China Business Summit 2006

WORLD ECONOMIC FORUM China Business Summit 2006 Sustainable Growth through Innovation: China’s Creative Imperative Beijing, 10-11 September INSIGHTS

Contents This publication is also available in electronic form on the World Economic Forum website at the following address: China Business Summit 2006 report: http://www.weforum.org/summitreports/china2006 (HTML) The electronic version of this report allows access to a richer level of content Preface 3 from meeting, including the weblog, photographs and session summaries. The report is also available as a PDF: http://www.weforum.org/pdf/summitreports/china2006.pdf (PDF) Summary – Sustainable Growth through Innovation: China’s Creative Imperative 4 Other specific information on the China Business Summit 2006, Beijing, 10-11 September, can be found at the following links: Innovation 6 Meeting News www.weforum.org/china Photographs www.pbase.com/forumweb/china2006 Programme www.weforum.org/china/programme Interviews www.weforum.org/china/indepth Risk Management 9 Partners www.weforum.org/china/partners KnowledgeConcierge www.weforum.org/china/kc Weblog www.forumblog.org Sustainable Growth 12 Globalization 15 The Creative Imperative in China 18 Acknowledgements 20 The views expressed in this publication do not necessarily reflect those of the World Economic Forum. World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: contact@weforum.org www.weforum.org © 2006 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. REF: 121006 1 China Business Summit 2006

Preface The China Business Summit 2006 was designed to generate insight and guide action to improve the alignment of China’s public policy, development and industry agendas. The frank and open discussions in Beijing laid bare the reality that China today is something of an anomaly in terms of modern economic history. It has accumulated now close to US$ 1 trillion in foreign currency reserves, while at the same time hundreds of millions of its citizens still live on less than US$ 500 a year. Or, as one pundit put it recently, China is “a developing country that has vast global impact.”* The report that follows examines this duality, particularly in the context of the newly endorsed 11th Five-Year Plan (2006-2010) which focuses on implementing “people- centred” and “scientific” development policies. Concepts, still not yet fully understood in terms of their long-term policy and economic impact, but much better appreciated in terms of their growing importance by those executives who engaged the senior officials participating in the Summit. China is now the world’s fourth largest economy – its per capita GDP is well over US$ 1,000 and it has surpassed the United States as the leading destination for foreign direct investment. These accomplishments, however, have led to the realization that this rapid economic success has also introduced new challenges requiring innovative government policies and creative business solutions if the country is to maintain its strong record of growth. During the week of the Summit, the Chinese government released its first measurement of the country’s “Green GDP” which subtracts the cost of natural resources and environmental degradation from total GDP. In 2004, the economic loss from environmental pollution amounted to 3.05% of GDP (US$ 64 billion). Thus, the China Business Summit 2006 was timely in bringing key stakeholders together to rethink and reshape the country’s growth and industry agendas in this changing development context. China’s first quarter GDP is already 10% greater than a year before and concerns are growing over excessive investment in specific industries and the need to tighten monetary policy. Although fears of excessive growth loom large, the new Five-Year Plan is focused squarely on reducing rural-urban income disparities and uplifting the living standards of the 800 million Chinese earning less than US$ 1,000 a year. Readers of this report will find that addressing both challenges requires shifting from investment and export driven economic growth to sustainable growth driven by technology innovation and domestic consumption. The modalities of achieving this appear to be at the centre of many more discussions in the future. Lee Howell Director, Asia * Martin Wolf, “Why Beijing should dip into China’s corporate piggy bank,” Financial Times, 4 October 2006 3 China Business Summit 2006

Summary – Sustainable Growth through Innovation: China’s Creative Imperative “We have to switch from “What will truly spur “One major question is Sustainable Growth our previous industrial innovation within Chinese whether Chinese innovation development mode, from companies is the recognition will occur only in products, consuming large amounts of of the real value of or more importantly will The chief economic challenge is to shift from an export- natural resources to a intellectual property rights.” occur in business institutions led growth model to one driven by domestic consumption development mode based – in processes, organization on science and technology Maurice Levy and management style. and innovation. Chairman and Chief Executive as well as innovation.” That locus of creativity could • A key obstacle is the lack of social safety nets, which Officer, Publicis Groupe, France; actually be more powerful hinders the deployment of savings to more productive Co-Chair of the China Business Zhang Xiaoqiang than innovation in new Summit 2006 purposes and discourages entrepreneurship. Vice-Chairman, National products.” Development and Reform • Reflecting the macroeconomic paradigm change that Commission, People's Republic Tom Manning needs to take place, Chinese firms must transform of China Chief Executive Officer, China themselves from focusing on market share to focusing Board Directors, Hong Kong on sustainable profits. SAR • Achieving energy security with environmental responsibility and efficiency is top priority. • Addressing the absence of safety nets and the need for Innovation The economic model that has given China over two Acquiring adequate energy for China’s development will energy efficiency and environmental protection offers decades of remarkable growth is getting an overhaul. continue to be the paramount challenge, one commercial opportunities that could drive new, From now on, sustainable growth and development will compounded by the urgent need to find cleaner and more China needs innovation to produce less energy- sustainable growth. depend on China’s ability to innovate. That was the efficient means of delivering it. China’s leaders must also intensive economic growth and to reduce its message from the more than 500 senior government, solve the riddle of how to ensure that future development dependency on foreign technology. Globalization business, media and academic leaders at the China reverses growing disparities of income. Moreover, they • China’s companies have to innovate to fend off rival Business Summit 2006. To accomplish this will require must somehow unleash the nation’s innovative potential in low-cost manufacturing centres and increasing that policy-makers and businesses keep the following a way that can arrest China’s growing trade deficit in foreign competition in Chinese markets. Both rich and poor, China is a paradox. It is the fourth priorities at the forefront of their agenda: intellectual property. • China’s emphasis on R&D in cutting-edge industries largest economy in the world but still has millions living presents new opportunities for foreign investors. below US$ 1,000 per capital GDP. • Increase the protection of intellectual property rights of Unleashing China’s creative impulse will require dramatic • Universities need to work more closely with the • China’s population and economic size are giving it Chinese and foreign companies changes to the nation’s educational system, particularly its private sector to develop curricula that produce greater clout in the global community, with increasing universities – the crucibles of China’s creative leadership. graduates more suited to the workplace. influence in international organizations. • Improve environmental protection at the provincial and China will continue to need foreign cooperation and • Innovative industries will not flourish without freer • China is using this influence to exercise greater local levels investment in order to make the transition. But Chinese capital markets and a vigorous venture capital responsibility in issues where it has a major stake, such companies must take the lead to innovate new products community. as the Korean Peninsula, energy security and the • Address corruption at the local level as well as their management processes. It will also need • China’s emphasis on protecting intellectual property environment. more dynamic capital markets that can channel the rights is crucial to stimulating domestic innovation. • Chinese diplomacy has been largely economic, but its • Promote the growing presence of Chinese multinational nation’s vast savings towards innovation and ensure that value-neutral foreign policy may not be sustainable, corporations in major industries and markets profit rewards those who dare to take risk. particularly with its major trading partners. Risk Management throughout the global economy • More and more Chinese enterprises are venturing abroad, reflecting China’s increasingly open economy quot;Whatever future China has, it will be a major shaper of The priorities emerged from a survey prior to the Summit As China expands, a growing number of risks threaten and presenting new opportunities and challenges. the global system.quot; that asked which issues would have the most impact on to impede its growth. China’s development. The Summit began with the focus • Foreign companies fear the risk of China’s economy Ged Davis on how innovation has become the bedrock of the 11th overheating. Managing Director, World Economic Forum Five-Year Plan. What became clear in those discussions • Growing global protectionism is an even greater risk was that China can no longer behave as merely the to companies in China, imperilling the global supply largest emerging economy, but must assert a role in chain and requiring greater regional focus. global affairs proportionate to its size. “Whatever future • China is particularly vulnerable to oil shocks. China has,” said Ged Davis, Managing Director, World Securing stable energy supplies is therefore a Economic Forum, “it will be a major shaper of the global priority in government policy. system.” • Hedging against risks would require more developed Chinese capital markets. quot;Xu Guanhua • Other risks are posed by political and geopolitical Minister of Science and Technology of the People’s tensions. Republic of China 4 5 China Business Summit 2006 China Business Summit 2006

Innovation “We need to increase the “We have to constantly “China has to move up the “We hope to absorb development of our conduct systematic levels of development with technologies from abroad independently owned innovation or else we will innovation to the high end and adapt them into our technologies.” be eliminated by the market and only in this own.” competition.” way can we continue to Cheng Siwei develop.” Chen Yuan Vice-Chairman, Standing Governor, China Development Chen Tonghai Committee, National People’s Bank, People's Republic of Chairman, China Petroleum & Wang Jianzhou Congress, People’s Republic of China; Co-Chair of the China Chemical Corporation (Sinopec), Chief Executive, China Mobile China Business Summit 2006 People’s Republic of China Communications Corporation, People’s Republic of China; Co- Chair of the China Business Summit 2006 It should come as no surprise that intellectual property are eroding China’s cost competitiveness, turning China has already made significant progress. Figure 2: China Equity Markets Lagging rights once again topped the agenda in discussions about countries like Vietnam, Indonesia and even India into the Spending on R&D has risen above 1.2% of GDP from China. What is remarkable is that, this year, it was China’s new Chinas. less than 0.6% a decade ago (see Figure 1). China’s own officials and executives – not foreigners – who were aim is to push that figure up to 2.5% by 2020, vaulting banging the drum loudest for greater copyright China’s stress on “indigenous innovation” doesn’t mean it it above where most OECD countries are today. enforcement and patent protection. won’t welcome further foreign investment and technology. On the contrary, the business opportunities are manifold Spending won’t be enough, however. While some of For good reason: In its newest Five-Year Plan, the for companies that can help China move up the value- China’s top universities have become nascent centres government has laid out an ambitious plan to reclaim added ladder. In addition to offering incentives for of innovation, most Chinese institutions still specialize China’s mantle as a world leader in science and research into cleaner and more efficient energy use and in churning out graduates who can ace exams but technology. Staggering in scope, the plan seeks to redraw renewable energy, China is promoting the development of cannot think outside the box. Universities also need to the economic landscape in a way that will promote less polluting industries. More broadly, the government work with companies to devise more practical innovation not only in China’s universities and companies, aims to promote research and development in every field curricula that will produce graduates who can go but in the very way policies are created and implemented. from aerospace and biotech to semiconductors and straight to work. “We need to get away from trophy “Innovation is the soul of a nation’s advancement and the space shots – even missions to the moon. degrees and concentrate more on hands-on everlasting, driving power of national prosperity,” said education if we are to encourage innovation in China,” Zeng Peiyan, Vice-Premier of the People’s Republic of said Nandani Lynton, Vice-President, Asia, Figure 1: R&D Spending Increasing…and China. Thunderbird, The Garvin School of International Source: Datastream Shifting towards the Private Sector Management, People’s Republic of China. After 20 years of stunning growth, China’s old resource- guzzling, pollution-spewing engine of an economy cannot Too much of the research at Chinese universities stays The good news for innovators is that the government is run at the pace it has for much longer. Not only is China locked in the lab. The government is trying to get determined to beef up its intellectual property regime. “Let choking on the environmental problems created by educational institutions to work with companies to me put it this way,” said Xu Guanhua, Minister of Science inefficient use of coal and oil, but it faces growing risks to move discoveries more quickly into profitable and Technology of the People’s Republic of China, future growth. China is far too dependent on imported oil applications. Despite China’s massive foreign “without effective protection for intellectual property what and other raw materials, too reliant on exports – exchange reserves and vast public savings, however, we have said about indigenous innovation would be particularly to the United States – and too accustomed to venture financing remains scarce for researchers trying nothing more than empty words.” competing largely on price rather than quality. to commercialize discoveries. With the largely state- owned banking sector unreceptive and the stock China’s entry into the World Trade Organization five years market still struggling (see Figure 2), financial experts ago has made innovation an even more pressing say venture finance will not take off until China’s imperative. As China opens up its markets, its companies capital markets are more mature. and banks face greater competition from more advanced global players. At the same time, rising wages at home Source: OECD Main Science and Technology Indicators 2006-1 6 7 China Business Summit 2006 China Business Summit 2006

Risk Management China’s policy imperatives “Even an unfriendly quot;We need to improve our Figure 3: Chinese Companies Raising More external environment will legal system and also the “We are going to conduct another major round of Equity Overseas not block China’s corporate system as well as innovation. We will be a society based on scientific development.” our cultural system.quot; development with innovation taking centre stage,” declared Zeng Peiyan, Vice-Premier of the People’s Li Ruogu Tu Guangshao Chairman and President, Export- Vice-Chairman, China Securities Republic of China, at the opening of the China Business Import Bank of China, People's Regulatory Commission, Summit 2006. “China’s 11th Five-Year Plan outlines the Republic of China People's Republic of China national strategy to develop indigenous innovation. Our ability in indigenous innovation still lags behind, and some technologies rely on imports. For example, 80% of integrated chips in China are imported,” echoed Zhang Xiaoqiang, Vice-Chairman, National Development and Reform Commission, People’s Republic of China. Those in the business community welcomed China’s creative imperative. “We have to constantly conduct As solid as China’s growth has been (see Figure 1) and as Chinese companies, on the other hand, are pondering the systematic innovation or else we will be eliminated by the Source: Bloomberg, Datastream steady as the government’s hand might seem, a growing risks of greater foreign competition, how to offset it by competition,” said Chen Tonghai, Chairman, China list of risks could impede or alter China’s progress. expanding overseas. “The risk for many Chinese Petroleum & Chemical Corporation (Sinopec), People’s The government is also adamant that companies will have companies is integrating foreign companies into their Republic of China. “China is one of the fastest-growing to be at the forefront of China’s innovation drive (see portfolio, how to make it work,” said Edward C. Tse, economies in the world and one of the engines of the Figure 1: China’s Growth Still Outpacing World Figure 3). Caught between a looming invasion by foreign Managing Director, Greater China, Booz Allen Hamilton, global economy. We have to bring the latest, cutting-edge imports, they must venture abroad into markets where People’s Republic of China. technology to China. There’s no way out,” said Winfried consumers see them just as they saw the Japanese, Vahland, President and Chief Executive Officer, Taiwanese and Koreans that came before them – cheap Many risks lay beyond companies’ control. Political Volkswagen Group China, People’s Republic of China. and inferior. Only by innovating in quality can they hope to manoeuvring in anticipation of the 2007 meeting of the win market share overseas. Central Committee of the Communist Party of China to China’s Patent Office Busier elect the new Party leadership, for example, has As they try to shift from manufacturing into services, distracted the bureaucracy, imposing delays and however, companies also need to find innovative ways to constraints on foreign investment. And there are utter wild run. “China may need technological innovation less than cards, such as an avian flu pandemic or the possibility of innovation in management, institutions and processes,” an armed conflict on the Korean peninsula. said Wang Jianzhou, Chief Executive, China Mobile Communications Corporation, People’s Republic of China; One of the greater risks, though, is raised in the World Co-Chair, China Business Summit 2006. Economic Forum’s scenario report China and the World: Scenarios to 2025: an increasingly protectionist world that Ultimately, however, the most difficult hurdle China may forces China and the rest of Asia to turn within for growth. face in igniting its innovative spark is itself. Beyond deep The breakdown of the Doha Round appears to have pockets, governments have generally proven poor agents increased the plausibility of this scenario, raising the risks Source: World Intellectual Property Organization of creativity, tending instead to stifle it. China may also to China and businesses in the country. “What this implies Source: IMF World Economic Outlook April 2006 …And Chinese Inventors Active in Overseas need to overcome its traditional fear of failure if it is to is that the global supply chain is going to be severely Patenting successfully reintroduce innovation to its cultural mix. affected and that you’re going to, as a business, have to Foreign multinationals tend to focus on risks to China’s develop and depend upon regional supply chains,” said domestic economy. What is the likelihood of Jean-Pierre Lehmann, Professor of International Political overinvestment and overcapacity caving in? How is Economy, IMD (International Institute for Management deregulation changing the business landscape and will it Development), Switzerland. As bilateral trade agreements increase or reduce corruption? Some even discuss the multiply, the danger is that increasingly complex rules will need to offset their China risk with a presence in Vietnam raise transaction costs and complicate trade. or Malaysia. Perhaps the biggest risk foreign firms are trying to fathom, however, is the risk of not being in China at all. Source: World Intellectual Property Organization 8 9 China Business Summit 2006 China Business Summit 2006

These home improvements are vital, as David Dollar, quot;Today we see a lot of risks “It is not easy for companies in the private sector and the from the West, who are Country Director, China and Mongolia, World Bank, Environmental risk to sustainable Chinese growth country in general is borne often seen as ‘wolves’, to Beijing warned: “To keep growing quickly, China needs to by the banking system, get a foothold in the Chinese improve its institutions.” For example, a basic impediment China’s GDP is expected to quadruple by 2020, which takes on most of the market and generate a to implementing much of China’s transformation plan is propelling aggregate energy use towards US levels and corporate risk.quot; profit.” the lack of safety nets for unemployment, healthcare and presenting challenges to overall environmental John P. Drzik Liu Changle retirement. Without them, the Chinese will continue to management. Pressure is rising on policy-makers and President, Mercer Oliver Wyman Chairman of the Board and save at prodigious rates, instead of channelling funds to CEOs alike to improve energy efficiency and to take (MMC), USA CEO, Phoenix Satellite Television more productive purposes. The absence of social security measures to mitigate widespread potential Co., Hong Kong SAR; Co-Chair of the China Business Summit also limits entrepreneurship and the willingness of environmental damage to water supplies and air quality. 2006 investors to take risks. “Savings are high because there is There is an increasing recognition of environmental insecurity,” said Pierre E. Cohade, President, Asia Pacific stress in Chinese cities, the fragility of several of China’s Region, Goodyear Tire Management Company multiple ecosystems and the risks posed by (Shanghai), People’s Republic of China. environmental degradation to China’s long-term sustainable growth path. “The central government The weak rule of law is another risk. Take intellectual attaches great importance to building an China’s vulnerability to imported oil supplies is also property rights. Enforcement of IPR protection, while Yet, the obstacles and risks that could block China’s environmentally friendly society,” said Zhang Xiaoqiang, fostering a well publicized push overseas to secure oil-rich improving, remains patchy due to feeble commitment at economic transformation offer the very commercial Vice-Chairman, National Development and Reform friends. Beijing’s diplomats and executives have become the local level and the lack of a sufficiently independent opportunities that could drive new, sustainable growth. Commission, People’s Republic of China. Zhang told frequent visitors to Central Asia, Africa and South legal system. This is not just a problem for foreign Japan and the US could supply China with the technology participants that China aims to reduce energy America. China has also assumed a more proactive role in investors. In fact, about 90% of IPR infringements involve to enhance energy efficiency. The lack of social safety consumption of per unit GDP by 20% and reduce total settling diplomatic disputes in areas it depends on for oil, domestic firms. “The general issue is the extraordinary nets represents a “humongous opportunity not just for emissions by 10% over the next five years. This goal such as Iran. degree of decentralization in China,” Dollar explained. improving the quality of life in China but for unleashing all will be achieved through the reduction of pollution at these savings,” said Cohade. He predicted that “empty source, implementation of new technologies and While those efforts may help mitigate the risk of an oil nesters”, parents born during the years of the Cultural innovation. Market factors, such as adjustment to the supply shock, for those in China the ability to offset risk Revolution whose single child has already grown up and price of oil, may also help this process. While Zhang would be greatly enhanced if its stock and bond markets left home, would be “the engine of consumption” in said that China would continue to rely on coal as its Figure 2: Bank Loans Dominate Capital were more developed. “Today we see a lot of risks in the coming years. “Understanding the empty nesters is going major source of energy, the installation of clean coal Structure in China private sector and the country in general is borne by the to be critical” for retailers and financial services providers. technology and the increasing use of nuclear power – banking system, which takes on most of the corporate set to rise to 4% of overall energy production by 2020 risk,” said John P. Drzik, President, Mercer Oliver Wyman – will help China to achieve its ambitious goals. Failure (MMC), USA (see Figure 2). Insurers also want the to act now to shore up the environmental foundations freedom to invest in a wider range of assets to enable of China’s growth – locally, nationally and globally – China’s savers to better hedge risks to the value of their risks human and political costs and future economic nest eggs. “Rome was not built in a day,” cautioned Tu growth. Guangshao, Vice-Chairman, China Securities Regulatory Commission, People’s Republic of China. Before China China’s Spending on the Environment can further liberalize its capital markets, he said: “We Rising… need to improve our legal system and also the corporate system as well as our cultural system.” Source: Nicholas Lardy, Institute of International Economics Source: State Environmental Protection Administration Reports on the Economy 2000- 2004, China Statistical Yearbook, press accounts 10 11 China Business Summit 2006 China Business Summit 2006

Sustainable Growth “The domestic service sector “I don't see China becoming quot;Local governments want to “Internationalization is not will grow very fast, faster a service centre to the world focus on increasing GDP an end in itself; it is a means than the rest of the anytime soon. To be at the and, in doing so, favour to help you grow and economy, but it will mainly same level of critical mass vested local interests such as develop.” cater to the local market. In as India at a global level – factories that may also be general, we will not see it's probably about 7 to 10 polluters.quot; Yang Yuanqing Chairman of the Board of large-scale service practice years away.” Lenovo Group, People’s to the world.” Pan Yue Republic of China; Co-Chair of Vice-Minister of China's State Sriram Venkataraman the China Business Summit Environmental Protection Senior Vice-President and Head David Li Daokui 2006 Administration of Asia Pacific, Infosys Mansfield Freeman Chair Technologies, Japan Professor of Economics, Tsinghua University, People's Republic of China China’s chief economic challenge for the next decade is The key to that transformation was obvious from the For that reason, the government is trying to overhaul Protection Administration. He called for an honest clear: how to shift from an export-led growth model to Summit theme: Sustainable Growth through Innovation: the economy to make China a greener, more energy- evaluation of the state of China’s environment and one driven by consumption and innovation, while China’s Creative Imperative. Among the buzzwords of efficient nation. China has been moving, for example, urged local governments to adopt sustainable maintaining social stability and avoiding a hard landing. development, “sustainability”, “innovation” and “creativity” to gradually reduce subsidies on fuel in order to practices. “Not all central government policies are fully When an economy as big as China’s – now the fourth are practically regarded as off-the-shelf ingredients for a remove the incentive for waste and make consumers implemented in the localities,” noted Zhang Xiaoqiang, largest in the world – is growing at a 10%-plus clip, that magic potion to combat the pressures of globalization. bear the true cost of oil. The government is investing Vice-Chairman of China’s National Development task is the macroeconomic equivalent of getting a But China’s current Five-Year Plan offers a real recipe for in new technologies for oil and gas exploration and Reform Commission. “We need to improve the quality charging elephant to turn the right corner without action that can hardly be dismissed as glib: stimulate financing the development of renewable energy such of our civil servants and the whole administrative crashing or slipping. But make the turn the giant must. domestic demand, shift investment away from industries as hydropower, biomass and wind power (see Figure mechanism has to deal in a balanced way with short- Heavy fixed asset investment has led to overcapacity in with too much capacity such as automobiles and steel, 2). China is also trying to adopt cleaner ways to burn and long-term issues, all of which have to be many industries, while China’s high savings rate of over shore up the financial system so that it can better absorb domestic coal and plans to build 40 nuclear power coordinated on a national basis.” 40% of GDP is unsustainable, particularly as the the savings of Chinese, and mobilize more capital to plants in the next 15 years. “In China, most of our population ages. Meanwhile, in 2004, China has the productive investments. As for innovation, the plan experts and the public believe nuclear energy is Figure 2: Alternative Energy Expected to largest energy imbalance in Asia (see Figure 1) and commits China to increasing R&D spending from the relatively safe and clean. So the Chinese government Rise with Demand… pollution was estimated to have resulted in economic current 1.2% of GDP to 2.4%, just above the OECD believes we should still actively develop nuclear losses equivalent to 3.05% of GDP. “We cannot continue average. “Only by constructing new ways of development energy,” said Zhang Xiaoqiang, Vice-Chairman, with the traditional development approach and growth can China enhance overall growth,” said Summit Co- National Development and Reform Commission, pattern,” concluded Zeng Peiyan, Vice-Premier of the Chair Chen Yuan, Governor of the China Development People’s Republic of China. People’s Republic of China, in a special address to open Bank. the China Business Summit 2006. “We have to transform At the same time, the government is trying to push our approach.” But there are obstacles and risks. Perhaps the most industry into shape, phasing out inefficient factories talked about risk is that posed by increasingly volatile oil and promoting cleaner, more efficient ones. It is prices. Since becoming a net oil importer in 1993, China imposing tighter emission standards on vehicles, Figure 1: China Has the Largest Energy has emerged as the world’s second largest energy clamping down on overloaded, gas-guzzling trucks, Imbalance in Asia consumer, increasingly dependent on imported oil. and even changing the way it evaluates local officials to rate them not just on economic growth but also on China’s policy-makers are cognizant that China’s energy efficiency. dependency on imported oil – and its wasteful use of it – is not only a drain on development, but that its growing Efforts to boost China’s energy efficiency, its economic demand for the increasingly scarce resource also raises expansion and environmental protection have been the long-term probability of China getting into a conflict undermined by China’s decentralized political system. over oil, whether commercial or military. “Local governments want to focus on increasing GDP and, in doing so, favour vested local interests such as Source: US Energy Information Administration, China Daily, International Energy Outlook factories that may also be polluters,” said Pan Yue, 2006 Vice-Minister of China’s State Environmental Source: IEA Energy Balances of OECD Countries and Non-OECD Countries 2003; World Bank World Development Report 2005; CIA World Factbook 12 13 China Business Summit 2006 China Business Summit 2006

Globalization The onus for action must also fall on enterprises. “Many The maturation of China’s economy will surely speed up companies in China have focused on the short term such its transformation – naturally. The services sector already quot;I can assure you that “China is engaged and Japan's next administration building partnerships to as on increasing revenues from sales and marketing,” said contributes almost 40% of GDP, Hellmut Schutte, Dean, will share the basic send a message to the Zhang Weiying, Vice-Dean, Guanghua School of Asia Campus, INSEAD, Singapore, remarked (see Figures recognition that the rise of world that it will play by the Management, Peking University. Instead of focusing on 3 and 4). “As manufacturing productivity growth comes in, China is an opportunity for rules of the game. Let the racking up double-digit sales, enterprises have to put more people will be laid off with many of them starting all of us rather than a threat rules of the game be fair.” against us.quot; more effort and investment into R&D and generating their own little shop along the street,” he explained. “It’s Kapil Sibal sustainable profits, Zhang advised. Said Chen Tonghai, pretty obvious that as China’s economy grows, Minister of Science and Yasuhisa Shiozaki Chairman of China Petroleum & Chemical Corporation consumption patterns will change, with very high growth Technology and Earth Sciences Senior Vice-Minister for Foreign (Sinopec), which leads Chinese enterprises in annual in the leisure industries, healthcare and education.” The of India Affairs of Japan patent applications: “In our industry, we not only have to elephant is making the turn, but will it keep its balance? look for new types of energy but to develop environmentally friendly products. We have to constantly conduct systematic innovation or else we will be eliminated by the competition.” In 30 years, China has transformed itself from a The recent agreement to increase China’s voting Figure 3: Chinese Economy Gradually Figure 4: …But Services Sector Still Has command economy inhospitable to overseas investors power in the International Monetary Fund (IMF), albeit Shifting towards Services… Room to Grow to an emerging free enterprise market that attracts the by only a small percentage, is an acknowledgement of biggest share of global foreign direct investment. its rising profile – and mounting responsibilities. China is a key driver of globalization and one of its Geopolitically, China’s participation in the six-party major beneficiaries. The world’s third biggest trader talks on North Korea’s nuclear programme has been and the fourth largest economy, China combines pivotal. And as a permanent member of the UN geographic and demographic heft with purchasing Security Council, Beijing is playing a key behind-the- power and manufacturing prowess. scenes part in the selection of the next UN Secretary- General, who is expected to be an Asian. “Anything Even so, China is still a developing country. China’s that happens in China will have a global impact so we per capita GDP is above that of the Philippines but have to be globally responsible,” said Wang Jianmao, below that of Thailand. In the World Economic Professor of Economics and Associate Dean, China Forum’s Global Competitiveness Report 2006-2007, Europe International Business School (CEIBS). China’s competitiveness ranking dropped from 48th to 54th. According to the World Bank, over the past two Chinese diplomacy, however, has largely been driven decades, China accounted for over 75% of the by pragmatic economic motives, particularly the need poverty reduction achieved in developing economies. to meet its burgeoning energy, raw materials and Yet, today, more than 135 million people, mainly in components demands. China has been an China’s western and interior regions, scrape by on enthusiastic driver of integration with South-East Asia less than a dollar a day, without the benefits of clean and has also forged strong commercial links with Source: China Statistical Yearbook 2005 Source: CIA World Factbook; 2005 estimates when available water, adequate healthcare and education. resource-rich countries in Central Asia, Latin America, the Middle East and Africa, as well as Australia. That said, China has become a leading player in the Energy imports rose by 55% in the first four months of international community, both through the roles it has this year to US$ 21.3 billion. sought such as its membership in the World Trade Organization (WTO) and those that have been thrust upon it. Beijing has emerged as a role model for developing economies, its non-judgmental foreign policy serving as a counterweight to western developed countries, particularly the United States. 14 15 China Business Summit 2006 China Business Summit 2006

“We are entering a new phase in the relationship between Asia and the China’s foreign policy, its economic ascendancy and its The part China plays in the WTO in the aftermath of Middle East, but we need to Figure 1: China-US Trade Balance Shifting ambitious enterprises have at times put China at odds the collapse of the Doha Round will be an immediate create the foundations for with the global establishment. Beijing has clashed with indicator of its willingness to shoulder new better understanding of each other to take it to Washington over how to deal with the conflict in Darfur responsibilities. Beijing could be instrumental in another level.” and Iran’s nuclear programme. The bid by a Chinese state reviving the talks. China’s trading partners, meanwhile, firm to take over a US energy company alarmed many will be assessing how well Beijing implements its WTO Rachid M. Rachid American politicians. China’s trade surplus has fuelled commitments, including the opening of the banking Minister of Trade and Industry of Egypt accusations and led to enormous pressure on Beijing to sector at the end of this year. Lastly, China’s attempts move to a more flexible currency regime faster than it is to set its own industry and technology standards have willing to allow. raised concerns among some trading partners and investors. The frequency of such friction is likely to increase. For now, China has played the unassuming new kid on the block with benign intentions. At the same time, it basks in China’s foreign investment strategy the acclaim of those who see its market as a glowing opportunity no sensible investor can resist. After all, China Asia is the biggest investment destination for China which channels 60% of its overseas direct investment into the region, will be hosting the Olympic Games in 2008, what for the according to Deutsche Bank. Latin America receives 16% of Chinese foreign investment. Africa, North America and previous Asian hosts – South Korea and Japan – was Europe tie in third place with roughly 7%, while Oceania receives 4%. something of a global coming-out party. “Our policy of reform and opening up to the world means we embrace globalization,” said Wu Jianmin, President of the China Chinese Investment Mostly to Asia… Foreign Affairs University. “The most important feature of China’s rise is to share the growth with the rest of the Source: World Trade Organization world.” China’s exports, especially to the US, have increased to all-time highs, pushing its trade surplus to monthly Figure 2: China’s Foreign Reserves records – US$ 18.8 billion in August 2006 (see Figure 1). Growing…and Diversifying This has inundated China’s economy with cash, boosting its foreign exchange reserves to nearly US$ 1 trillion (see Figure 2). Chinese enterprises, particularly industrial groups, are now accompanying the country’s diplomats to far-flung countries from Venezuela to Sudan. While some companies, notably the state energy groups, have gone global for strategic reasons, many others are seeking to hone their competitiveness abroad. “The reason for going global is simple: to create new opportunities to make profits today and in the future,” said Wang Jianzhou, Chief Executive, China Mobile Communications Corporation. Source: Deutsche Bank Added Yang Yuanqing, Chairman of the Board of Lenovo Group, which went global through its acquisition of IBM’s personal computing division: “Internationalization is not an The US and Chinese economies have become deeply integrated. In 2005 bilateral trade reached US$ 216 billion, and end in itself; it is a means to help you grow and develop.” through the first half of 2006 the figure rose 25% from last year, said Ma Zhengang, Director, China Institute of International Studies, People’s Republic of China. Furthermore, China is now the fourth largest market for US exports. But as China marks the fifth anniversary of WTO membership, market barriers and the trade deficit with the US could create further problems and misunderstandings between the two sides, warned John Frisbie, President, US-China Business Source: State Administration of Foreign Exchange, People’s Republic of China, PwC Council, USA. “I am concerned about the rising voices of protectionism on both sides of the ocean,” Frisbie said. If Sino- estimates of composition US relations suffer, said Ma, “both sides will suffer.” 16 17 China Business Summit 2006 China Business Summit 2006

The Creative Imperative in China Sustainable Growth Globalization “Never has the world seen quot;Innovation is the soul of a the simultaneous take-off of nation’s advancement and China should focus less on incentives to attract The collapse of the Doha Round indicates a two such nations together. the everlasting, driving investment and more on institutional renewal to create disconnect between the reform-reluctant developed This is the time for China power of national a better business environment. The skills shortage, for world and the reform-eager developing world. Along and India to think out of the prosperity.” example, must be addressed through an overhaul of with other Asian economies, China could be a catalyst box so they can achieve their stated goals.” Zeng Peiyan the education system to promote creativity and critical for the revival of the multilateral trade talks, even as Vice-Premier of the People's thinking over rote learning and exam-focused they forge their own regional arrangements. Republic of China Baba N. Kalyani assessment. Chairman and Managing A key challenge for China will be how well it continues Director, Bharat Forge, India; Co-Chair of the China Business The urgent need for China to become more energy to manage its integration into the global economy Summit 2006 efficient can be addressed by cutting-edge technology which requires balancing its inherent market muscle available in Japan and the US, thus creating an with the benefits of integration. A major policy opportunity from a challenge. For this to happen, question of whether Chinese enterprises should adopt China’s intellectual property regime has to work for the accepted world industrial and technology standards or logical technology transfer to occur. The need to insist on setting their own remains to be answered. create a social safety net system offers similar Risk Management The theme of the World Economic Forum’s China opportunities to providers of financial services. Business Summit 2006 – Sustainable Growth through Innovation: China’s Creative Imperative – clearly spelled A key to mitigating the many risks confronting China is the out the priority for China as it aims to achieve a new level appropriate sequencing of reforms. To mobilize the of economic development. The discussions in Beijing enormous pool of savings to more productive uses and neatly continued the Forum’s pursuit of the “creative stimulate consumption to head off an economic imperative” since the Annual Meeting 2006 in Davos and slowdown will require significant progress in creating through regional summits in São Paulo, Sharm El Sheikh social safety nets that encourage personal and and Tokyo. The goal: to identify innovative approaches to commercial risk taking. Banking reform and strong capital key challenges. By capturing these ideas, the Forum markets will have a similar domino effect in promoting hopes to stimulate further debate and brainstorming at innovation, enterprise and the reform of state firms. The upcoming regional meetings and in next year’s Annual transfer to China of much needed technology will also Meeting. happen only if intellectual property rights enforcement is sufficient. This is a selection of some of the insights from the China Business Summit 2006 in Beijing: Innovation While fast growing, the service sector in China is focusing more on the domestic market than on global customers. Key areas with strong growth potential include pharmaceutical R&D, aviation engineering, and the provision of business process outsourcing and call centre services to the Japan market. China’s innovation drive should focus not just on the development of new products and services but also on the creation of new business models to fit the specific characteristics of the domestic market. Examples of such inventive strategies include the varying of marketing approaches according to a city or region’s tier level and using offbeat sales techniques or promotions to generate brand loyalty in a market where such affinities are minimal. caption 18 19 China Business Summit 2006 China Business Summit 2006

Acknowledgements The China Business Summit 2006 is held in cooperation with the China Enterprise Confederation (CEC) and with the special support of the National Development and Reform Commission (NDRC). The NDRC serves as the World Economic Forum’s counterpart in China. The World Economic Forum wishes to acknowledge the support of the following companies as Partners: Strategic Partners Accel Partners Accenture AMD Apax Partners Audi Bombardier Booz Allen Hamilton BT CA Credit Suisse Deloitte Deutsche Bank Ernst & Young Fluor HP HSBC Intel Lehman Brothers Manpower Marsh & McLennan Companies Nakheel NASDAQ NYSE Group PricewaterhouseCoopers Reuters UBS Volkswagen Zurich Financial Services Regional Partner GeoPost Intercontinental Phoenix Satellite Television UPS Summit Supporter Ogilvy Public Relations Worldwide The World Economic Forum would also like to thank The Coca-Cola Company and Nestlé for their support. 20 China Business Summit 2006

Contributors Peter Torreele is Managing Director of the World Economic Forum. Lee Howell is Director, Head of Asia, at the Forum. The China Business Summit 2006 was under his direct responsibility, with Li Zhang, Associate Director, China; Dezhi Ma, Global Leadership Fellow, China; Yu Liu, Global Leadership Fellow, China; and Nadine Bonard, Senior Specialist, Events. Samantha Tonkin, Senior Media Manager at the World Economic Forum worked with Wayne Arnold and Alejandro Reyes to produce this report. The World Economic Forum would like to express its appreciation to the summary writers for their work at the Summit. Session summaries are available at www.weforum.org. Associate Principal, Editing: Nancy Tranchet Design and Layout: Kamal Kimaoui, Associate Principal, Production and Design Photographs: Doug Kanter Special thanks to PricewaterhouseCoopers for their help in preparing data and statistics underpinning this report.

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)

China Business Summit 2006

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