Nanjing University China s 12 th FYP: Transformation and Upgrade Opportunities for Engagement September, 2010 Prof. Li Xindan School of management and engineering
Agenda Navigating risk in a land of opportunity China s 12th Five-Year Plan (2011-2015) China s regional economy Key take-aways Nanjing University 2
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 GDP (US$ Billion) 30 Years of Chinese Economic Development Four major milestones 6000 12 th FYP 5000 4000 3000 2001: China's WTO Accession 2009-2010: Global downturn, stimulus plan, recovery 2000 1000 1978: "Reform and Opening Up" begins 1992: Deng Xiaoping's "Southern Tour" 0 Source: China Investment Guide Nanjing University 3
China Today Engine of Global Recovery 2008-2009 GDP growth (%) Contribution to Global GDP Growth, PPP Basis (percent, three-year moving averages) 2008 2009 China 9.6 8.7 U.S. 0.4-2.5 EU-27 1.0-4.0 Japan -1.2-5.3 Brazil 5.1-0.4 Russia 5.6-9.0 India 7.3 5.6 ASEAN 5 4.7 1.3 Australia 2.4 0.7 World 3.0-0.8 This is the first time China to be the engine of global recovery. Source: IMF, 2010 Nanjing University 4
China Future Leader of Global Growth According to IMF, China s average growth during 2010 2011 is expected to continue at a brisk pace leading other emerging markets Nanjing University 5
China is a Land of Opportunity According to the World Investment Prospects Survey 2009-2011 by UNCTAD, China is the most preferred location for FDI (Foreign Direct Investment). The 15 most attractive economies for the location of FDI, 2009 2011 (Per cent of responses) Source: UNCTAD, 2010 Nanjing University 6
FDI into China In the past decades, FDI into China was growing quickly. Although FDI into China fell 2.6% during 2009, China still had its 2nd best-year. 100.0 FDI Into China (1986-2009) 80.0 60.0 40.0 20.0 0.0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Utilized FDI ($ billion) Source: UNCTAD, 2010 Nanjing University 7
Leading Australian Companies in China Many of Australia's leading companies have made investment in China, and has made good business returns in Chinese market. The company has representative offices in Beijing and factories in Shanghai. Everybody in China knows bhpbillition. BlueScope Steel has been operating in China for over 20 years. Currently, BlueScope Steel employs over 1800 people with 7 manufacturing sites and an extensive sales network across China. As early as 1988, the company signed agreements with the Chinese Academy of Space Technology. In 1995, the company set up representative office in Beijing. ANZ established a representative office in Beijing since 1986. In 1993, a branch was opened in Shanghai. The Beijing office was upgraded to branch status in 1997. The Guangzhou office was upgraded to branch status in 2009. Nanjing University 8
Risk and Opportunities are Twins What about the risk Michael Wine: Chinese Economy Treads Risky Path. New York Times, May-26-2010 Based on these risk ratings, it would appear that doing business in China is less risky than doing business in other large emerging markets Nanjing University 9
Managing Risk in China Risks, as perceived by foreign investors in China, change fast. Effective risk management in China requires constant updating of priorities and not overly relying on past experience Results of the U.S.-China Business Council Annual Member Survey (2003-2009) Top Business Issues in China Nanjing University 10
Challenges of Risk Management in China Three reasons the Learning Curve often does not apply. As it is much harder to benefit from past experience in today s China, developing the local relationship becomes essential. Nanjing University 11
Key Point Understanding the Legal Environment China s Foreign Investment Regulatory Framework Principal Laws Applicable to Foreign Investment (Company Law, Wholly Foreign-Owned Enterprise Law, Equity Joint Venture Law, Contractual Joint Venture Law ) Industry Regulations Catalogue on Guiding Foreign Investment Administrative Measure for Foreign Investment in the Commercial Sector... Government Department Regulations Foreign Investment Enterprise Income tax Law Rules of the PRC on Foreign Exchange Control Economic Zone Regulations Administrative Measure for Free Trade Zone Administrative Measure for Export Processing Zone Source: http://english.mofcom.gov.cn/ Nanjing University 12
Agenda Navigating risk in a land of opportunity China s 12th Five-Year Plan (2011-2015) China s regional economy Key take-aways Nanjing University 13
China s 12th Five Year Plan (2011-2015) China s 12 th FYP includes two goals and four measurements. Promote Inclusive Growth Deepen financial Reforms Traditional Economy Export oriented High saving ratio Economy Transformation Reduce the reliance on exports boost domestic consumption 12 th FYP Industry Upgrading Promote Service Industry Develop Emerging Industries Balance Regional and Society Development Strengthen Environmental Sustainability Source: Ministry of Commerce of the PRC, Author analysis Nanjing University 14
Measurements Details Inclusive Growth Balanced Development Healthcare Pensions Education Urbanization Foreign exchange policies Government spending reduces the need for households to self-insure against the risk of a large future medical bill, then household consumption would rise. Reforms would need to focus on continuing to expand coverage of the new rural pension scheme and urban workers basic pension system, increasing the uniformity of pension policies. Ensure universal publicly funded education up to the senior secondary school level and improving the quality of and access to education (particularly to children of migrant workers). The process of urbanization creates a steadily expanding flow demand for housing, services, and higher productivity jobs. A stronger currency will help increase the purchasing power of households, raise the labor share of income, and reorient investment toward those sectors that serve the domestic market. Major Reforms Financial liberalization Fiscal support for consumption Financial liberalization yield a more efficient allocation of capital, create incentives to favor labor over capital in the means of production, raise household income. Lowering the VAT rate and expanding its base would help increase the marginal incentives to consume. A similar effect could be achieved by reducing the burden of other consumption taxes. Tax reducing of labor income There was also significant scope to reduce the taxation of labor income. A lower level of contributions would boost household disposable income, lessen inequality, and foster job growth. Environmental Sustainability New energy and Environmental protection Relative shortage of resources and low environmental sustainability is the basic conditions of China. Emerging industries focused on enhancing resource conservation and environmental protection must be developed and deployed. Nanjing University 15
Example: Urbanization With wide urban-rural income gap and rapid urbanization, China has large headroom for expanding domestic consumption. Ratio of urban to rural in per capita terms The Central and local Governments will invest thousands of billions CNY for Urbanization. From 2011 to 2015, the number of towns will be doubled. More and more farmers will become city residents Urban income per capita is about 3 times bigger than rural income per capita. *Source: McKinsey Global Institute, 2009 Nanjing University 16
Identifying Emerging Urban Growth Centers Of China s 655 cities, 26 will have urban rail systems under construction. Nanjing University 17
Identifying Emerging Urban Growth Centers A high-speed rail routes network is also under construction. China will invest US$300 billion in the next five years to extend high-speed rail routes Nanjing University 18
Much more openness in service industries China will carry out its commitments under WTO, Liberalization of China s services sector would help in unlocking its growth potential. Sector coverage rate of China s commitments under WTO and the liberalization index for each sector (2009) Sector Sector coverage rate of commitments Liberalization Index Average 54.2 0.54 Commercial business 60.9 0.60 Communication services 62.5 0.63 Construction and related engineering service 100.0 1.00 Distribution services 100.0 1.00 Education services 100.0 1.00 Enviromental services 100.0 1.00 Financial services 76.5 0.65 Health services 0.0 0.00 Tourism and traval-related services 50.0 0.50 Entertainment services 0.0 0.00 Transport services 20.0 0.26 Other services 0.0 0.00 Source: World Bank, 2009 Nanjing University 19
Strategic Emerging Industries in 12 th FYP Strategic emerging industries will be prioritized in China s 12th Five-Year Plan. Strategic emerging industries: 7main areas, 23 focus directions Energy-saving and environmental protection The emerging information industry Bio-technology industry Breakthrough energy-efficient, advanced environmental protection and recycling; Next-generation communications networks, Internet of things, triple play, new flat panel display, high-performance integrated circuits and high-end software Bio-medicine, bio-agriculture, bio-manufacturing New energy industry Nuclear, solar, wind, biomass Clean-energy vehicles Equipment Manufacturing New materials Plug-in hybrid vehicles and pure electric vehicles Aerospace, Marine engineering equipment and smart equipment Special features and high performance composite materials Source: Ministry of Commerce of the PRC Nanjing University 20
Strategic Emerging Industries in 12 th FYP China is pouring thousands of billions and will issue supportives policies such as human resources, taxation China enhances support to emerging industries Extend preferential loans to key high-tech industrialization projects Encourage venture capital investment with government funding, policy loans and commercial loans Create a favorable environment for companies to be listed domestic and overseas Give preference to domestically-produced high-tech equipment and products with IP ownership in Government procurement Types of support to emerging industry Granting investment subsidies, preferable production and consumption tax policies Accord preferential tax treatment to the purchase of advanced scientific research equipment Intensify the magnitude of tax incentives for research and development expenditure facilitate the establishment of overseas R&D centers, giving support in foreign exchange and financing Source: Ministry of Commerce of the PRC, Author analysis Nanjing University 21
Agenda Navigating risk in a land of opportunity China s 12th Five-Year Plan (2011-2015) China s regional economy Key take-aways Nanjing University 22
China s Regional Economy China can be divided into several regions according to its development level. Western Region Nanjing University 23
China s Regional Economy China s new regional economic plan Yangtze Delta Region is the MOST powerful economic zone in China. The region accounts for 20 percent of China's GDP and is responsible for one third of its imports and exports. Shanghai predominates in the finance, banking, property, automobiles and logistics industry. Suzhou is a strong manufacturing base for foreign companies. Nanjing is a hub for the automobile industry, electronics, education, energy, iron and steel industries. Ningbo is a growing economic port Hangzhou is a famous touring city Chengdu- Chongqing Economic Zone Zhengzhou Economic Zone Changsha-Zhuzhou- Xiangtan Economic Zone Beijing-Tianjin- Hebei Economic Zone Tumen River Delta Economic Zone Yangtze River Delta Economic Zone Pearl River Delta Economic Zone Nanjing University 24
Opportunities to Invest in Jiangsu Jiangsu is one of China's most prosperous provinces. Jiangsu Province is located in the middle of the east coast of China. It lies within the lower reaches of the Yangtze River and adjoins Shanghai, the largest economic center in China. 2008 Jiangsu % of China's Area 103 thousand km 2 1.06% Population 77 million 5.78% GDP 3031 Billion RMB 10.08% Goods Exports 238 Billion USD 17.00% High-tech Industrial Output 175 Billion USD 21.00% Source: National Bureau of Statistics of China Statistics Information Network of Jiangsu Nanjing University 25
Billions US $ Opportunities to Invest in Jiangsu Jiangsu s GDP is larger than those of many countries and half of Australia's GDP GDP of Jiangsu and Other Countries 1200 997 800 400 795 615 539 501 495 470 430 405 383 331 309 287 228 195 177 0 1 USD = 6.8 RMB Source: IMF, WEO Databases, April 21, 2010; Statistic Information Network of Jiangsu, Feb. 26, 2010; Nanjing University 26
Agenda Navigating risk in a land of opportunity China s 12th Five-Year Plan (2011-2015) China s regional economy Key take-aways Nanjing University 27
Key Take-aways China is too large and complex to tackle as a whole; Study the central government's development goals as a road map for identifying emerging investment opportunities; Find the most suitable locations for your investment; Engage in the opportunities of Strategic Emerging Industries; Understand and well manage the relationship with different stakeholders such as local officials, lawyers, accountants Articulate your value proposition and team accordingly. Nanjing University 28
China: Land of Opportunity Thank You! School of Management and Engineering http://sme.nju.edu.cn Nanjing University http://www.nju.edu.cn Nanjing, Jiangsu Nanjing University 29