China, Quo Vadis? Joerg Wuttke President President EU Chamber of Commerce in China. Luxembourg June 23 rd _BCS2016_Appendix_v4.

Transcription

1 China, Quo Vadis? Joerg Wuttke President President EU Chamber of Commerce in China Luxembourg June 23 rd _BCS2016_Appendix_v4.pptx 1

2 Publications Third Plenum reality check : taking stock of the Chinese Government s reform progress Conducted with Roland Berger

3 Launch of First Three Local Position Papers in 2015

4 Launch of Two More Local Position Papers in 2016 Tianjin Position Paper published in March 2016 Southwest China Position Paper published in April 2016

5 Overcapacity in China Analysis of eight severely affected industries Builds on 2009 report, providing completely updated analysis Provides 30 recommendations to tackle the problem Received an unprecedented media coverage

6 B Outlook on the Chinese Business Environment 4) Your Industry 37A. Is there overcapacity in your industry sector? N=371 N=18 N=37 N=13 N=35 N=13 N=19 N=20 N=23 N=44 N=14 45% 38% 32% 30% 26% 25% 14% 72% 70% 69% 66% 55% 62% 68% 70% 74% 75% 86% 28% 30% 31% 34% 2016 Chemicals and petroleum Automotive and auto components Transportation, logistics, and distribution IT & Telecom Yes Media and publishing No Hospitality Financial services Machinery Professional Pharmaceuticals services Note: Excluding Not applicable Source: Business Confidence Survey Data, Roland Berger analysis _BCS2016_Appendix_v4.pptx 6

7 Survey on June 7 th

8 A Company Profile 2) Financial Information 8. How did your company's total Mainland China revenue for 2015 compare to 2014? N=506 15% 36% 35% 12% 2% % N=18 N=18 N=17 N=72 N=25 N= % 5% 5% 12% 18% 15% 15% 13% 28% 24% 47% 40% 38% 61% 44% 40% 40% 39% 26% 33% 33% Media and publishing 33% 6% 12% Pharmaceuticals Food & Beverages 29% 33% 36% 33% 38% 5% 12% 10% 8% 8% 8% Professional services Machinery Automotive and auto components Financial services 38% 13% Hospitality 30% 25% Chemicals and petroleum 37% 8% IT & Telecom Increased substantially (>20%) Increased (5-20%) Remained the same (+/- 5%) Decreased (5-20%) Decreased substantially (> 20%) Source: Business Confidence Survey Data, Roland Berger analysis _BCS2016_Appendix_v4.pptx 8

9 A Company Profile 2) Financial Information Crossing with industry 10A. Please characterize your company's earnings before interest and tax (EBIT) in Mainland China in N=506 N=25 N=20 N=18 N=40 N=72 N=38 N=17 N=53 N=24 N=18 66% 80% 80% 72% 70% 68% 66% 65% 62% 58% 50% 20% 14% % 10% 21% 26% 33% 22% 12% 10% 22% 29% 20% 8% 10% 10% 13% 11% 6% 8% Machinery Chemicals and petroleum Media and publishing Automotive and auto components Professional services IT & Telecom Food and beverage Financial services Hospitality 33% 17% Pharmaceuticals Positive Broke even Negative Source: Business Confidence Survey Data, Roland Berger analysis _BCS2016_Appendix_v4.pptx 9

10 A Company Profile 2) Financial Information 10B. How did your company's EBIT in China for 2015 compare to 2014? N=506 11% 32% N= % 11% 8% 3% 15% 18% 18% 13% 17% 24% 6% 38% 24% 28% 44% 44% 40% 30% % 39% 67% 67% 43% 36% 38% 35% 43% 46% 47% 47% 29% 11% 3% 4% 4% 7% 10% 3% 8% 8% 12% 11% 5% 6% 6% 11% 2016 Machinery Professional services Chemicals and petroleum Automotive and auto components Hospitality Food and beverage Financial services IT and Pharmaceuticals telecommunications Media and publishing Increased substantially (>20%) Increased (5-20%) Remained the same (+/- 5%) Decreased (5-20%) Decreased substantially (> 20%) Source: Business Confidence Survey Data, Roland Berger analysis _BCS2016_Appendix_v4.pptx 10

11 The conventional thinking Commonly cited, but weakly supported in reality: China has time Muddling through is a viable option (even if suboptimal) China has the tools/resources to deal with anything slowing down can bring China s leaders recognize the problems China s Leaders can fast-track reform

12 Source: The Economist The New Normal

13 Source: The Economist

14 Economic weakness: but regional differences 16 GDP: percent growth, quarterly, y-o-y Growth volatility has eased substantially since 2013 as policy support has tempered the pace of the slowdown The growth trend started around 6 percent back in 1999 The slowdown will not be linear, but the growth cycle will revolve around a slowing trend Sources: NBS, CEIC, The Conference Board *stylized growth outlook, not actual projections

15 China is growing at 6.7% in 1Q16 and broadly stabilizing, but.. The recent improvement in China s industrial sectors is due to the government s fiscal and quasi-fiscal spending ramp-up in the second half of last year by 16%, or RMB2.4trn In Q1, increases in total credit exploded to RMB7.5tn, up 58% YoY and equivalent to 47% of nominal GDP the highest ratios ever Considering also swaps of local government debt into local government bonds, total credit to the non-financial sector actually increased nearly RMB3tn in March

16 Chinese equivalents population Population 2010, millions CHILE POLAND TEMEN SAUDI ARABIA ROMANIA GHANA SUDAN ZIMNABWE JORDAN CONGO UGANDA VIETNAM DENMARK ARMENIA CANADA ETHIOPIA ITALY BRITAIN IRAN CAMERON GERMANY WENEZULE AGENTINA FRANCE Jiangxi KENYA MYANMAR ALGEARIA SPAIN SOUTH AFRICA PHILPPINES PAPUA NEW GUINEA BURUNDI SOLOMON ISLANDS Less than < < < or more Source: The Economist; Economist Intelligence Unit; CEIC; WTO

17 Continent China Source: Access China, Economist Intelligence Unit Source: Economist Intelligence Unit

18 The two-speed economy Li Keqiang: 20% of provinces insolvent

19 The Continent China Real Estate Market

20 1/2011 5/2011 9/2011 1/2012 5/2012 9/2012 1/2013 5/2013 9/2013 1/2014 5/2014 9/2014 1/2015 5/2015 9/2015 1/2016 Jan-2011 Apr-2011 Jul-2011 Oct-2011 Jan-2012 Apr-2012 Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014 Oct-2014 Jan-2015 Apr-2015 Jul-2015 Oct-2015 Jan-2016 Apr-2016 In urgent response to 2015, Q1 stimulus reached new heights 6.6 trillion RMB in new TSF in Q1; and 4x that in interbank lending RMB bn 4,000 Percent 25 Net lending, RMB bn 30,000 3,500 3,000 Total social financing, new increase Money supply (M2) growth, y-o-y 20 25,000 20,000 Net Special Clearing Member Net National Commercial Banks 2, ,000 2,000 10,000 1, ,000 1, ,000 Sources: PBoC, CEIC, The Conference Board Sources: J Capital, The Conference Board

21 1/2008 7/2008 1/2009 7/2009 1/2010 7/2010 1/2011 7/2011 1/2012 7/2012 1/2013 7/2013 1/2014 7/2014 1/2015 7/2015 1/2016 1/2008 7/2008 1/2009 7/2009 1/2010 7/2010 1/2011 7/2011 1/2012 7/2012 1/2013 7/2013 1/2014 7/2014 1/2015 7/2015 1/2016 By order? SOEs resume investing FAI growth: SOE vs. private sector, percent FAI growth, SOE FAI Growth, Private FAI Growth, total % 90% 80% 70% 60% 50% 40% FAI growth: contribution from SOE and Non-SOE SOE non-soe % 20% % 0 0% Sources: CEIC, The Conference Board Sources: CEIC, The Conference Board

22 Debt is rising much faster than output An increasing share of debt is allocated in excess capacity sectors. Eventually, such costs will have to be borne by the financial sector and eventually by savers, asset prices will have to correct, corporate profitability may be depressed, and future growth will be hurt. Assets exploded by a record RMB27trn ($4.1trn) in 2015, rising by 15.7% to RMB200trn. There are significant limitations to continuing to expand a $31trn banking system by $3 to 4trn in assets per year without resorting to increasingly speculative funding strategies. China now accounts for 28% of the global stock of M2, significantly higher than in any other country.

23 China s companies have taken on $10trn of debt in the past eight years (10% in Forex) In 2007 China s Total non financial debt to GDP ratio was 147%. Now it is at 260% and climbing, possibly 300% in Total debt RMB152tn ($23tn). Net debt increase 2015: RMB18trn, 2016: RMB23trn. Source: FT

24 Source: The Economist $512bn fall in currency reserves in 2015 China has a current account and net direct investment surplus of about $600bn, implied capital outflows must have been close to $1tn

25 Waking up to a critical loss in translation. Reform vs Re-Form Liberalization Marketization Institutionalization De-regulation Transparency Pooling Recombination Recapitalization Control changes Extraction More Market Driven More Statist

26 Outlook on the Chinese Business Environment 2) Regulatory Framework Crossing with industry 26. Has the continued strengthening in measures to tighten Internet control and access restrictions in China been having an even bigger negative impact on your company? N=506 N=24 N= % 75% 72% 71% 69% 55% 50% 49% 48% 44% 35% Yes 42% 25% 28% 29% 31% 45% 50% 51% 52% 56% 65% No 2016 Hospitality PharmaceuticalsFood & Beverages Professional services Automotive and auto components IT & Telecom Financial services Machinery Media and publishing Chemicals and petroleum Source: Business Confidence Survey Data, Roland Berger analysis

27 Outlook on the Chinese Business Environment 4) Your Industry 36. How would you describe the business outlook for your sector in China over the next two years? (1/4) N=506 Growth N=25 N=40 N=18 N=17 N=72 N=18 N=38 N=53 N=24 N=20 44% 56% 53% 50% 47% 43% 39% 37% 34% 33% 25% 35% 39% 36% 38% 44% 41% 38% 56% 39% 47% 50% 40% 15% 2% 8% 10% 6% 12% 18% 1% 6% 24% 17% 13% 4% 1) NA: Not applicable 2016 Machiner y Automotive and auto components Pharmaceuticals Optimistic Food & Beverages Neutral Professional services Pessimistic Media & publishin g Not applicable IT & Telecom Financial services Hospitalit y Chemicals and petroleum Source: Business Confidence Survey Data, Roland Berger analysis

28 Outlook on the Chinese Business Environment 4) Your Industry 36. How would you describe the business outlook for your sector in China over the next two years? (1/4) N=506 N=20 N=17 N=72 PROFITABILITY N=18 N=53 N=25 N=24 N=38 N=40 N=18 19% 30% 29% 26% 22% 21% 20% 13% 13% 13% 48% 30% 47% 49% 44% 55% 64% 58% 45% 48% 61% 31% 2% 40% 24% 24% 1% 33% 23% 16% 25% 4% 37% 5% 40% 39% Chemicals and petroleum Food and beverag e Profession al services Optimistic Pharmaceutical s Neutral Financial services Pessimistic Machiner y Not applicable Hospitali ty IT and Automotiv telecommunicatio e and auto ns component s Media and publishin g Source: Business Confidence Survey Data, Roland Berger analysis

29 Outlook on Company Strategy 1) The Role of China in Your Business Crossing with industry 46A. Does your company plan on cutting costs in China this year? N=505 N=40 N=18 N=38 N=20 N=18 N=25 N=17 N=53 N=72 N=24 41% 63% 61% 61% 47% 44% 36% 29% 26% 25% 21% 59% 38% 39% 39% 53% 56% 64% 71% 74% 75% 79% 2016 Automotive and auto components Media and publishing IT & Telecom Chemicals and petroleum Pharmaceuticals Machinery Food and beverage Financial services Professional services Hospitality Yes No Source: Business Confidence Survey Data, Roland Berger analysis

30 Summary and outlook The economy looks different to SOEs, POEs, and MNCs The Last 6 Months Weak 2015 year-end and January offset by a huge credit surge and its impacts in Q1 Resulting uptick of volatility in asset classes and massive swings in investment flows Fundamentals continue to deteriorate investment, industrial performance, trade Services and consumption growth rates are also now slowing Debt drag is increasing, consuming more of the new liquidity and shifting the grave risks of credit expansion into financialization channels The Near-Term Outlook More of the same credit and liquidity support when things over-slow; shuffling away of debt problems in any and every way possible Depreciation is more and more likely 7:1 range expected, accompanied by tightening of capital account processes to slow outflows More clamps on re-leveraging Stronger and stronger macro-prudential measures and financial innovation to mitigate, mute, obscure, and suspend defaults Continued stagnation of the industrial sector SOEs Reform pressures increasing amidst mixed signals Continued access to vast credit leaves little incentive to reform POEs Main source of marketsourced capital in system Aggressive M&A off monopoly market shares MNCs Consumer interest and demand rising Regulatory walls and costs rising Source: The Conference Board