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Milken Institute China Overview 2014

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  • 1. China’s GDP slows out of double-digit growth 0 2 4 6 8 10 12 14 16 1980 1985 1990 1995 2000 2005 2010 2015 Percent change, annual Source: International Monetary Fund.
  • 2. China’s growth forecast slows among Asian countries Percent change in real GDP 0 1 2 3 4 5 6 7 8 9 10 11 South Korea Thailand Hong Kong SAR Malaysia Indonesia India China 2014 Forecast 2003-2013 Percent change, annual Source: International Monetary Fund.
  • 3. Consumption low in China compared to developing countries Final consumption expenditure 45 50 55 60 65 70 75 80 85 China Malaysia Russian Federation India Mexico South Africa Brazil Philippines Source: The World Bank. Percent of GDP
  • 4. GDP per capita growth still the highest in China -10 -5 0 5 10 15 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Percent change, annual Thailand United States China Japan Malaysia Source: The World Bank.
  • 5. China’s government expenditures and revenue 0 5 10 15 20 25 30 35 1990 1993 1996 1999 2002 2005 2008 2011 Expenditure Revenue Percent change, annual Source: Quandl.
  • 6. China energy use outstrips domestic production -5 0 5 10 15 1990 1994 1998 2002 2006 2010 Percent change, annual Use Imports (percent of energy use) Production Source: The World Bank.
  • 7. China continues to increase total savings Gross savings per GDP 0 10 20 30 40 50 60 1982 1986 1990 1994 1998 2002 2006 2010 Percent of GDP China Japan United States Source: The World Bank.
  • 8. China’s inward and outward foreign investment flows 0 1 2 3 4 5 2005 2006 2007 2008 2009 2010 2011 2012 Percent of GDP Outflows Source: The World Bank. Inflows
  • 9. China's foreign direct investment net inflows 0 1 2 3 4 5 6 7 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Source: The World Bank. Percent of GDP
  • 10. China moves away from agriculture into services 0 10 20 30 40 50 60 70 80 90 100 1970 1975 1980 1985 1990 1995 2000 2005 2010 Agriculture Industry ServicesPercent of GDP Source: The World Bank.
  • 11. Migration from China’s rural areas to urban Share of population 0 10 20 30 40 50 60 70 80 90 100 1980 1985 1990 1995 2000 2005 2010 Urban Population Rural PopulationPercent Source: The World Bank.
  • 12. All of China’s tech exports are growing Tech exports from China to the world 0 100 200 300 400 500 600 700 1992 1995 1998 2001 2004 2007 2010 US$ billions HiTech MHTech LoTech MLTech Source: STAN bilateral trade database. Notes: “MLTech” refers to medium low tech, and “MHTech” refers to medium high tech.
  • 13. US patents issued to China increase 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Patents Source: U.S. Patent and Trademark Office.
  • 14. Chinese internet users and internet penetration 0 5 10 15 20 25 30 35 40 45 50 0 100 200 300 400 500 600 700 2005 2006 2007 2008 2009 2010 2011 2012 2013 Millions Percent Number of internet users (left) Internet penetration (right) Source: China Internet Network Information Center, 33rd Statistical Report on Internet Development in China.
  • 15. Mobile internet is a main facilitator of internet access 0 10 20 30 40 50 60 70 80 90 0 100 200 300 400 500 600 2007 2008 2009 2010 2011 2012 2013 Millions Number of mobile internet users (left) Mobile internet users to total internet users Percent Source: China Internet Network Information Center, 33rd Statistical Report on Internet Development in China.
  • 16. China’s internet users outnumber the entire U.S. population China internet users: 618 million U.S. population: 318 million Source: China Internet Network Information Center, 33rd Statistical Report on Internet Development in China, U.S. Census Bureau.
  • 17. China’s e-commerce is dominated by large marketplaces 0 20 40 60 80 100 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011 Marketplace Independent merchantsPercent China U.S. Source: iResearch, eMarketer, McKinsey.
  • 18. Enterprises that carry out online sales in key industries Percent 11.3 12.2 17.2 17.3 18.9 23.1 23.5 25.3 27.6 0 5 10 15 20 25 30 Real estate Resident service and other services Leasing and commercial service Transportation, storage, postal Construction IT, computers, software Overall Wholesale and retail Manufacturing Source: China Internet Network Information Center, 33rd Statistical Report on Internet Development in China.
  • 19. China was already the second-largest e-tailing market in 2011 194 120 107 56 32 22 20 11 9 5 5 3 0 50 100 150 200 250 US$ billions Source: Euromonitor, Forrester, iResearch, EIU, McKinsey.
  • 20. Composition of China’s e-commerce market Market share as of 2013 B2B: SMEs 52% B2B: large enterprises 26% Online shopping 19% Online travel 2% O2O 1% Source: iResearch.
  • 21. VC and PE investment in China’s healthcare industry 0 20 40 60 80 100 120 140 160 180 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 2006 2007 2008 2009 2010 2011 US$ billions Count Number of deals (right) Source: Zero2ipo. Amount of investment (left)
  • 22. 2013 global box office All films 11 11 10 11 11 19 21 22 24 25 0 5 10 15 20 25 30 35 40 2009 2010 2011 2012 2013 U.S./Canada International $29.4 $32.6 $34.7 $35.9 $31.6 (66%)(64%) (70%)(69%)(69%) US$ billion Rank Country Money spent on all films (US$ billions) 1 China $3.6 2 Japan $2.4 3 U.K. $1.7 4 France $1.6 5 India $1.5 6 South Korea $1.4 7 Russia $1.4 8 Germany $1.3 9 Australia $1.1 10 Mexico $0.9 Source: Motion Picture Association of America.
  • 23. Premier’s NPC Lianghui speech and 2014 targets Key targets 2014 2013 GDP growth ~7.5% ~7.5% CPI inflation ~3.5% ~3.5% Household income growth In line with real GDP growth In line with real GDP growth Job creation >10 million >9 millionn Balance of payment Basically balanced Further improvement Budget deficit CNY 1.35 trillion (central govt 950 billion , local govt 400 billion), ~2.1% of GDP CNY 1.2 trillion (central govt 850 billion, local govt 350 billion), ~ 2% of GDP M2 growth ~13% ~13% Sources: Standard Chartered, Milken Institute.
  • 24. Premier’s NPC Lianghui speech and 2014 targets Key targets 2014 2013 Credit growth Maintain appropriate growth, reasonably increase total social financing Maintain appropriate growth, reasonably increase total social financing Farmland area 1.8 billion mu “red line” 1.8 billion mu “red line” Social housing Start 7 million new units; renovate 2.6 million houses in rural areas Complete 4.7 million units and start 6.3 million new units in cities; continue renovation in rural areas Sources: Standard Chartered, Milken Institute.
  • 25. Premier’s NPC Lianghui speech and 2014 targets Key targets 2014 2013 Fiscal policy stance Proactive fiscal policy (limited detail provided in the speech) Proactive fiscal policy: 1. Maintain stable growth, advance reforms, improve people's livelihood 2. Expand VAT coverage, reduce tax burden 3. Restrict general expenses 4. Support social housing, infrastructure, and social projects 5. Better manage local government debt; properly deal with financing for existing investment projects and debt repayment. Sources: Standard Chartered, Milken Institute.
  • 26. Premier’s NPC Lianghui speech and 2014 targets Key targets 2014 2013 Monetary policy stance Prudent monetary policy: 1. Balanced demand and supply, stable financial environment 2. Perfect macro-prudential framework, appropriate growth in M2 and credit 3. Enhance coordination with fiscal, industrial, and investment policies 4. Fine-tune policy to ensure stable economic growth Prudent monetary policy: 1. Perfect macro-prudential framework, appropriate growth in M2 and credit 2. Support agricultural SMEs, new strategic industries, and key national projects 3. Prevent systematic or regional financial crisis, improve supervision and sustainability Sources: Standard Chartered, Milken Institute.
  • 27. China healthcare expenditures shift from private to public 0 1 2 3 4 1995 1997 1999 2001 2003 2005 2007 2009 2011 Public Private Percent of GDP Source: The World Bank.
  • 28. Difference between a clear and smoggy day in Beijing Source: The Atlantic, China Air Daily.
  • 29. Third Plenum decisions Social reform One Child Policy If one parent is an only child, a couple can now have two kids Reform through Labor System Dismantling a form of imprisonment without trial Source: Milken Institute.
  • 30. Third Plenum decisions Ministry of Finance mandates Oversee open and transparent budgets Create local government debt-management framework Sort out transfer system Reform VAT and resource taxes Accelerate property tax legislation Source: Milken Institute.
  • 31. Third Plenum decisions Financial sector reforms Accelerated interest rate liberalization Further opening up of capital account Privately held banks Greater freedom for companies to issue foreign debt Source: Milken Institute.
  • 32. Biggest gains and losses in total wealth 2012-13 -8 -6 -4 -2 0 2 4 6 8 10 U.S. China Germany U.K. Mexico India Russia Brazil Japan Change in total wealth, US$ trillions Sources: Davies, Lluberas, Shorrocks, Credit Suisse. Note: Net worth or “wealth” is defined as the value of financial assets plus real assets (principally housing) owned by households, less their debts.
  • 33. Wealth growth rates Since 2000 0 50 100 150 200 250 300 350 400 China India Lat. America Africa World Asia Percent, 2000-2013 Source: Davies, Lluberas, Shorrocks, Credit Suisse. Note: Net worth or “wealth” is defined as the value of financial assets plus real assets (principally housing) owned by households, less their debts.
  • 34. China’s wealth distribution relative to the world 0 10 20 30 40 50 60 70 80 <US$ 10,000 US$ 10,000-100,000 US$ 100,000 - 1m >US$ 1m Percent World China Source: Davies, Lluberas, Shorrocks, Credit Suisse. Note: Net worth or “wealth” is defined as the value of financial assets plus real assets (principally housing) owned by households, less their debts.
  • 35. China’s composition of wealth per adult -5,000 0 5,000 10,000 15,000 20,000 25,000 Financial Real Debts Net worth Composition of wealth per adult, US$ Source: Davies, Lluberas, Shorrocks, Credit Suisse. Note: Net worth or “wealth” is defined as the value of financial assets plus real assets (principally housing) owned by households, less their debts.
  • 36. China’s wealth per adult over time 0 5,000 10,000 15,000 20,000 25,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 US$ billions Wealth per adult at constant exchange rate Wealth per adult Source: Davies, Lluberas, Shorrocks, Credit Suisse. Note: Net worth or “wealth” is defined as the value of financial assets plus real assets (principally housing) owned by households, less their debts.
  • 37. The population is aging 0 5 10 15 20 25 30 35 40 45 India Brazil China 2012 World Asia Pacific Russia U.S. China 2025 U.K. Euro area Japan Age dependency ratio, old Source: World Bank. Note: The old age dependency ratio is the ratio of the elderly to the workforce. All countries are 2012.
  • 38. China share of elderly will increase rapidly Share of population 65+ 0 5 10 15 20 25 30 35 1950 1965 1980 1995 2010 2025 2040 2055 2070 2085 2100 Percent India U.S. China Source: World Bank.
  • 39. China’s aging population mirrors problem throughout Asia 0 100 200 300 400 500 600 700 800 900 1,000 1950 1975 2000 2025 2050 0-14 15-59 60 & over Population, millions Source: United Nations.
  • 40. China and India will make waves in the global middle class Share of global middle-class consumption, 2000-2050 Source: OECD.
  • 41. China and U.S. current account balances converge -6 -4 -2 0 2 4 6 8 10 2005 2006 2007 2008 2009 2010 2011 2012 2013 Current account balance, percent of GDP U.S. China Sources: World Bank, BEA, SAFE.
  • 42. China’s external imbalance is getting worse 0 2 4 6 8 10 12 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Current account, percent of GDP Source: CEIC.
  • 43. China PMI manufacturing falls to an 8-month low 46 47 48 49 50 51 52 53 54 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Markit PMI composite Sources: Markit, Bloomberg.
  • 44. China’s debt is on the rise -10 0 10 20 30 40 50 60 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 RMB trillions Non-bank debt Bank loans Source: Bloomberg. Note: “Non-bank debt” refers to Entrusted loans, trust loans, bank acceptance, corporate bond financing.
  • 45. Bad debts have not followed the credit boom yet 0 5 10 15 20 25 30 35 40 0 10 20 30 40 50 60 70 80 Total loans RMB trillions Non-performing loans, percent of total Sources: Economist, Bloomberg.
  • 46. China relies on increasing domestic credit to support growth 0 2 4 6 8 10 12 100 110 120 130 140 1997 2000 2003 2006 2009 2012 Percent of GDP Current account balance (right) Domestic credit to private sector (left) Percent of GDP Source: World Bank.
  • 47. Shenzhen outperforms Shanghai index 85 90 95 100 105 110 115 120 125 130 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Index, 100=1/1/2013 Large caps (Shanghai Index) Small caps (Shenzhen Index) Source: Bloomberg.
  • 48. Emerging market equity index performance 70 75 80 85 90 95 100 105 110 115 120 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Index, 100=1/1/2013 India Russia Emerging markets China Brazil South Africa Source: Bloomberg.
  • 49. Cost of offshore CNY borrowing market decreases 3 year dim sum bond yield 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2010 2011 2012 2013 Percent Source: Bloomberg. Note: 3-year bonds have historically seen the most issuance.
  • 50. Total social financing stock breakdown Percent of total social financing outstanding, 2013 Bank loans 67% Bank FX loans 5% Entrusted loans 7% Trust loans 4% BADs 6% Corporate bonds 8% Public equity 3% Sources: CEIC, Standard Chartered Research. Note: “BADs” are defined as bankers’ accepted drafts.
  • 51. Analyzing Chinese acquisitions of U.S. companies 0 5 10 15 20 25 30 0 1 2 3 4 5 6 7 8 9 10 2007 2008 2009 2010 2011 2012 2013 2014 Volume (left) Deal count (right) US$ billions Count Source: Bloomberg.
  • 52. CNYs onshore-offshore funding costs converge 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Percent Onshore CNY Offshore CNY Source: Bloomberg.
  • 53. Dim sum bond issuance By country 7 12 30 34 3 2 6 4 3 6 4 2 0 5 10 15 20 25 30 35 40 45 2011 2012 2013 2014 US$ trillions CN HK Other Source: Bloomberg.
  • 54. Financial issuers have dominated the dim sum bond market 0 5 10 15 20 25 30 35 40 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Issuance, US$ billions Other sectors Financials Source: Bloomberg.
  • 55. RMB tumbled to lowest levels in a year 0.160 0.161 0.162 0.163 0.164 0.165 0.166 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 1 CNY to USD Source: Bloomberg.
  • 56. RMB internationalization 0 20 40 60 80 100 120 140 160 180 0 20 40 60 80 100 120 140 160 180 Mar-10 Mar-11 Mar-12 Mar-13 US$ billions Share of PRC’s RMB Trade Settlement (right) Percent of total foreign trade Source: Eichengreen (2013). Volume of cross-border RMB trade settlement (left)
  • 57. The bulk of Chinese lending goes to real estate Top 10 industries 0 5 10 15 20 25 0 10 20 30 40 50 60 70 Utilities Real Estate Metals & Mining Industrial Transportation Financial Chemicals Govt Regional & Local Airlines Railroad US$ billion Percent Source: Bloomberg. Note: Loans from ICBC, Bank of China, BoAg, BoCom, China Construction Bank, China Merchants, Minsheng, Everbright, and Citic. Loan tranche size (left) Market share (right)
  • 58. China’s biggest maturing loans concentrated in real estate 0 10 20 30 40 50 60 70 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Percent of total expiring loans Source: Bloomberg.
  • 59. Importance of China’s property market to wider economy 16 33 20 26 39 0 5 10 15 20 25 30 35 40 45 GDP Fixed asset investment Outstanding loans New loans Government revenues Property market, percent of each category Source: Nomura.
  • 60. Non-loan credit extension has accelerated substantially China, moving 12-month average 0 2 4 6 8 10 12 14 16 18 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 RMB billions RMB loans Alternative financing Social financing Sources: PBOC, Datastream.
  • 61. Banks’ wealth management products continue to rise Assets under management 2 3 3 3 3 4 5 5 6 7 8 9 10 11 0 20 40 60 80 100 120 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 CNY billions Sources: CEIC, Standard Chartered. WMP Deposits
  • 62. Where trust funds go Assets under management Real estate 9% Stock market 11% Financial institutions 11% Other 13% Infrastructure 26% Industry 30% Sources: CEIC, Standard Chartered Research.
  • 63. Working Age Population Share Comparisons (%) (China vs. Japan)  During the 1950s to early 1970s, China’s birth rate stayed at a high level up to roughly 30% due to a peaceful environment, improved medical services, and the government policy of “honorable mother.” The Chinese government began to introduce family planning policy at the end of 1970s, and the one- child policy was implemented across the country, causing birth rate collapse.  From 1980 to 2010, as the baby boomers grew into the labor force, the share of working-age population rose continuously. Economic growth was supported by a rising share of working-age population and falling dependency ratio.  Demographic dividends are projected to peak out during 2010-15 and fall precipitously afterwards. Source: Goldman Sachs Investment Strategy Group, IMF, CEIC, National Bureau of Statistic of China This is for informational purposes only. This material represents the views of the Investment Strategy Group of the Investment Management Division of Goldman Sachs and is not a product of Goldman Sachs Asset Management or Goldman Sachs Global Investment Research. The views and opinions expressed herein may differ from those expressed by other groups of Goldman Sachs and is not a product of the Goldman Sachs Global Investment Research Department. China’s demographic dividend 73 70 50 55 60 65 70 75 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 China Japan
  • 64. China: Private Consumption vs. Investment (%GDP) – Through 2013  Implementing reforms in China will be a catch-22.  Both the level and the trajectory of China’s investment-to-GDP ratio are unsustainable. Such high levels of investment have led to overcapacity in many sectors of the economy and have been facilitated by tight financial controls.  China’s investment boom has also been fueled by rapid credit expansion, especially of the “shadow banking,” raising concerns about credit quality and potential defaults. Source: Goldman Sachs Investment Strategy Group, CEIC, National Bureau of Statistic of China This is for informational purposes only. This material represents the views of the Investment Strategy Group of the Investment Management Division of Goldman Sachs and is not a product of Goldman Sachs Asset Management or Goldman Sachs Global Investment Research. The views and opinions expressed herein may differ from those expressed by other groups of Goldman Sachs and is not a product of the Goldman Sachs Global Investment Research Department. Imbalanced Growth Unsustainable 33% 53% 25% 30% 35% 40% 45% 50% 55% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 %GDP Private Consumption Investment 2007: Prime MinisterWen Jiabao calls the Chinese economy increasingly "unstable, imbalanced,uncoordinated, and ultimately unsustainable."2 2011: PresidentHu Jintao says that economic development remains "imbalanced, uncoordinated,and unsustainable."3 2012: Prime MinisterLi Keqiang says that"the problem of imbalanced,uncoordinated, and unsustainable developmentis still serious."4
  • 65. Total Gross Debt as a Percent of GDP and the Cumulative 5-Year Increase  Over the past five years, China’s debt has grown at a faster rate than the rate preceding financial crises in other more advanced countries.  China’s debt-to-GDP ratio now exceeds that of the U.S. prior to the financial crisis. Source: Goldman Sachs Investment Strategy Group, The Wall Street Journal, Datastream, IMF, CEIC, Goldman Sachs Investment Research, US Federal Reserve. This is for informational purposes only. This material represents the views of the Investment Strategy Group of the Investment Management Division of Goldman Sachs and is not a product of Goldman Sachs Asset Management or Goldman Sachs Global Investment Research. The views and opinions expressed herein may differ from those expressed by other groups of Goldman Sachs and is not a product of the Goldman Sachs Global Investment Research Department. Rapid debt increase 0 50 100 150 200 250 300 350 US (2003 - 2007) 2007 per capita GDP: $52,423 UK (2003 - 2007) 2007 per capita GDP: $51,223 Japan (1986 - 1990) 1990 per capita GDP: $40,008 South Korea (1994 - 1998) 1998 per capita GDP: $10,409 China (2009 - 2013) 2013 per capita GDP: $6,569 TotalGrossDebtas%ofGDP 24 pp 33 pp 13 pp 38 pp 43 pp
  • 66. China: Real GDP Growth vs. Real Lending Rate (%)  The GDP growth in secondary industry has been decreasing while the real leading rate has climbed up in recent years. Source: Goldman Sachs Investment Strategy Group, CEIC, National Bureau of Statistic of China This is for informational purposes only. This material represents the views of the Investment Strategy Group of the Investment Management Division of Goldman Sachs and is not a product of Goldman Sachs Asset Management or Goldman Sachs Global Investment Research. The views and opinions expressed herein may differ from those expressed by other groups of Goldman Sachs and is not a product of the Goldman Sachs Global Investment Research Department. Higher cost of funding -4 -2 0 2 4 6 8 10 12 14 16 18 6/2005 6/2006 6/2007 6/2008 6/2009 6/2010 6/2011 6/2012 6/2013 Real Lending Rate (%) Real GDP: Secondary Industry YoY%

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