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  • 1. The Dbriefs China Issues series presents:China’s InvestmentEnvironment: Trends andOutlookChris Cooper, Partner, Deloitte & Touche LLPKen Dewoskin, Senior Advisor, Deloitte Touche Tohmatsu CPA Ltd.David Hoffman, Vice President and Managing Director, The Conference Board’sChina Center for Economics and BusinessDecember 13, 2012
  • 2. AgendaChina at an inflection pointNew leadershipThe outlookQuestion and answer Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 3. The lessons of 2012 After a full generation of reform, and three orderly leadership transitions . . . Levels and drivers of growth transforming A new team of top Party leaders Concerns about sustainability— Imbalances at ―red at home and abroad alert‖ level Recalibration of China’s prospects New externalenvironment & attitudes Comprehensive MNC investor strategic refresh 1 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 4. China at an inflection point
  • 5. Polling question #1Given your recent experience and media reports, hasChina’s importance in maintaining your global marketshare:• Become more important?• Stayed the same?• Become less important?• Don’t know/not applicable Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 6. Transformation of growth driversBig growth vs. quality growth What generates the activity? Who gets to spend the money?  Major reform growth driver Net Exports ▼  Trade surpluses in steady decline  Global demand? Competitiveness?  Rising growth driver since 2003 Investment ▼  Largely State-driven  Rapidly declining ROI  Designated growth driver from 2008 Household Consumption  Growing but too slowly  Core structural problemSources: The Conference Board, Deloitte Research 2 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 7. Household consumptionWill it rise to the challenge? Percentage points (contribution to growth) Percent of GDP 30 50 Household Consumption 25 45 Government Consumption GFCF 20 40 Net Exports 15 35 Real GDP Growth 10 30 Household Consumption Share of GDP (RHS) 5 25 0 20 1996 1991 1992 1993 1994 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Decomposition of China’s GDP (expenditure side) Sources: PRC National Bureau of Statistics, CEIC Data Bases, The Conference Board3 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 8. China’s middle class on the edge . . .  Move spending power from the state to households ESSENTIALS  Radically improve wealth distribution 1. Demographic Shift – Moving toward a 2:1 worker-retiree ratio 2. Social Welfare Deficit – levels of precautionary savings 3. Services Sector “Marketization” – availability and choice 4. Consumer Wealth – options and security 5. Consumer Credit – Will it grow? 6. Inflation– structural drivers, state spending, and money supply4 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 9. Polling question #2What are your expectations of China’s middle class andthe future of consumer spending?• Continued strong growth of size and spending power• Plateauing• At risk of contracting• Don’t know/not applicable Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 10. New leadership
  • 11. New leaders facing new challenges 1. Scrutiny and accountability from social media and global journalism 2. More international experience in elite population 3. More international experience among leaders 4. First heavily hereditary regime 5. Much more complex economy, data weaknesses, and control weaknesses5 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 12. Three big decision areas Components Obstacles Moderate Japan, disputed islands regional China trade practices diplomatic Vested interests activity In and outbound investment • Large SOEs/LNEs • Regulators Capital allocation • Elite families Reform & Holder of spending power expand credit Investment security Immature institutions systems Risk-based returns State ownership Politicized private sector Market-based transfer pricing No institutional independence Implement Curtail monopolistic practices SOE reform Bankruptcy and debt constraints6 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 13. Time frames and outcomes Wave 1: 0-18 months Wave 2: 12-48 months Moderate No Scenario 3: No Scenario 1: regional Muddle diplomatic New Isolation Kingdom activity Yes Leadership Choice Point Implement Scenario results SOE reform Yes Reform & No Scenario 2: Yes Scenario 4: expand credit Financial Some Pain, systems Cliff Some Gain7 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 14. Polling question #3Do you believe the risks of policy failure, and thepotential impacts on your business, in China are:• High• Medium• Low• Don’t know/not applicable Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 15. The outlook
  • 16. Five “breaking” stories – December 20121. Corruption: China ranked 80th this year on this year’s Transparency International index, with a score of 39 in terms of perceived corruption.2. Shadow banking: New wealth management products (WMP) may represent 13% of all lending, about US$1.9 trillion. Shanghai Huaxia related WMP default sent shockwaves through the banking system.3. Capital market performance: ―A‖ share markets worst in world. Wave of layoffs at securities companies as revenues from underwriting, along with the number of companies planning IPOs, both hit record lows.4. China’s property market: A transaction media between the government, enterprises and citizens. Additions to public and private debt since the housing boom began in 2006 amount to ~200% of China’s 2011 GDP.5. Signs of recovery: Proliferation of news articles, global stock market reactions, and official reports from China celebrating end of slowdownSource: Transparency International Corruption Perceptions Index 2012, Fitch Ratings8 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 17. Bulls and Bears China in the years ahead: complex and unprecedented Outlook on China’s Worst now medium-term economy Unprecedented behind us challenges ahead Investment International Top government Bankers press leaders Government data Consultants collectors Who’s saying what (and why?)9 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 18. What many MNC China CEOs report today Eleven and a half snapshots• Oil and Gas: Lagging regulations (shale), highly protected sector• Alternative energy: Vast overcapacity, pricing collapse, LNE stress• Manufacturing: Soaring factor prices, slow growth domestic demand• Retail: Steady 8%-10% annual growth, rising payroll, tight margins• Engineering equipment: Collapse of demand, desperate domestic players• Banking: Labyrinths of regulations, highly protected markets• Equity investment: Entry & exit challenges, insider game, rule changes• Infrastructure (rail, etc): Steady 10%-15% growth, margin pressure• Catering services: Steady 15%-20% growth, soaring payroll costs:• Luxury goods: Flat to -10% sales• Automotive: -5% to +5% growth, move to smaller cars, tough regulations, Japanese Auto: Freefall Sources: Deloitte analysis,, NBS10 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 19. Potential responses by MNCsThree themes 1. Intense cost management 2. Right products and technologies 3. Super brandsAnd five steps Prepare for potential increased attention from local tax and compliance authorities, overcapacity, slowing demand, SOE/LNE competition Set (or re-set) realistic expectations at corporate level for China market growth and profitability Accelerate 21st century new product development (NPD) thinking regionally as well as nationally Structure investment in organization and capacity for agility and watch long-term commitments, accounts receivables and cash flows Understand and align with local interests/champions to the extent possible & prudent; explore new kinds of on-shore / offshore cooperation11 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 20. Polling question #4Over the next five years, which of the following do you thinkposes the most significant challenge for U.S. companies inChina?• Increasing competition• Intellectual property issues• Rising operating costs• RMB volatility• Slower growth• Human capital/talent shortage Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 21. Question and answer
  • 22. Join us January 10th at 11 AM ETas our China Issues seriespresents:Beyond the CommodityDownturn: Chinas and NorthAsias Impact on the GlobalMining Industry
  • 23. CPE certificates are now available for immediate download.Click the Request CPE link in the lower right hand corner of the screen. Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 24. Contact infoChris Cooperchriscooper@deloitte.com+1 408 704 2526Ken Dewoskinkdewoskin@deloitte.com.cn+86 10 8512 5601David Hoffmandavid.hoffman@conference-board.org+86 10 8532 4688 Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 25. This presentation contains general information only and Deloitte is not, by means of thispresentation, rendering accounting, business, financial, investment, legal, tax, or otherprofessional advice or services. This presentation is not a substitute for such professional adviceor services, nor should it be used as a basis for any decision or action that may affect yourbusiness. Before making any decision or taking any action that may affect your business, youshould consult a qualified professional advisor. Deloitte shall not be responsible for any losssustained by any person who relies on this presentation. Copyright © 2012 Deloitte Development LLC. All rights reserved.
  • 26. About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network ofmember firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detaileddescription of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/aboutfor a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attestclients under the rules and regulations of public accounting.Copyright © 2012 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu Limited