黄冈),Three investment platforms to lead new growth Xiaogan (孝感), Jingmen (荆门), Huangshi (黄Despite concerns over credit risks arising from 石), Shiyan (十堰), Xianning (咸宁), Suizhou (随local government-sponsored investment vehicles, 州), Ezhou (鄂州)Hubei will continue to rely on three investment Top officialsentities sponsored by the provincial government Party Secretary: Li Hongzhong (李鸿忠)to drive growth in the coming five years. Governor: Wang Guosheng (王国生)They are the Yangtze River Industrial InvestmentCompany (长江产业投资公司, or 长江投资),Hubei Transport Investment Company (湖北省交通投资公司 or 湖北交投) and Hubei UnitedDevelopment Investment Co., Ltd. (湖北联合发展投资有限公司 or 湖北联投).A key difference from previous investmentprogrammes is that much of the funding will be inthe form of equity instead of debt (bank loans). Map of Hubei Shiy an Xiangfan Suizhou Jingmen Xiaogan Huanggang Yichang Wuhan Jingzhou Ez hou Xianning Huangshi Source: HSBC138

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Hubei Urban and rural population 2009 - Hubei Total Total Primary UrbanSecondary Rural Tertiary 0 15 30 45 60 0 300 600 900 1,200 1,500 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Hubei Annual fixed asset investment 2008 - Hubei TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 150 300 450 600 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Hubei Government income and expenditure 2009 - Hubei Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-9 -6 -3 0 3 6 9 -200 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC, Hubei Provincial Bureau of Statistics 139

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Hubei Annual fixed asset investment - Hubei 30 1,500 100% 80% 20 1,000 RMB (k) 60% RMB (bn) 10 40% 500 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2004 Source: CEIC Source: CEIC, HSBC Exports/imports - Hubei Commodity building volume and price - Hubei 12 30 4 RMB (k) per sqm 24 3 9 sqm (mn) 18 USD (bn) 2 6 12 6 1 3 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Hubei Auto sales and expressway growth - Hubei 600 120 200 4,000 100 450 150 3,000 80 RMB (bn) kwh (bn) RMB (bn) km 300 60 100 2,000 40 150 50 1,000 20 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC140

Inside the growth engine China Research abc December 2010Hunan (湖南) Emerging manufacturing hub and auto industrySize Hunan has already developed a strong local heavyLocated in south central China and to the south of industry led by companies like Hunan Valin IronLake Dongting, the nation’s second largest lake, and Steel (湖南华菱钢铁), Changsha ZoomlionHunan connects the leader of the Western Region, Heavy Industry Science & TechnologyChongqing, with the largest economy of Development Co., Ltd (长沙中联重工), SanyGuangdong province. It has a population (64m) Group (三一集团) and Lengshuijiang Iron andsimilar to France, the land size of Romania, the Steel (冷水江钢铁).GDP of Malaysia and GDP per capita of Morocco. Hunan is also an attractive destination for lowStrengths value-added manufacturers from rich coastalRice and fresh water provinces like Guangdong, Zhejiang and Jiangsu.Hunan has a large agriculture sector thanks to its Low wage levels and real estate prices, sufficientfertile soil, temperate climate and supply of fresh primary product supply, and a better environmentwater provided by the Yangtze River and Lake and cultural climate all help, although itsDongting. The province is China’s largest rice mountainous terrain is a serious disadvantageproducer, the second largest manufacturer of tea relative to peers. However, most importantly,products and the second largest tobacco producer, Hunan is home to one of the largest populations ofbehind Yunnan. migrant workers currently working in (or recentlyCreative entertainment centre returned from) rich coastal manufacturing basesTo the surprise of many, Hunan is also a creative where they have developed new skills. Withentertainment centre ranked behind only the opportunities emerging at home, they may be happymunicipalities of Beijing and Shanghai and the to return, even at a much lower nominal wages.province of Guangdong. It is the birthplace of Some of China’s major auto manufacturers haveseveral of the most popular TV shows in China already built plants in Hunan, and the auto industryand Hunan TV has been the most watched there is expected to continue to grow rapidly. Autoprovincial channel for years. It can be argued that, sales in Hunan jumped 83% even during the peakbased on popular opinion, Hunan TV is the of the financial crisis of 2008. Other parts ofsecond most powerful media influence in the Hunan’s secondary industry, mainly tobacco, steel,television industry after the central government- power generation and heavy equipment, willrun CCTV, although some of its programming further benefit from its potential to attract moreremains controversial. Hunan could take its media manufacturing businesses.and entertainment industry to a new level.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 64 7 France 21Area (sq km) 211,855 10 Romania 80Density (per sq km) 302 13 Philippines 20GDP (RMBbn) 1,293 10 Malaysia 43GDP per capita (RMB) 20,428 20 Morocco 105GDP density (RMB per sqm) 6 15 Sweden 50Source: CEIC, IMF, CIA, HSBC 141

Inside the growth engine China Research abc December 2010Challenges Major cities (by GDP)FAI dependence and low energy efficiency Changsha (长沙, capital), Yueyang (岳阳),Hunan suffers from the typical drawbacks that Changde (常德), Hengyang (衡阳), Zhuzhou (株come with emphasizing heavy and low value- 洲), Chenzhou (郴州), Xiangtan (湘潭),added industries. Its total fossil energy efficiency Yongzhou (永州), Shaoyang (邵阳), Yiyang (益is low while dependence on FAI for growth is 阳), Loudi (娄底), Huaihua (怀化), Zhangjiajiehigh, with its latest FAI to GDP ratio at 0.6. (张家界)Five-year outlook Top officialsMaintaining growth momentum Party Secretary: Zhou Qiang (周强)Hunan will continue its massive infrastructure Governor: Xu Shousheng (徐守盛)construction in the next five years, whilenurturing its emerging and high tech industry. Theprovince is prepared to take advantage of theongoing migration of manufacturing activitiesfrom rich coastal provinces such as Guangdongand Zhejiang to low cost areas such as Hunan.Develop the western part of HunanFor its 12th Five-Year Plan, Hunan aims todevelop the western part of the province with agoal of doubling the area’s GDP by 2015. Inparticular, tourism income is expected grow at anannual rate of 25% in the next five years. Map of Hunan Yueyang Changde Zhangjiajie Yiyang Changsha Xiangtan Loudi Zhuzhou Huaihua Shaoyang Hengyang Yongzhou Chenzhou Source: HSBC142

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Hunan Urban and rural population 2009 - Hunan Total Total Primary UrbanSecondary Rural Tertiary 0 20 40 60 80 0 300 600 900 1,200 1,500 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Hunan Annual fixed asset investment 2008 - Hunan TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 150 300 450 600 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Hunan Government income and expenditure 2009 - Hunan Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-8 -4 0 4 8 -300 -200 -100 0 100 200 USD (bn) RMB (bn) Source: CEIC Source: CEIC 143

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Hunan Annual fixed asset investment - Hunan 30 1,500 100% 80% 20 1,000 RMB (k) 60% RMB (bn) 10 40% 500 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Hunan Commodity building volume and price - Hunan 10 40 3 RMB (k) per sqm 8 30 2 sqm (mn) USD (bn) 6 20 4 1 10 2 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Hunan Auto sales and expressway growth - Hunan 600 120 75 2,500 100 2,000 450 80 50 RMB (bn) kwh (bn) RMB (bn) 1,500 km 300 60 1,000 40 25 150 500 20 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC144

Inside the growth engine China Research abc December 2010Jiangxi (江西) from the neighbouring provinces of Guangdong and Zhejiang, two of the richest in China.SizeJiangxi is an inland province in southeast China, Agriculture basebordering Guangdong, Zhejiang and four other About 15% of its GDP is contributed by primaryprovinces. It has a population of 44m, similar to industry, 50% above the national average, asColombia, with 59% living in rural areas. Jiangxi Jiangxi is a major producer of rice, freshwaterhas the land area of Uruguay, GDP comparable to products, timber and bamboo due to its climateKuwait and GDP per capita similar to the and forests – 60% of its area is covered by forest,Republic of Congo. the second highest in China behind Fujian.Strengths ChallengesRich in natural resources Low-tech and risk of brain drainJiangxi is very rich in minerals and its reserves With its cheap labour and land, much of Jiangxi’slead the nation in 22 different types of resources, economy remains at the low-end of the valueincluding copper, gold, silver and rare earths. chain. For example, the city of Jingdezhen hasConsequently, metal-related mining, smelting and been producing quality china and pottery forpressing dominate its secondary industry with centuries. However, due to a lack of technologyJiangxi Copper Corporation (江西铜业集团), and creativity, manufacturers now make highXingang Group (新余钢铁集团) and Jiangxi volume, low-end products.Pinggang Co. (江西萍钢实业) being the major There is also a flip side to cheap labour.industry players. Rich resources also attract Neighbouring provinces Guangdong and Zhejiangforeign capital, making Jiangxi the second fastest lead the country in wages and have been attractinggrowing provincial destination for FDI in China. talent from Jiangxi, a brain drain that is yet to beWith an astonishingly high CAGR of 41% from reversed. Consequently, Jiangxi has been caught2000 to 2008, Jiangxi utilized USD3.6bn FDI in in a vicious cycle of low skill, low value-added,2008, ranking it 12th in the nation that year, up low innovation and low energy efficiency,from 22nd in 2000. representing a hollowing out risk to its rich metalCheap labour and land resources unless structural changes take place.Jiangxi has the lowest average wage in China, Jiangxi’s recent economic growth has beenaround RMB1,200 or USD180 per month. This is largely driven by FAI, with a FAI to GDP ratio ofdespite a 24% rise in the minimum wage from 0.88 in 2009, the second highest in the country.RMB580 to RMB720 early this year. Along with FAI CAGR was 33% from 2001 to 2009, thethe third lowest property prices in China, Jiangxi highest in China over the period.has the potential to lure manufacturing activitiesGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 44 13 Colombia 29Area (sq km) 166,894 17 Uruguay 87Density (per sq km) 266 16 Vietnam 27GDP (RMBbn) 759 19 Kuwait 55GDP per capita (RMB) 17,335 25 Republic of Congo 114GDP density (RMB per sqm) 5 18 Romania 53Source: CEIC, IMF, CIA, HSBC 145

Inside the growth engine China Research abc December 2010Five-year outlook Major cities (by GDP)Developing nuclear, solar and wind energy Nanchang (南昌, capital), Ganzhou (赣州),New energy is targeted to account for 8% and Jiujiang (九江), Shangrao (上饶), Yichun (宜春),15% of total energy consumption by 2015 and Jian (吉安), Fuzhou (抚州), Xinyu (新余),2020, respectively. Locations for new nuclear Pingxiang (萍乡), Jingdezhen (景德镇), Yingtanenergy power projects have been identified and (鹰潭)total installed wind power capacity is expected to Top officialsreach at least 60m kilowatts by 2015. Party Secretary: Su Rong (苏荣)Railway expansion Governor: Wu Xinxiong (吴新雄)Jiangxi will spend RMB180bn in the next 5 yearsto build 1,900km of new railway lines, taking thelength of the total network to 5,800km. Given thatJiangxi has recently raised its 2012 target to4,000km – 500km ahead of the original schedule– the old target may well be raised again. Map of Jiangxi Jiujiang Jingdezhen Nanchang Shangrao Yingtan Yichun Xinyu Fuzhou Pingxiang Jian Ganzhou Source: HSBC146

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Jiangxi Urban and rural population 2009 - Jiangxi Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 40 50 0 200 400 600 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Jiangxi Annual fixed asset investment 2008 - Jiangxi TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 Others RMB 0 100 200 300 400 500 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Jiangxi Government income and expenditure 2009 - Jiangxi Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-10 -5 0 5 10 -200 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 147

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Jiangxi Annual fixed asset investment - Jiangxi 30 800 100% 80% 600 20 RMB (k) 60% RMB (bn) 400 10 40% 200 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: Average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Jiangxi Commodity building volume and price - Jiangxi 8 25 3 RMB (k) per sqm 20 6 2 sqm (mn) 15 USD (bn) 4 10 1 5 2 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Jiangxi Auto sales and expressway growth - Jiangxi 400 80 30 3,000 25 2,500 300 60 20 2,000 RMB (bn) kwh (bn) RMB (bn) km 200 40 15 1,500 10 1,000 100 20 5 500 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC148

Inside the growth engine China Research abc December 2010Shanxi (山西) ChallengesSize Poor energy efficiency Shanxi’s fossil energy consumption is almostLocated in central China, Shanxi has the 100% dependent on coal. Its annual energy andpopulation of Canada, is the size of Tunisia and coal consumption are both the second highest inhas the GDP of Bangladesh (or Kuwait), metrics China, yet its GDP is ranked 21st (RMB737bn inthat all rank in the mid-range of China’s 2009), reflecting poor energy efficiency. It costsprovinces. 0.29kg of coal-equivalent energy in Shanxi forStrengths every RMB of GDP, the second highest in theCoal and coal-driven economy nation and 7 times higher than the most efficientShanxi is extremely rich in coal and led the provinces of Guangdong and Jiangsu.country in proven coal reserves of 207bn tonnes Pollution and dangerous work placesup to 2006 (approximately 30% of the national Shanxi is the most polluted province in China.total) but was overtaken by Inner Mongolia in Frequent mine accidents is another huge problem.proven reserves in 2007 and production in 2009. The death ratio of mine accidents in Shanxi is 10Its vast coal resources – the country’s primary times higher than in the US due to out of dateenergy source – have attracted investment in equipment and technology, negligence of minerelated sectors such as railways and highway owners and workers and poor mine conditions.building, power plants, mining, metallurgy, coal Fatal accidents have also cost the political careersrelated chemical research and products, heavy of several promising officials in the past, makingmachine products and other heavy industries. it a risky assignment to head the province.Shanxi is also reported to have large reserves of The poor quality of its environment is alsocoal bed gas. reflected in the local property market. PropertyThe province has the largest group of coal sales in Shanxi have been fewer than incompanies in China. Shanxi Coking Coal Group comparable provinces such as Shaanxi and Jilin(山西焦煤集团) and Shanxi Coal Transportation which have similar populations, wage levels andand Sales Group (山西煤炭运销集团) are the even slightly higher prices.leaders, both with annual sales above RMB70bn. The province started to tackle these problems inBecause of its exclusive focus on coal and related 2009 through the forced closure of half its mines,industries, Shanxi needs to import many other but there is still a long way to go.products such as food, electronics, cars andtextiles from other provinces and overseas.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mn) 34 19 Canada 36Area (sq km) 156,711 20 Tunisia 88Density (per sq km) 219 18 Germany 31GDP (RMBbn) 737 21 Bangladesh 56GDP per capita (RMB) 21,522 17 Tonga 103GDP density (RMB per sqm) 5 16 Finland 52Source: CEIC, IMF, CIA, HSBC 149

Inside the growth engine China Research abc December 2010Five-year outlook Major cities (by GDP)A “new-look” Shanxi is the target Taiyuan (太原, capital), Changzhi (长治), LinfenShanxi aims to become less dependent on coal (临汾), Yuncheng (运城), Jinzhong (晋中), Luliangand to double the size of its economy while (吕梁), Jincheng (晋城), Datong (大同), Shuozhoubecoming a modern manufacturing base and the (朔州), Yangquan (阳泉), Xinzhou (忻州)logistics centre for central and western areas. Top officialsExpediting urbanization Party Secretary: Yuan Chunqing (袁纯清)Shanxi aims to increase its urbanization rate by Governor: Wang Jun (王君)1.8% every year for the next five years, creating3m more city dwellers and RMB300bn in newinvestment demand to reach an urbanization rateof 55% by the end of 2015. As a result, the capital,Taiyuan, will become an expanded metropolitanarea. Map of Shanxi Datong Shuozhou Xinzhou Taiyuan Yangquan Jinzhong Luliang Changzhi Linfen Jincheng Yuncheng Source: HSBC150

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Shanxi Urban and rural population 2009 - Shanxi Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 40 0 200 400 600 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Shanxi Annual fixed asset investment 2008 - Shanxi TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 Others RMB 0 100 200 300 400 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Shanxi Government income and expenditure 2009 - Shanxi Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-6 -4 -2 0 2 4 6 -200 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 151

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Shanxi Annual fixed asset investment - Shanxi 30 750 100% 80% 20 500 RMB (k) 60% RMB (bn) 10 40% 250 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Shanxi Commodity building volume and price - Shanxi 15 12 3 RMB (k) per sqm 9 2 sqm (mn) 10 USD (bn) 6 1 5 3 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Shanxi Shanxi 500 150 4 2,000 400 3 1,500 100 RMB (bn) kwh (bn) RMB (bn) 300 km 2 1,000 200 50 100 1 500 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC152

Inside the growth engine China Research abc December 2010Northeast Region China’s agricultural and heavy industry base, thanks to fertile land and rich reserves of natural resources The “Revitalize the Old Northeast Industrial Base” program has underpinned growth since 2005 and will continue to do so Figure 24: Map of the Northeast Region transport system and earlier urbanization than in most other provinces. Although growth stalled in the 1980s, with millions laid off from SOEs, the 1 region remains an important centre of agriculture 2 3 and heavy industry, with respective 2009 sector GDPs of RMB355bn and RMB1,523bn. The northern part of the region is largely covered by the Greater Khingan (大兴安岭) and Lesser Khingan (小兴安岭) forests and black earth plain, which provide rich natural resources and fertile land. It is one of China’s major grain bases and leads the production of organic foods and milk. 1. Heilongjiang 2. Jilin 3. Liaoning Source: HSBC Natural resources provide the backbone for the region’s industrial activities. In HeilongjiangThe Northeast has a land area similar to Pakistan, province, the Daqing oil field has been China’sa population close to that of Mexico and a GDP of largest source of crude oil for over 50 years.RMB3trn in 2009, similar to Poland’s. Although it Despite reserve depletion over the years plus newis China’s smallest region with only three discoveries elsewhere, the region is still expectedprovinces, its per capita GDP is second only to the to maintain its leading position in oil for at leastEastern Region, thanks to its fertile land, rich 8-10 years. Downstream industries in oil refiningreserves of natural resources and traditional and petrochemicals have also picked up in theindustrial heritage. surrounding areas.Heavy industry and agricultural base Liaoning province has 24% of China’s total ironThe Northeast Region was China’s industrial ore reserves, underpinning a strong iron and steelworkshop in the mid-1900s, especially after the industry which has became an important regionaldiscovery of massive oil and iron reserves. pillar. Automobile manufacturing has also becomeSignificant heavy industrial bases were developed another important industry in the region and Jilinin the region, bringing with it an upgraded province has the country’s third largest auto 153

Inside the growth engine China Research abc December 2010Region summary 2009 Ranking Comparable country Rank as a countryPopulation (mn) 109 4 Mexico 14Area (sq km) 791,833 4 Pakistan 40Density (per sq km) 137 3 Uganda 50GDP (RMBbn) 3,056 4 Poland 25GDP per capita (RMB) 28,072 2 Algeria 91GDP density (RMB per sqm) 4 3 Costa Rica 61Source: HSBC, CEIC, IMF, CIAcompany, China FAW Group Corporation (中国 The region has also become an attractive第一汽车集团公司). destination for foreign capital since 2005, with an FDI CAGR of 40.1%, double the nationalNortheast China Revitalization average, laying a solid foundation for continuedThe region’s growth has lagged behind the rest of growth in coming years.China since the start of economic reform in 1979even in the area of heavy industry where it used to Meanwhile, the southern part of the region haslead the country. Tens of millions of workers in increasingly focused on service industries andstate-owned factories have been laid off over the foreign trade. For example, the Dalianyears as the region failed to upgrade outdated Commodity Exchange has become the secondtechnology and management. largest commodity market in China (10th in the world) and the world’s second largest futuresIn 2003, the State Council launched the Northeast market for soybeans. Dalian has also developedChina Revitalization or Revitalize the Old port services, local and international financialNortheast Industrial Base project (振兴东北老工 services, software design and high-end业基地), backed by massive subsidies. The manufacturing.program aimed to reinvigorate traditional industrywith technology upgrades, inter-provincial co-operation and structural reforms.Since then, the region seems to have regained itsgrowth momentum. For example, thanks to a largepick-up in FAI (CAGR of 32.6% since 2005 vs. anational average of 26.2%), the region’s real GDPis growing at an annual rate of 13.5%3, comparedwith 12.7% and 13% for the Eastern Region andthe Central Region, respectively, over the sameperiod.3 Based on a weighted average of real GDP rates at the provinciallevel, which are usually higher than headline GDP at the national level.154

Inside the growth engine China Research abc December 2010Heilongjiang (黑龙江) Black earth Heilongjiang is famous for its fertile black earthSize which produces excellent wheat, rice and cornLocated in the northeast corner of China and harvests. The province is a major grain base and abordering Russia to the north, Heilongjiang has a leading producer of organic foods. Heilongjiangpopulation the size of Poland, a land area similar has the highest milk production in China.to Sweden, GDP the size of Peru (ranked 16th in Heilongjiang Agriculture Company (黑龙江北大China) and per capita GDP of RMB21,665 or 荒农垦集团) and Jiusan Oil & Fat Co. (九三粮油USD3,280. 工业集团) are not only the province’s largestStrengths companies but also the country’s leadingLargest oil field agriculture players.Since the discovery of the Daqing oilfield in 1959, ChallengesHeilongjiang has become the major source of Oil dependency and risk post-Daqing erapetroleum for the country. This field has produced After 50 years of production, the Daqing field hasover 10bn barrels of oil since production started in been depleted, leaving the remaining reserves1960. In 2009, it produced 40m tonnes of crude increasingly costly to extract. Heilongjiang is theoil, accounting for 21% of the nation’s total only major oil province that has experienced adomestic production. Its current production rate is reduction in production every year since 2000. Aabout 1m barrels a day, making it the fourth most new growth engine is needed to replace shrinkingproductive oil field in the world. GDP contribution from the Daqing field.Many downstream industries like petrochemicals Five-year outlookand refining have been established around the area, Speeding uprepresenting the largest portion of the province’s Heilongjiang plans to accelerate its growth byindustry sector. doubling both its nominal GDP and governmentOther major natural resources include gold and revenue by 2015 to RMB1.7trn and RMB130bn,graphite. respectively, from their levels in 2010. The target nominal GDP growth rate of 15% will be its highestProximity to Russia since China’s economic reform began in 1979.The province’s border between China and Russia isthe most active avenue for bilateral trade with RMB120bn water projectUSD11.6bn goods exchanged in 2009. Light Agriculture needs water to sustain harvests.industry products from China are mainly exchanged Heilongjiang plans to spend RMB120bn in thefor Russia’s heavy industry and energy products. next five years on water conservation projects.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mm) 38 15 Poland 33Area (sq km) 452,645 6 Sweden 52Density (per sq km) 85 26 Greece 78GDP (RMBbn) 829 16 Peru 52GDP per capita (RMB) 22,447 16 Samoa 103GDP density (RMB per sqm) 2 25 Vietnam 86Source: CEIC, IMF, CIA, HSBC 155

Inside the growth engine China Research abc December 2010Regional airport expansion Major cities (by GDP)Heilongjiang plans to build another three or four Harbin (哈尔滨, capital), Daqing (大庆),regional airports (it already has nine) in the next Qiqihar (齐齐哈尔), Suihua (绥化),five years to increase airport density from the Mudanjiang (牡丹江), Jiamusi (佳木斯),current 0.2/million sq km to 0.25/million sq km. Jixi (鸡西), Shuangyashan (双鸭山),This is despite the fact that China’s top 20 airports Heihe (黑河), Qitaihe (七台河), Hegang (鹤岗),carry 80% of passenger traffic while the rest are Yichun (伊春)largely underused. Top officialsNew industries such as equipment manufacturing, Party Secretary: Ji Bingxuan (吉炳轩)energy, petrochemicals, textiles and food Governor: Wang Xiankui (王宪魁)processing are planned. Map of Heilongjiang Heihe Yichun Qiqihar Hegang Suihua Shuangyashan Daqing Jiamusi Harbin Qitaihe Jixi Mudanjiang Source: HSBC156

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Heilongjiang Urban and rural population 2009 - Heilongjiang Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 40 0 300 600 900 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Heilongjiang Annual fixed asset investment 2008 - Heilongjiang TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 Others RMB 0 100 200 300 400 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Heilongjiang Government income and expenditure 2009 - Heilongjiang Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-10 -5 0 5 10 -200 -150 -100 -50 0 50 100 USD (bn) RMB (bn) Source: CEIC Source: CEIC 157

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Heilongjiang Annual fixed asset investment - Heilongjiang 30 900 100% 80% 20 600 RMB (k) 60% RMB (bn) 10 40% 300 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Heilongjiang Commodity building volume and price - Heilongjiang 12 20 4 RMB (k) per sqm 10 15 3 sqm (mn) 8 USD (bn) 10 2 6 4 5 1 2 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity Auto sales and expressway growth - Heilongjiang usage - Heilongjiang 500 80 20 1,500 400 60 15 1,000 RMB (bn) kwh (bn) RMB (bn) 300 km 40 10 200 500 100 20 5 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC158

Inside the growth engine China Research abc December 2010Jilin (吉林) regions for pharmaceuticals. Jilin leads the country in the production of ginseng and deerSize antlers, two of the most valuable traditionalLocated in the middle of northeast China, Jilin has Chinese medicine products, which sell all over thea population the size of Malaysia; the land area of world. Xiuzheng Pharmaceutical Group (修正药Senegal, a population density that mirrors China’s 业集团) is a fast-growing private enterprise thataverage, a GDP similar to Vietnam and a per sells medicines domestically.capita GDP close to the Maldives. Railway connection to North KoreaStrengths Jilin is the only province that has railway accessTraditional heavy industry base to neighbouring North Korea. This raises itsJilin was one of the first provinces to develop strategic importance should North Korea embarklarge scale heavy industry in China. Automobile on liberal economic reforms.manufacturing, machinery equipment andpetrochemicals are still the province’s pillar Challengesindustries. Its automobile industry led the country Moving up the value chaineven before the birth of the new China in 1949. Jilin urgently needs to upgrade its traditionalGuangdong, Shanghai and Beijing have made heavy industry and move up the value chain. Sorapid progress in recent years but Jilin still had the far, its growth is largely FAI-driven with a FAI tosecond largest production volumes in 2008. China GDP ratio of 0.89 in 2009. Diversification awayFAW Group Corporation (中国第一汽车集团公 from heavy industry is another priority.司) is the third largest automobile company and Five-year outlookthe 21st largest company in China overall. Jilin’s Culture: new pillar industryother large heavy industrial players in iron, steel Jilin’s new Five-Year Plan calls for theand cement are Tonghua Iron & Steel Group (通 development of a new pillar industry that includes化钢铁集团) and Jilin Yatai Group (吉林亚泰). radio and television, journalism, publishing,Jilin has a well-established 4,000km railway performing arts and entertainment, animationsystem which is better than in most other games, digital transmission, network services,provinces, connecting all the major cities and cultural exhibition, entertainment and arts training,important industry locations. arts and crafts. The aim is to increase the GDP share of these 10 industries from 4.9% to 6%.PharmaceuticalsBenefiting from the abundant supply of mineralsand herbs, Jilin has a well-developed Chinesetraditional medicine industry and is one of the topGeneral information 2009 Ranking in China Comparable country Rank as a countryPopulation (mm) 27 21 Malaysia 45Area (sq km) 191,124 12 Senegal 83Density (per sq km) 143 23 China 45GDP (RMBbn) 720 22 Vietnam 56GDP per capita (RMB) 26,595 11 Maldives 95GDP density (RMB per sqm) 4 20 Philippines 60Source: CEIC, IMF, CIA, HSBC 159

Inside the growth engine China Research abc December 2010 Map of Jilin Major cities (by GDP) Changchun (长春, capital), Jilin (吉林), Baicheng Songyuan (松原), Siping (四平), Tonghua (通化), Songyuan Baishan (白山), Baicheng (白城), Liaoyuan (辽源) Changchun Top officials Jilin Party Secretary: Sun Zhengcai (孙政才) Siping Governor: Wang Rulin (王儒林) Lioayuan Baishan Tonghua Source: HSBC160

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Jilin Urban and rural population 2009 - Jilin Total Total Primary UrbanSecondary Rural Tertiary 0 5 10 15 20 25 30 0 200 400 600 800 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Jilin Annual fixed asset investment 2008 - Jilin TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 5,000 10,000 15,000 Others RMB 0 100 200 300 400 500 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Jilin Government income and expenditure 2009 - Jilin Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-10 -5 0 5 -150 -100 -50 0 50 USD (bn) RMB (bn) Source: CEIC Source: CEIC 161

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Jilin Annual fixed asset investment - Jilin 30 800 100% 80% 600 20 RMB (k) 60% RMB (bn) 400 10 40% 200 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Jilin Commodity building volume and price - Jilin 10 20 4 RMB (k) per sqm 8 15 3 sqm (mn) USD (bn) 6 10 2 4 5 1 2 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Jilin Auto sales and expressway growth - Jilin 350 60 250 1,200 300 50 200 900 250 40 RMB (bn) kwh (bn) RMB (bn) 200 150 km 30 600 150 100 100 20 50 300 50 10 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC162

Inside the growth engine China Research abc December 2010Liaoning (辽宁) Corporation (鞍山钢铁集团), Beitai Iron & Steel Group Co., Ltd (北台钢铁集团) and Benxi IronSize & Steel (Group) Co., Ltd (本溪钢铁集团) areLiaoning is a northeast province with a population leading examples.the size of Colombia and the land area of Nepal.Its GDP and per capita GDP are similar to The province also has a large amount of crude oilPortugal and Colombia, respectively. reserves, approximately 7.9% of the national total. The Dalian Commodity Exchange (DCE) hasStrengths been established in Liaoning, reflecting its leadingEconomic centre for northeast China position in the northeast. The DCE leads in aConnecting northeast China to the Pacific Ocean, range of futures products, including corn, No. 1Liaoning is ideally positioned as a transportation soybeans (non-GMO), No. 2 soybeans (GMO),hub, boosting its economic status. Dalian port, a soybean meal, soybean oil, RBD palm olein,crucial link to China’s major trading partners, linear low density polyethylene (LLDPE) andKorea and Japan, is the second largest in northern polyvinyl chloride (PVC).China and the fifth largest in the country in termsof freight movements. Liaoning has expanded its major industries into equipment manufacturing, petrochemicals andLiaoning’s RMB1.5trn GDP is the 7th largest in food processing, with many locally establishedChina. Its foreign trade value is three times bigger companies such as Shenyang Brilliance Jinbeithan its neighbouring provinces, Heilongjiang and Automobile (华晨汽车集团), Dalian DHI.DCWJilin, combined and FDI (USD15.4bn, third in Group (大连重工·起重集团) and YuandaChina in 2009) is six times larger. This is despite the Enterprise Group (沈阳远大企业), growing intofact that it only has two-thirds of the population and China’s Top 500 company list.a quarter of the land area of its two neighbours Dalian: model for a new Liaoningcombined. The PBOC has its northeast headquartersin Shenyang (沈阳), Liaoning’s capital. In many ways, the city of Dalian is an outlier. Unlike other cities in the largely industrial region,Heavy industry base with rich reserves Dalian enjoys a liveable environment with aSimilar to its northeast peers, Liaoning used to be service-oriented economy. Its key industries includeprimarily a heavy industry base focusing on iron software (based in the Dalian Software Park or 大连and steel industry. Its iron ore reserves still 软件园), financial services in its foreign exchangesaccount for 24% of China’s total, the largest in the and international trade settlement and the well-country. Large iron and steel companies in known Dalian Commodity Exchange, whichLiaoning are among the largest companies in the provide good examples of the likely direction of thecountry. Anshan Iron And Steel Group province’s future development.General information 2009 Ranking in China Comparable country Rank as a countryPopulation (mm) 43 14 Colombia 29Area (sq km) 148,064 21 Nepal 89Density (per sq km) 292 15 Burundi 23GDP (RMBbn) 1,507 7 Portugal 38GDP per capita (RMB) 35,239 9 Colombia 81GDP density (RMB per sqm) 10 9 United States 42Source: CEIC, IMF, CIA, HSBC 163

Inside the growth engine China Research abc December 2010Challenges Map of LiaoningEnergy efficiencyLiaoning is the second largest crude oil and thirdlargest fossil energy consumer. Heavy industry Tielingdependence and lack of energy efficiency suggest Fuxin Shenyang Fushunits economy is still at the relatively low end of the Chaoyang Liaoyangvalue chain. Jinzhou Panjin Benxi AnshanLiaoning spent RMB1.2trn on FAI in 2009 Huludao Yingkourelative to its RMB1.5trn GDP. Some 4,100km of Dangdongrailway lines and 1,276km of expressways areunder construction, which will underpin growth –but FAI can’t be the main economic driver forever. Dalian5 year outlook Source: HSBCSupporting private enterprisesLiaoning aims to focus on nurturing private Major cities (by GDP)enterprises in the next five years by helping small Shenyang (沈阳, capital), Dalian (大连),and medium enterprises raise funds from equity Anshan (鞍山), Yingkou (营口), Jinzhou (锦州),and debt markets. It plans to provide bank Panjin (盘锦), Fushun (抚顺), Benxi (本溪),subsidies to towns and villages on top of reduced Liaoyang (辽阳), Dandong (丹东), Tieling (铁岭),business income tax. The province aims to Huludao (葫芦岛), Chaoyang (朝阳), Fuxin (阜新)achieve RMB4.28trn GDP by the end of 2015, a Top officials19% CAGR in nominal GDP over the six-year Party Secretary: Wang Min (王珉)period from 2009 to 2015. Around 70% Governor: Chen Zhenggao (陈政高)(RMB3trn) of this is expected to come from theprivate sector, an increase from the current 60%.Tax revenue is also expected to hit RMB400bn in2015, a goal that may only be achieved if thecurrent property prices hold up.164

Inside the growth engine China Research abc December 2010Key financial and demographic data Annual gross domestic production 2009 - Liaoning Urban and rural population 2009 - Liaoning Total Total Primary UrbanSecondary Rural Tertiary 0 10 20 30 40 50 0 400 800 1,200 1,600 Population (mn) RMB (bn) Source: CEIC Source: CEIC Personal disposable income and consumption 2009 - Liaoning Annual fixed asset investment 2008 - Liaoning TotalUrban National Budget Municipal Debt Rural Foreign Inv estor Local Budget 0 4,000 8,000 12,000 16,000 Others RMB 0 200 400 600 800 1,000 1,200 RMB (bn) PDI Consumption Source: National Bureau of Statistics of China Source: National Bureau of Statistics of China Foreign trade 2009 - Liaoning Government income and expenditure 2009 - Liaoning Ex port Income Import Ex penditure Surplus (Deficit) Surplus (Deficit)-40 -20 0 20 40 -300 -200 -100 0 100 200 USD (bn) RMB (bn) Source: CEIC Source: CEIC 165

Inside the growth engine China Research abc December 2010Key growth figures Per capita income and consumption - Liaoning Annual fixed asset investment - Liaoning 40 1,600 100% 30 80% 1,200 RMB (k) 60% RMB (bn) 20 800 40% 10 400 20% 0 0 0% 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 GDP per capita Av erage annual w age FAI (LHS) GDP (LHS) Av erage retail consumption % of GDP (RHS) Note: average retail consumption is not available until 2005 Source: CEIC Source: CEIC, HSBC Exports/imports - Liaoning Commodity building volume and price - Liaoning 45 60 5 RMB (k) per sqm 4 40 sqm (mn) 30 3 USD (bn) 2 20 15 1 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Floor space completed (LHS) Floor space sold (LHS) Ex port Import Price (RHS) Source: CEIC Source: CEIC Secondary industry production and electricity usage - Auto sales and expressway growth - Liaoning Liaoning 800 200 100 3,000 600 150 75 2,000 RMB (bn) kwh (bn) RMB (bn) km 400 100 50 1,000 200 50 25 0 0 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008 Secondary industry production (LHS) Auto sales (LHS) Electricity consumption (RHS) Length of ex pressw ay (RHS) Source: CEIC Source: CEIC166

Inside the growth engineChina Research abcDecember 2010 Province Comparison 167

168 RMB (bn) 0% 3% 6% 9% 12% 15% 18% 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Inner Mongolia Source: CEIC Tianjin Guangdong Source: CEIC, HSBC Chongqing Jiangsu December 2010 China Research Sichuan Shandong Guangxi Zhejiang Inside the growth engine Hunan Henan Shaanxi Hebei Jilin Liaoning Hubei Shanghai Provincial GDP and sector breakdown (2009) Liaoning Sichuan Jiangxi Hunan Anhui Hubei Primary Fujian 2009 Jiangsu Beijing Tibet Anhui Fujian Secondary Inner Mongolia Shandong Heilongjiang GDP growth momentum across provinces: current vs. last decade average Yunnan Shaanxi Tertiary Ningxia Guangxi Hainan Jiangxi Heilongjiang Tianjin Guizhou Shanxi 2000-2009 Average GDP growth Henan Jilin Gansu Chongqing Beijing Yunnan Qinghai Xinjiang Hebei Guizhou Guangdong Gansu Zhejiang Hainan Shanghai Ningxia Xinjiang Qinghai Shanxi Tibet abc

RMB Population (mn) 0 10 20 30 40 50 60 70 80 90 100 0 5,000 10,000 15,000 20,000 25,000 30,000 Source: CEIC Guangdong Yunnan Source: CEIC, HSBC Henan Guizhou December 2010 China Research Shandong Shaanxi Sichuan Gansu Jiangsu Inside the growth engine Guangxi Tibet Hebei Qinghai Hunan Chongqing Anhui Ningxia Hubei Shanxi Zhejiang Inner Mongolia Guangxi PDI - Urban (LHS) Xinjiang Yunnan Population breakdown by province: urban vs. rural (2008) Anhui Jiangxi Guangdong Urban Liaoning Sichuan Heilongjiang Personal disposable income across provinces – urban vs. rural (2009) Hunan Rural PDI - Rural (LHS) Guizhou Henan Shaanxi Fujian Fujian Shandong Shanxi Hainan Chongqing Hebei Jilin Urban / Rural (RHS) Hubei Jiangxi Gansu Jilin Inner Mongolia Liaoning Xinjiang Jiangsu Shanghai Tianjin Beijing Zhejiang Tianjin Heilongjiang Hainan Shanghai Ningxia Beijing Qinghai Tibet 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 abc169

170 RMB 0% 5% 10% 15% 20% 25% Inner Mongolia 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 Source: CEIC Shaanxi Shanghai Source: CEIC, HSBC Chongqing Beijing December 2010 China Research Ningxia Tibet Shandong Tianjin Inside the growth engine Jiangsu Zhejiang Qinghai Guangdong Henan Jiangsu Hunan Ningxia Wages and consumption by province (2009) Shanxi Qinghai Guizhou Liaoning Jilin Chongqing Average annual wage Tianjin Inner Mongolia Hubei Shaanxi Jiangxi Shandong GDP per capita growth Anhui Sichuan Fujian Guangxi GDP per capita vs. wage growth: compound annual growth rate, 2000 to 2009 Sichuan Anhui Shanxi Tibet Average annual consumption Hebei Zhejiang Guangxi Hebei Wage growth Guizhou Guangdong Xinjiang Liaoning Henan Gansu Hunan Fujian Gansu Beijing Hubei Yunnan Yunnan Hainan Heilongjiang Heilongjiang Jilin Xinjiang Hainan Shanghai Jiangxi abc

Inside the growth engine China Research abc December 2010Heavy concentration on imports and exports (2009): It’s all about the big 5 400 70% 350 60% 300 50% 250 40%USD (bn) 200 30% 150 20% 100 50 10% 0 0% Shanxi Shaanxi Shanghai Shandong Beijing Sichuan Xinjiang Anhui Jiangxi Guangxi Ningxia Hebei Hubei Qinghai Tibet Guangdong Jiangsu Zhejiang Inner Mongolia Fujian Liaoning Tianjin Henan

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A guide to china's regions, provinces and cities

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