13 th Five Year Plan and the New Normal

Transcription

1 13 th Five Year Plan and the New Normal Sam Walsh, Chief executive The 4 th Annual CBBC China Business Conference, China 22 March 2016 **Check against delivery** It s a real pleasure to be here today, to share some thoughts on a topic of such importance to all of us. And no, it s not my retirement from Rio Tinto. Although, I do think that my personal career has in some ways mirrored China s own growth path and no matter what I end up doing in the future, I am sure that China will always play a big part. After 25 great years at Rio Tinto, three as chief executive, I believe it is the right time to step down. I have always wanted to make a difference and I believe I have achieved that, returning Rio Tinto to a position of industry leadership and strength. And those of you who are wise enough to own Rio Tinto shares may have a sense of déjà vu in a few weeks, when Rio Tinto has its Annual General Meeting in this same room. These days, our AGM is also largely about China. It now accounts for more than 40 per cent of our global revenue, and is the world s largest consumer of most of our products. So, when faced with reports of slowing growth in China, and headlines predicting imminent doom, you may expect me to be losing sleep. Well, the only sleep I lost last night was due to a flight back from Beijing, where I ve spent the past few days attending the China Development Forum. CDF is one of the most important annual gatherings of Chinese officials, policymakers and business leaders from around the world, and it concluded last night with a meeting hosted by the Chinese Premier. While the mood was certainly more subdued than in previous years, it was still one of optimism, and the trip only served to reinforce our positive long-term outlook with regard to China. The immediate future will be challenging, there is no doubt about that. In the mining sector we ve seen a steep fall in prices as markets have moved into oversupply while demand growth in China has slowed. That fall has been faster and further than most expected, but then so too was the rise we all experienced ten years ago. That s the problem with many of the charts you see. The x-axis only extends back to the peak, which makes the recent trend look far worse than it is. Take it back a bit further, and you ll be reminded that we operate in a cyclical industry. Page 1 of 7

2 The long-term nature of mining investment means there is often a significant lag between new demand and the resulting supply response. While customers are waiting for supply to catch up, prices rise, inducing even more investment in new supply. With human optimism being what it is, part of that supply is inevitably surplus to requirements, so prices fall, marginal production exits the market, and the cycle begins again. Rio Tinto has been in business for more than 140 years, so we ve seen this cycle repeat many times, and know the importance of remaining at the lower end of the cost curve with a healthy balance sheet. Happily, we still tick both of those boxes, so we re confident in our ability to weather whatever the future may bring. And that confidence is reinforced by what is happening in China. There is no doubt that China s economy is changing, both in its composition and its rate of growth. But it s still growing, and that growth is still adding a huge amount of new demand to the global economy every year. That s the point that is often missed as we read forecast after forecast, agonising over whether China will grow at 6.8 or 6.9 per cent while lamenting the fact that these are the worst rates for more than a decade. We lose sight of the forest for the trees or the mountain for the pebbles, to use a metaphor better suited to my business. Although the rate of growth is falling, the sheer size of the base to which that rate applies means that China is actually contributing more to the global economy today, in absolute terms, than it was a decade ago when it was growing at double the rate. The GDP figures may vary depending on the basis for calculation, but by most measures China already has at least the second largest economy in the world. In nominal terms, the IMF estimates that China s GDP is currently more than 12 trillion US dollars, or around 8.4 trillion pounds. That rises to more than 21 trillion dollars in terms of purchasing power parity. Using the lower of those two figures, even a 6.5 per cent average rate of growth would add more than 800 billion dollars of economic activity over the next year. In global terms, that s comparable to the entire economy of Switzerland or the Netherlands. Or roughly one quarter of the total UK economy. I m sure the Chancellor would have been delighted to report a 25% growth rate in his recent budget, and yet the addition of the same amount of activity to the global economy is often reported as a failure on behalf of China. I think part of the problem is that we ve been spoilt. We enjoyed the benefits of double-digit growth in China for so long that we convinced ourselves it was both normal and sustainable. Page 2 of 7

3 We ve anchored our reference points to the peak of an economic transformation that may never be repeated on such a large scale. And the fact that we may never again see double-digit growth in China is really not the end of the world. In many respects it s a very good thing. Although that rapid growth was great for my business, and for many others here in the room today, it was not sustainable. Rapid industrialisation and urbanisation came at a high price to China. On one hand, it helped achieve what may be the greatest example of poverty eradication in human history, improving quality of life for hundreds of millions of Chinese people. But it also took a great toll on China s environment, both physical and social, with widespread pollution and growing inequality between different parts of the country. With that in mind, the Government has been actively working to transform the Chinese economy and place it on a more sustainable footing. Gone are the days of low-margin, high-volume manufacturing that relied on loose environmental standards, foreign intellectual property and a vast pool of cheap migrant labour. Changing demographics, education levels and community expectations mean that the New Normal will involve a move up the value chain for Chinese manufacturing, and continued growth of the services sector as a proportion of the overall economy. Subdued growth in the global economy has reinforced the fact that China can t rely too much on exports and credit to drive that new model, and must also encourage real domestic consumption. This underpins the minimum annual growth target of 6.5 per cent, which is the rate required for China to achieve its goal of doubling per capita incomes between 2010 and Just think about that for a minute. Doubling the average income of 1.3 billion people. Business opportunities don t get much bigger than that. The relevance of this goes well beyond the world of economic theory. We all have an interest in the success of the transformation that is now underway in China. It will ensure the continued growth and stability of a nation that is home to one-fifth of humanity; A nation on which most others now depend as their largest trading partner and customer; And a nation that is once again making a contribution to global development and prosperity that is commensurate with its size. For British companies, large and small, the opportunities are myriad, particularly with regard to services and high-end goods. Page 3 of 7

4 China already has the largest middle class in the world, and it continues to grow rapidly. That means hundreds of millions of increasingly affluent consumers in search of high quality goods, financial services and education. It means more opportunity for British researchers and businesses that are leading the world, whether it s in healthcare, professional services, or sustainable low-carbon technologies. It also means more access to investment and expertise from China in critical areas such as infrastructure development. On Saturday in Beijing I chaired a panel discussion on China s Belt and Road initiative, and how it ties in with the work of the B20 and G20 to meet the world s infrastructure needs. There is certainly scope for UK companies to contribute their skills in areas such as financing, engineering and sustainable development. However, there is also scope for Chinese companies to help the UK modernise its domestic infrastructure. The sheer scale of the Chinese market has allowed the application of mass production techniques to infrastructure components that would be bespoke elements anywhere else. In many cases, that allows a dramatic reduction in time and cost without any sacrifice in quality. I spent the first half of my career in car manufacturing, and it is staggering to see state-of-the-art factories in China using similar techniques to produce reactor vessels or massive turbines. As investment in China slows, more of that capacity will be available for export, helping China sustain a more sophisticated manufacturing base while providing other countries with the modern infrastructure they need to grow their own economies. Those economies will increasingly revolve around trade with China, creating a virtuous circle in which China helps provide the tools that allow other countries to supply and benefit from its growth. That s the basic idea behind the Belt and Road initiative creating a series of win-win developments that absorb Chinese capacity while improving the prosperity and stability of China s neighbours and trading partners. It s another example of the type of long-term thinking that characterises the 13 th Five Year Plan. It s not just about achieving a level of moderate prosperity for the Chinese people, but about ensuring that prosperity is both sustainable and enjoyable. That means ensuring that wealth does not come at the expense of China s environment, social coherence, or the international systems on which China also depends. I think the five development themes in the 13 th Five Year Plan are reassuring in this regard, as they show that China acknowledges the fundamental challenges and is prepared to push ahead with the necessary reforms. It won t be easy, but we all have a vested interest in their success. That s where organisations like the China-Britain Business Council are important. Page 4 of 7

5 They provide a forum for us to share ideas, to help others learn from our experience, and to form the relationships from which new opportunities for partnership emerge. In this regard, I must also stress the importance of visiting China. London remains one of the world s great hubs. It helps the UK maintain that critical mass of talent and opportunity that keeps attracting the best and brightest from around the world. That melting pot effect is a large part of what makes it such an attractive place for companies like Rio Tinto to maintain their headquarters. But there are risks that come with success, and perhaps foremost among them is the risk of complacency. When you ve been a magnet for talent and capital for such a long time, it can be tempting just to sit back and hope the world keeps arriving on your doorstep bearing gifts. The real benefits accrue to those who venture out, and that is particularly the case in relation to China. If I just sat behind my desk and relied on what I read in the paper or heard from visiting delegations, I would have a very limited view of China and would have missed a number of important opportunities. The same applies whether you re a multinational corporation in the City or a one-woman start-up building the next big thing from a coffee shop in Cardiff. Your ideas may be brilliant, but their success will ultimately depend on the relationships you establish with potential customers, investors, suppliers and business partners. And as far as potential opportunities are concerned, they don t come any bigger than China. So get on a plane. Visit China. Build those relationships, and see what is happening with your own eyes. And when you visit, make sure you venture beyond Beijing and Shanghai. Otherwise it s like walking through Piccadilly Circus and thinking you ve seen all that the UK has to offer. Based on the number of British people I meet throughout China, I think the risk of this is small, but it s always worth reinforcing. I realise I m the now only thing standing between you and your lunch. If there s one message I d like to leave you with, it s that China s New Normal is a positive thing. Getting there will involve uncertainty. There will be setbacks. There will be more volatility. But when you take the time to step back and look at the big picture, I think the long-term view for China is still a positive one. Even at slower rates of growth it will still be adding the economic equivalent of a new G20 nation every year, and the 13 th Five Year Plan will help ensure the sustainability of the new model on which that growth is based. That s good news for China, good news for the UK, and good news for a world in which China once again plays a central role. Page 5 of 7

6 Thank you. Page 6 of 7

7 Contacts on Twitter Media Relations, EMEA/Americas Illtud Harri T M David Outhwaite T M David Luff T M Investor Relations, EMEA/Americas John Smelt T M David Ovington T M Media Relations, Australia/Asia Ben Mitchell T M Bruce Tobin T M Matthew Klar T M Investor Relations, Australia/Asia Natalie Worley T M Rachel Storrs T M Grant Donald T M Rio Tinto plc 6 St James s Square London SW1Y 4AD United Kingdom T Registered in England No Rio Tinto Limited 120 Collins Street Melbourne 3000 Australia T Registered in Australia ABN Page 7 of 7