China Economy: Making Economic Turnpoint a Reform Turnpoint

Transcription

1 China Economy: Making Economic Turnpoint a Reform Turnpoint Chief Economist Haitong Securities Co., Ltd Xunlei Li May, 214

2 Content The downturn of Chinese economy is all but irreversible. Necessity of reform and opportunities Shift and adjustment of economic policies Trends and opportunities for capital market 2

3 Three factors that drive growth Factors that drive growth Sources: processed by the institution of Haitong Securities. Labor Capital Economic Growth Technology advancement In view of traditional growth theory, labor, capital and technology advancement are three main factors that drive the economic growth. 3 3

4 The economic growth fluctuates with population cycle. Those born during are getting elderly during 21 23, which indicates fast population ageing and labor supply reduction thousand 新出生人口 Newly Born Population Getting elderly during the year 21-3, and withdraw from labor market E 229E 239E 249E Sources: Wind, Institutions of Haitong Securities 4 4

5 End of demographic dividends reduces labor supply Sources: Institution of Haitong Securities Working-age population reduction in China (unit: 1 yuan) 中国 Working-age 岁劳动年龄人口 population in China aged Sharp decline in the increase rate of non-farm payroll supply Growth-rate of Industrial added-value Growth-rate of non-farm payroll (righ 工业增加值增速非农就业增速 ( 右轴 ) Latest statistical data indicates the end of the demographic dividends. The absolute number of working-age population between in 213 China decreased by 2.44 million, a consecutive drop in last two years. In the past, the labor taking non-farm jobs mainly comes from 1) agricultural field at about ten million each year; and 2) new labors at about five million each year. However, new labors will drop by five million each year in future, which indicates the non-farm payrolls supply will drop from fifteen million each year to five million and the increase rate of non-farm labors will drop from 3% to 1%. 5 5

6 Steady growth relies on investment while monetary disconnects to the economy. Sources: Wind, CEIC, Institutions of Haitong Securities Steady growth relies on investment Monetary disconnects to the economy 1% 8% 6% 4% 2% % 城镇固定资产投资 /GDP Urban fixed-asset investment /GDP Fixed-capital formation (right axis) 固定资本形成 /GDP( 右轴 ) % 45% 4% 35% 3% 中国融资总量余额增速中国 GDP 名义增速 Growth rate of balance of China s aggregate financing Nominated growth rate of GDP of China Because labor supply drops, and technology is stable in short term, from the point of key factors, steady growth will rely only on currency capital. Investment is the carrier of monetary. Share of investment in GDP has kept on rising since 28, which shows that steady economic growth since then has solely relied on investment. The nominal GDP growth rate of less than 1% is almost half of that of 27 which indicate the main reason for the increase of debt ratio is the decline of economic growth. Meanwhile, the financing amount balance still increases at the rate of 2%, being equal to that of 27. The increase of currency supply can not overcome the decline of economic growth rate caused by the decreasing of labor supply which results to the detach of increased currency supply and economic growth. 6 6

7 Infrastructure Investment Plunged Investment momentum of local government has largely worn off. Total investment growth rate has decreased from 18% to 17.1% in December 213, of which the growth rate of infrastructure investment has plunged from 24.3% to 8.6%, indicating a big risk of decline of infrastructure investment growth in % 22% 2% 18% 16% 14% 12% 1% Monthly growth rate of total investment and infrastructure investment 总投资增速增速 Growth rate of total 基建投资当月增速 ( 右轴 ) investment Monthly growth rate of infrastructure investment (right axis) 12/1 12/4 12/7 12/1 13/1 13/4 13/7 13/1 4% 35% 3% 25% 2% 15% 1% 5% % -5% -1% 7 7

8 Real estate: interest rate keeps on rising while loan begins to fall. Rising interest rate leads to bigger overall financial risks in China, which will have a significant negative impact on the real estate market in the future. Since 29, the house selling reliance on mortgages risen to about 3%. Although there was a big bulge in house price in 213 and the interest rate also increased, the discharge of rigid demand of house had led to the weakness of house loan growth in the 3rd and 4th quarters. The average mortgage rate in the 1st quarter of 214 increased by 17bps to 7.6%. The risk of real estate bubble burst in future becomes increasingly significant. 6% 5% 4% 3% 2% 1% % House selling relies heavily on mortgage Dependency of sales volume on middle and long term loan of residents 住宅销量对居民中长期贷款的依赖度 住宅销量对居民房贷的依赖度 Dependency of sales volume on house loan The increase of interest rate of house loan may breaks real estate bubble 7 居民新增长期贷款 Newly issued long-term loan for residents 6 Interest rate of house loan of financial 金融机构房贷利率 ( 右轴 ) institutions (right axis) /3 9/3 1/3 11/3 12/3 13/3 14/ Sources: WIND processed by the institution of Haitong Securities. 8

9 8/3 8/9 9/3 9/9 1/3 1/9 11/3 11/9 12/3 12/9 13/3 13/9 14/3 Zero growth of estate selling indicates poor performance of industry Due to investment-driven economy, the trend industrial economy is highly consistent to that of real estate investment. Meanwhile, the source of fund of manufacturing industry and infrastructure investment is highly reliant on the real estate industry. The commodity house area sold in the first quarter dropped by 3.8% as compared to the same period of last year, of which, the residential area sold dropped by 5.7% while the office building sold increased by 6.7% and business area sold increased by 6.%. The commodity house sales dropped by 5.2%, 1.5% more than that of January and February. At 214B, PMI keeps on falling, which is not seasonal. The reason is that fall of real estate sales growth after peaking has caused continuous decrease of the growth rate in the 1st quarter of 214 of crude steel and power generation. At present, the growth of power generation and the production of crude steel remains at the lowest point Zero increase of real estate selling 商品房销售面积单月同比 Monthly MOM % of house areas ( 左轴 sold ) 商品房销售面积累计同比 Accumulated MOM % of house ( 右轴 sold ) areas (right axis) Feb-9 Feb-1 Feb-11 Feb-12 Feb Decline of real estate market indicates poor performance of industry 8 发电量增速 6 粗钢产量增速地产销量增速 Growth rate of power generatio Growth rate of crude steel outpu Growth rate of house selling 9 Sources: WIND processed by the institution of Haitong Securities. 9

10 Construction industry climate index and real estate investment growth peaked in 建筑业景气指数 Construction industry climate index 地产投资 Investment on ( real 亿元 estate )(1 mil Yuan) 增速 Growth (%, rate (%, 右轴 right ) axis)

11 Hidden worries in stable consumption Some think that "Yu E Bao" (an online payment tool by Alipay) increases the resident s income and consumption. However, from the point of economic theory, high interest rate leads to increased deposit and suppresses consumption in the same period. The 1st quarter of this year has seen big drop in household appliances and communication equipments sales growth. As the latest data indicates, though the same period comparison base of last year is quite low, the consumption growth rate of golden week in the last Spring Festival is still the lowest since 25, which indicates there are hidden worries in the stable growth of consumption. Growth of golden week sales in spring festivals Consumer durable goods 2 18 Growth of golden week sales in spring festivals 历年春节黄金周销售增速 5 4 Growth of household 家电销售增速 appliances sales Growth of communication 通讯器材销售增速 equipment selling (1) 11 11

12 No over-optimism in export in 214 Economic outlook in 214 indicates overseas market demand will be the savior due to limited domestic demand under high interest rate and turnaround of US economy. We have no over-optimism in export of China in 214 which will remain steady for following reasons: 1) American economy turns goods, but it turns to domestic production, which leads to negative growth in import; 2) RMB Index increases significantly and constraints the export; and 3) Emerging markets, though important to China s export, slow down in economy which will encumber export of the later. Continuous zero growth of American import Continuous negative growth of European import 美国商品进口增速 Growth rate of US import 美国进口中国商品增速 Growth rate of US import from China 欧盟 27 国商品进口增速欧盟 27 国进口中国商品增速 Growth rate of goods imported from EU 27 countries Growth rate of Chinese goods exported EU 27 countries

13 8/6 8/12 9/6 9/12 1/6 1/12 11/6 11/12 12/6 12/12 13/6 13/12 More stress of economic downturn in 214, which may drop to 7% Low consumption, declined investment and flat export may make up the whole picture of the economy in 214. As finance has 3-6 months of lead-time to the economy, the de-leveraging and tightening of financing in the second half of 213 also forebode the economic downturn in the first half of 214. Moreover, house sale has lead time to the industrial economy under the context of rising interest rate, so we forecast drops in the GDP growth in 214. A sharp cut has been made in January to the annual GDP growth forecast to 7%, and the quarterly growth rate are respectively 73.%, 7.1%, 6.9% and 6.8%. Generally social financing growth rate will lead 3-6 months ahead of that of GDP (%) Forecast indicates drop of economic growth rate in 融资总量余额增速 ( 领先 1 个季度 ) GDP Actual growth Growth rate (right Rate of axis) GDP 增速 ( 右轴 ) Financing amount balance growth rate (one quarter ahead) Actual Growth Rate of GDP GDP 实际增速 Forecasted Growth Rate of GDP GDP 增速预测

14 12/1 12/3 12/5 12/7 12/9 12/11 13/1 13/3 13/5 13/7 13/9 13/11 14/1 12/1 12/3 12/5 12/7 12/9 12/11 13/1 13/3 13/5 13/7 13/9 13/11 14/1 Phantom of deflation returns In April, CPI drops to 1.8% and PPI is -2% while inflation in Europe and America remain low, which tell that the phantom of deflation returns. Lowering of manufacturing PMI also indicates that outlook for inflation should be revised largely down. We predict the average CPI in 214 will be 2.3%, lower than that of 213. Recent CPI drops sharply (%) Declined industry increases price fell back pressure 中国 CPI 及预测美国 America CPI CPI Eurozone CPI 欧元区 Chinese CPI and forecasts 中国 Chinese CPI 及预测 and forecasts 中国制造业 PMI( 右轴 ) China s manufacturing PMI (right axis)

15 Content The downturn trend of Chinese economy is all but irreversible Necessity and opportunities for reform Shift and adjustment of economic policies Trends and opportunities for capital market 15

16 Fast increase of debt of Chinese government, corporate, financial institution, and residents Of all, the corporate sector debt ratio to GDP increases from 85% to 121%, non-deposit debt ratio of financial institution to GDP increases from 62% to 88%, debt ratio of government to GDP increases from 31% to 5%, and resident debt ratio to GDP increases from 18% to 35%. We can see that the corporate sector debt increase and off-balance sheet liability of financial institution contribute significantly to the rise of the overall economy debt ratio. The increase of corporate sector stems from the investment-driven growth model where the investment continues in excess capacity. And, the off-balance sheet liability of financial institution stems from the expansion of shadow banks under the context of marketization and regulation circumvention. Structure of China Debt Ratio 居民负债 Residents Debts /GDP/ GDP 金融部门负债 /GDP Financial Agencies Debts / GDP 政府广义负债 /GDP 中国非金融企业负债 /GDP General Governmental Debts / GDP Non-financial Corporate Debts / GDP 5/12 6/12 7/12 8/12 9/12 1/12 11/12 12/12 16

17 Shift focus from monetary investment to human resource and technology advancement Future growth shall rely on human resource and technology advancement Sources: processed by the institution of Haitong Securities. Labor Service Rely Economic Growth Capital Industry Deindustrialization Technology Advancement Hi-Tech Rely In future, Chinese economic growth shall rely less on monetary investment and more on human resource and technology advancement. This means deindustrialization, for the industrial development is capital intensive. Instead, growth should rely heavily on service industry which is human resource intensive and hi-tech industry which is technology intensive

18 Promote reform: rehab of overcapacity and rise of service industry Impact of reform on industries Sources: processed by the institution of Haitong Securities. Restrict Resources price reform Finance and tax reform Natural Gas Medical Treatment Culture & Finance Telecom Media Financial reform Administrative reform Manufacturing Infrastructure Real Estate Land reform Household register reform Favor State-owned enterprises reform 214 is the first year for reform of the new administration. The implementation of the reform plans established in the third plenary session of the Eighteenth Central Committee of the CPC will have deep impact on economic transition. The reform in the fields of resource goods, land and finance will restrain investment in manufacturing and brings real hope for traditional industries to remove excessive capacities. Administrative system reform is intended to deregulate and improve supply, which is really good news in long-term for consumption and many service industries

19 The role that financial reform plays in general? Sectors involved in financial system reform Sources: processed by the institution of Haitong Securities. 1 To establish a multi-layer market system Indirect financing turned to direct financing promote the development of securities trader, future goods, PE, and private financial institution promote the improvement of multi-layer capital market for securities, stock and future goods inflow first; outflow latter long-terms first; short-term later direct first; indirect latter agencies first; individual latter 4 Opening up of capital account Financial Reform promote the marketization of interest rate long-terms first; short-term later large-amount first; small-amount later deposit insurance system 2 enlarge floating range making exchange rate more flexible marketize of median price Promote the marketization of exchange rate 3 Financial reform is mainly in two aspects, one of which is to establish multi-layer capital market, and it is mentioned in the 'Decision" that the financial industry shall be opened to private capital; a system of stockissuing registration shall be set up, and equity financing shall be promoted through different channels. And the other aspect is to promote the marketization of interest rate and exchange rate and other financial pricings, and to change the operation of bank by this way. In the area of risk regulation, it proposes to establish deposit-insurance system and a financial market exit-mechanism. 19

20 Highlights of reform: adversity leads to prosperity - state-owned enterprises reform Profit growth rate of industrial enterprises and GDP GDP Growth 增速 rate of GDP 工业企业利润增速 Growth rate of industrial enterprises ( 右轴 (right ) axis) The most effective time during the previous stateowned enterprises reform Sources: processed by the institution of Haitong Securities. 1% 8% 6% 4% 2% -2% -4% -6% In the context of big drop in economic growth, reform will be the only hope for the economy. We have undergone three sessions of state-owned enterprises reforms, and the most effective one is that carried out during , which was forced by economic depression. Nowadays, repeated economic depression and high debt ratio have laid conditions for another state-owned enterprises reform. In this reform, we can reduce government debt by selling or reorganization of state-owned enterprises; we can improve efficiency by purchase and merger of manufacturing industry, and the opening up of service industry, and furthermore, to improve the potential of economic growth. There is a positive signal for promoting state-owned enterprises reform recently - the public selling of company equity of Sinopec. 2 % 2

21 Assessment of debt and restrain of investment There are three main reasons for local government to reduce GDP and increase rate of investment. The first of which is to conform to the promotion of government assessment system implemented by central government. The Organization Department of the Central Committee of the CPC issued "Notice on Improvement of Local Government Performance Assessment System" in December 213, with the key purpose of paying less attention to GDP, improving quality and benefits and sustainable index, strengthening governmental debt assessment, and enhancing term audit and outgoing accountability system. The improvement of governmental assessment system will help to restrict the excessive pursuing of GDP of local government. Transformation of Assessment System of Local Government GDP Index Rely mainly on GDP Target Index of Benefits Increase Pressing investment impulse Relieving pressures from excess production capacity and environment Assessment of Local Debts 21 Sources: WIND processed by the institution of Haitong Securities. 21

22 Environment conditions being on the top concern Second, the environmental pollution in many regions has come beyond tolerance, of which, the largest pollution source is heavy industry. There are highly positive correlation between the PMI of manufacturing industry and the concentration of particulate matter at PM2.5 of the country. For this reason, many local NPC & CPPCC make environmental control as the most important tasks. For example, Tianjin municipal government will implement a project in the entire area called "Beauty Tianjin, No.1 Project", and pay unprecedented attention to environmental issue. Hebei provincial government makes up its mind to the environmental control. HSBC Manufacturing Industry PMI and National PM2.5 Statements concerning "Environmental Protection" in some local "Government Work Report" Provinces Specific Statements 全国 74 城市月均 PM2.5 浓度汇丰中国制造业 PMI( 右轴 ) Monthly average PM2.5 of 74 cities of China HSBC PMI of Chinese manufacturing industry (right) 13/1 13/3 13/5 13/7 13/9 13/11 14/ Tianjin Hebei Overall implementation of a project known as "Beauty Tianjin, No.1 Project", paying unprecedented attention to ecological environment, putting unprecedented force to carry out ecological protection projects, imposing unprecedented punishment to the environmental illegal activities according to law, and trying hard to create long-term good environment. Enological environment concerns the life and health of people, and the image of Hebei province. We have made up our minds to strengthen environment control and ecological protection, make more investment and set forth more rigid policies in this aspect, and we will try our best to make environment turn better within 3 years, and gain great achievements within 5 years. Take atmospheric pollution under control. Try hard to improve the quality of water environment Sources: WIND processed by the institution of Haitong Securities. 22

23 Content The downturn trend of Chinese economy is all but irreversible Necessity and opportunities for reform Shift and adjustment of economic policies Trends and opportunities for capital market 23

24 Three modes to realize stable growth We believe that the actual policies for this year is in the cause of transformation, including tightening of fiscal policies to promote efficiency, and easing of monetary to prevent risk. Loose fiscal + easing monetary "Four Trillion" Model = Loose fiscal + tightening = monetary Model for the last half of 213 Tightening fiscal + easing monetary Model for 214 = 24 24

25 Fiscal policies: namely easing and actual tightening by central government It is set a positive tone for the fiscal policies of the Central Government for 214, fiscal deficit enlarged from 1.2 trillion to 1.35 trillion, and is kept at 2.1%. However, the contribution of fiscal policies to GDP depends on the variation of deficit ratio. In 213, fiscal deficit ratio rose from 1.6% to 2.1%, contributing to the increase of GDP of.5%. For 214, fiscal deficit ratio will remain unchanged, meaning no contribution to the increase of GDP. That is, the contribution drops.5% as compared to the previous year. Scale and Deficit Ratio of National Finance Deficit from the Year 29 (%) The contribution to the increase of GDP by Central Government Finance drops.5% 财政赤字 Fiscal Deficit ( 亿元 (1, mil. 左轴 Yuan) ) 财政赤字率 Fiscal Deficit (%, Rate 右轴 (%,) right axis) E 财政赤字变动 Fiscal Deficit Change 财政赤字对 GDP 增速贡献 ( 右轴 ) Contribution of Fiscal Deficit to GDP Growth Rate (right axis)

26 Fiscal policies: Local policies obviously tightened Actually, there are double fiscal policies in China. One is from Central government on the paper, and the other is in shadow implemented by local government, borrowing money to make investment by ways of loan, bond issuance, and entrustment. The latest governmental debt audit data shows that such "shadow" fiscal deficit of local government in 213 is up to 2.1 trillion, almost doubled the amount of deficit of Central Government. Due to the more strict assessment of local government debt, one can forecast that the increase rate of local government debt for 214 will be less than the last year. The increase of GDP would be less.5% for this reason, and the economic growth will drop 1% due to such financial policies. So, we will experience a tightened finance policies Increase Ratio of Local Debt Starts to Drop (%) 地方债务余额 Local Debts Balance ((1 亿元 million ) Yuan) % 6% 4% 2% % -2% -4% -6% The contribution to economic growth by local government fiscal drops.5% 地方隐形财政赤字率地方隐形财政贡献 GDP 增速 Stealth Fiscal Deficit Ratio of Local Government Contribution of Local Stealth Fiscal to GDP Growth Rate

27 Monetary Policies: Lower RRR and Lower Currency Rate Central Through out the world, the key targets of national governments is to keep economy and inflation stable. The contracting policies of central bank carried out in the second half of the last year make the public believe that the main task of central bank is "deleveraging". In fact, "de-leveraging" is carried out for the purpose of long-term stable of economy. It is undeniable that economy inflation rose in the second half of the last year, which lay foundation for the central bank to carry out tighten policies. In this circumstance, Taylor rule is applicable. However, from the beginning of 214, economy inflation drops heavily, and forces central bank to consider the risks of short-term decrease of economy inflation and the downtrend of money rate central. In addition, measures of lower standard may be implemented to keep proper liquidity Taylor Rule: Forward-looking means drop of money rate central R7 季度均值 Quarterly average value R7 3%+(GDP-7%)/2+(CPI-3%)/2 5/3 6/3 7/3 8/3 9/3 1/3 11/3 12/3 13/3 14/3 27 Sources: Wind, CEIC, Institutions of Haitong Securities 27

28 From marginal cost pricing to central bank pricing In 213, the central bank takes an onlooker role in order to push de-leveraging of financial institution, and the money rate is priced according to marginal cost. If the income of non-standard assets obtain by the bank is up to 1%, a money rate more than 8% would be acceptable to the bank. This will result in high repo rate and accelerated fluctuation. In December 213, the central bank issues SLF, in case the repo rate for overnight, 7 days and 14 days is higher respectively than 5%, 7% and 8%, the financial agency as local legal person may apply to the central bank for operation of SLF. The central bank states in its announcement that "we are exploring to make SLF work as the ceiling of currency market interest rate tunnel". The implementation of SLF means that the marginal cost pricing has failed and been replaced by central bank pricing. The second half of 213: Marginal Cost Pricing 11 基建投资信托 Infrastructure Investment Trust 房地产信托 Real Estate Trust Sources: Wind, CEIC, Institutions of Haitong Securities 28

29 Social Financing Cost falls Why interest rate surged in last year? On the one hand, local governments are launching projects to stabilize growth, and generate different credit provisions such as loans, bonds, and non-standard credits. On the other hand, money supply and credit demand of banks has reduced due to tightening policies of the central bank. As a result, credit supply exceeds demand, which is reflected in investment growth much higher than financing growth and rising social financing interest rates. In 214, things change dramatically. Local governments revise down their economy and investment growth rates, which leads to sharp decline of new credit supply. After the shift of central bank policies, money supply and credit demand of banks increase which leads to an inflection point in investment and financing growth as well as fall in social financing rate. Improving of investment-financing relations Forecasting Fall in Social Financing Cost 4% 3% 融资总量余额增速投资累计增速 Growth of Financing Amount Balance Accumulated Growth of Investment 9 8 金融机构自主贷款利率 Independent Loan Rate of Financial Institutions (%,(%) 左轴 ) 中国投融资增速差 ( 右轴 ) 1% Difference between Growth Rates of Investment and Financing in China (right axis) 5% 2% 1% 7 % % 6-5% -1% 1/1 1/7 11/1 11/7 12/1 12/7 13/1 13/7 14/ /1 1/7 11/1 11/7 12/1 12/7 13/1 13/7 14/1 Sources: Wind, CEIC, Institutions of Haitong Securities -1% 29

30 Content The downturn trend of Chinese economy is all but irreversible Necessity and opportunities for reform Shift and adjustment of economic policies Trends and opportunities for capital market 3

31 Reasons for an optimistic securities market in China: resident s assent allocation structure imbalance Although financing and trust products emerge in recent years to diversify China s household asset structure, real estate and bank deposit remain the major account for residential property. High alert should be attached to different investment risks in 214. Meanwhile, open-up in finance sector in China is an irreversible trend which brings up structural investment opportunities. 中国居民家庭资产结构 Household Asset Structure of China 保险准备金 4% Insurance reserve 房地产 63% Real Estate 63% 股票 债券 理财等 6% Stock, Securities, Finance 6% Cash and Deposit 27% 存款现金 27% Sources: People's Bank of China, Institution of Haitiong Securities 31

32 8/12 9/3 9/6 9/9 9/12 1/3 1/6 1/9 1/12 11/3 11/6 11/9 11/12 12/3 12/6 12/9 12/12 13/3 13/6 13/9 13/12 Securities Market: how to improve insufficiency of incremental capital? Since the 4th quarter of 212, funds are steady in A-share market with range-bounds, and total market value remains around 27 trillion Yuan. Market Conditions Changed for Largest Market Category Conditions of Assets Changed for Largest Category of Assets Balance of Settlement Funds for Securities 证券交易结算资金余额 Transaction (1 million) ( 亿元, 左轴 ) 上证综指 ( 右轴 ) Shanghai Stock Index (right axis) Total Market Value of A- share (trillion) at the end of at the end of at the end of at the end of Present Sources: Wind, Institution of Haitong Securities 32 32

33 Twist in Stock Valuation System of China PE(TTM) 213/1/1 PE(TTM) Present Net Profit YOY (%) Net Profit YOY (%) 213E 214E Media Electronics Telecom Computer Medical Food Environmental Funds holding 24.4%(end of 212) 49.3%(end of 213) Sources: Wind, Institution of Haitong Securities 33 33

34 Being optimistic to state-owned enterprise reform and private service industry: large space for opening-up Investments in state-owned enterprises in transportation, medical, education, entertainment, telecom, finance and public utilities accounts for more than 2/3, indicating big growth potentials after breakup of monopoly. Proportion of investment in state-owned enterprises in 211 exceeded those for 2/3 of different industries. 12% 1% 国有企业 Proportion 211 of Investment 年投资占比 in Stateowned Enterprises in 211 Proportion of Investment Private Enterprises in 211 民营企业 211 年投资占比 8% 6% 4% 2% % 铁路运输 Railway Transportation 城市公共交通 urban Public Transportation 油气开采 Oil and Gas Exploitation 航空运输 Air Transportation 道路运输 Road Transportation 水利管理 Water Management 烟草 Tobacco 卫生 Health 教育 Education 体育 Sports 公共设施管理 Public Utilities Management 电信服务 Telecommunication Service 电热生产供应 Power and Heat 环境管理 Environment Management 公共管理 Public Management 管道运输 Pipeline Transportation 新闻出版 Press and Publications 水的生产供应 Water Supply 银行 Bank 广播电视电影 Broadcast, TV, Film 水上运输 Water Transportation 证券 Securities 34

35 Being optimistic to service consumption: population and income set the tune During197s, Japanese shifted from material consumption to service consumption due to improvement in population structure and income. 美元 USD Japan: Per Capita GDP China: Per Capita GDP 日本 : 人均 GDP 中国 : 人均 GDP % 4% 35% 3% 25% 2% 15% Proportion of food expense in worker family in Japan Proportion of miscellaneous (medical treatment, transportation, education, and entertainment) 44.3% 4.9% 41.4% 37.9% Experienses of Japan: Consumption pattern 29.% upgraded during 26.7% transformation period 25.5% 19.6% Current population structure and income level of China is similar to that of Japan in 197s Sources: Bloomberg, Institution of Haitong Securities 35 35

36 Being optimistic to medical, education and aged care Catalyst in the development of medical treatment and education such as the policies of "relax in four point, and simplify in one aspect" hospital incorporated by private funds; Alibaba invests in VIPABC, and Google invests in education software companies. Upgrade requirements: let the aged enjoy their lives Information: digitize medical system to facilitate monitor and trace Entertainment: tourism, leisure and social activities Upgrade requirements Laid to rest Laid to rest: bring peace Funeral Graveyard Basic Protection Basic Protection: well supported Healthcare, medical service Pension, insurance of serious disease Home care, nursing homes, and retirement community Sources: Institutions of Haitong Securities 36 36

37 Machine replacing human labors: working population topping and dropping Rising labor cost will drive the replacement of human labors by machines. 75% 7% 65% 6% 55% Proportion of working-age population(population aged accounts for the total population) Japan 日本中国 China 中国 China 214 Japan 日本 % 25% 15% 全产业平均工资 Average Salary of the Whole Industry 精密机械批发物价 Warehouse Price of Precision Machinery Payments 197s for 日本劳动者 workers in Japan in 197s 工资涨幅 rose much 远超机 more than that 械 of Machinery 5% 普通机械批发物价 Warehouse Price of Standard Machinery Intelligent story in Japan during 197s will be retold in China. 5% Sources: Bloomberg, Institution of Haitong Securities 37 37

38 Expansion of Internet leads to new business models Technologies change our lives: "red packets" via cell phone, "DI DI taxi, Weichat. Entertainment 娱乐需求 Needs 互联网 Internet: : 4G 大数据 Big Data 云计算 Cloud Smart terminal: 智能终端 : Smart TV 智能电视 Wearable 可穿戴设备 Social Needs 社交需求 O2O Business Models 商业模式 医疗信息化 Medical information Job 工作需求 Demands 互联网金融 Internet Finance Sources: Institutions of Haitong Securities 38 38

39 Information: Technology diffusion becomes a trend Mobile Internet crossing boundaries: mobile net surfing coverage in China is 31.4%. Online shopping accounts for 31% of disposable income of local residents. 5% 4% 3% 2% 1% % 互联网普及率 Internet coverage 手机网民普及率 WAP user coverage % 3% 2% 1% % 芬兰 Finland 日本 Japan 西班牙 Spain Percentage of income used for online shopping 网购消费占可支配收入百分比 to disposable income of residents 加拿大 Canada 俄罗斯 Russia 澳大利亚 Australia 法国 France 墨西哥 Mexico 阿根廷 德国 美国 American German y Argentina 英国 English 巴西 Brazil 中国 China 印度 平均 Average India Sources: Convergence Era, Institution of Haitong Security 39 39

40 Being optimistic to energy saving and environment industries China has been highly polluted for PM2.5. Average days of haze in 213 was about 3. Density of PM2.5:mcg/m3 Sources: NASA, Institution of Haitong Securities 4 4

41 Fiscal expense relating to the improvement of environment and living standard will increase The 'Decision' of Third Plenary Session highlights on ecological civilization, environmental protection fee charged as tax, and environment protection as part of assessment of local government performance. Automobile exhaust is a main source of atmosphere pollution. Per capita energy consumption of China in 21 has surpassed the world average level. Crude oil external dependence reached 6%. Automobile exhaust is a main source of atmosphere pollution. Vehicle exhaust and road dust 5% Others 3% Industry Emission 37% Emission of Residents and Power Plant 1% 25 2 Global: Per Capita Energy Consumption 全球 (Kg oil : 人均能耗量 equivalent per year) 年千克油当量 China: Per Capita Energy Consumption (Kg 中国 : 人均能耗量年千克油当量 oil equivalent per year) Sources: Wind, "Low Carbon Economy Development Report of China for 213" 41 41

42 New energy vehicle is market s new favorite Domestic: 214 is the substantial promotion stage with the first and second session including 4 cities and regions. More detailed rules and regulations will be introduced. 212 Preparing Stage Planning Tax benefit: Vehicle and vessel tax exempted 213 Promotion Stage Increase production Decrease cost Number of Cities Target Demo and promotion in large scale Commercial trial of business models 4 charging piles and 2 charge and converter stations Time E 22E Accumulative production and sales (1 units) Further Promotion Sources: processed by the institution of Haitong Securities. 42 Taken 213 as base Subsidies for Produced Vehicles Reduced (%) Original Policies Latest Policies

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