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The Latest Business Trends in China

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Title: The Latest Business Trends in China


1
The Latest Business Trends in China
By Montgomery Ho, Head of Commercial Banking,
HSBC China
8 April 2013
2
China in a nutshell
1.3 Billion People 2nd Largest Economy (GDP of
USD8.3tm after USA of USD15.7tm in 2012) 3
Billion International Trade (2nd largest
USD3.80bn after USA of USD3.96bn in 2012) 2nd
Largest Foreign Direct Investment (FDI) recipient
in 2012 2nd Outward Direct Investment (ODI)
source in 2011 2nd ODI source when combined
with Hong Kong
Source CIA Factbook National Statistic Bureau
International Monetary Fund UNCTAD
3
Chinas Economic Growth
Source CEIC China Premium Database
4
Looking ahead - Chinas 12th Five Year Plan
(2011-2015) Key Themes
A
Lower carbon intensity and green growth
  1. Cultivate the Emerging Strategic Industries
    (ESIs)
  2. Industry upgrading, improve energy and emission
    efficiency
  3. Accelerate development of service sectors

B
E
Overseas development and Going out
Urbanisation and regional development
  1. Accelerate urbanisation and regional development
  2. Improve agriculture / rural infrastructure and
    rural income
  1. Encourage and support mainland Chinese companies
    in Going out
  2. Renminbi (RMB) internationalisation
  3. Role of Hong Kong / Taiwan

Transform Chinas economic growth model to focus
on quality, balanced and sustainable growth
Drive domestic demand
C
D
Structural reforms
  1. Stimulate consumption through income growth
  2. Establish better social safety net
  1. State-owned enterprise (SOE) reform
  2. Financial market reform

Source China Parliament, National Peoples
Congress
5
Chinas Top 15 Foreign Direct Investment (FDI)

Ranking FDI into China by Countries USD million USD million USD million
Ranking FDI into China by Countries Foreign Direct Investment into China Foreign Direct Investment into China Foreign Direct Investment into China
Ranking FDI into China by Countries 2010 2011 Change
1 Hong Kong 60567 70500 16.4
2 Japan 4084 6330 3.7
3 Singapore 5428 6097 1.1
4 Korea 2692 2551 -0.2
5 United States 3017 2369 -1.1
6 Taiwan 2476 2183 -0.5
7 Germany 888 1129 0.4
8 France 1238 769 -0.8
9 Netherlands 914 761 -0.3
10 Macau 655 680 0.0
11 United Kingdom 710 582 -0.2
12 Switzerland 261 555 0.5
13 Canada 635 468 -0.3
14 Italy 396 388 0
15 Malaysia 294 358 0.1
Source CEIC China Premium Database Source
6
The Regional Economic Hubs
Regions Pearl River Delta Yangtze River Delta Bohai Rim Western China
9 cities in Guangdong Including Shanghai Including Beijing Tianjin Including Chongqing / Chengdu / Xi'an
Population 2011 million 105 157 246 362
GDP per capita 2011 (USD) 7,524 9,515 7,216 4,111
Main Economic Themes Traditional manufacturing Heavy industrial Petrochemical, automobiles, steel Heavy manufacturing
Main Economic Themes Economic integration with Hong Kong CEPA Shanghai An int'l financial shipping centre by 2020 Beijing China's domestic financial centre Mining
Main Economic Themes Progressing up the value chain to cover RD, high tech, financial services, education and medical Progressing up the value chain to cover high tech. Key source of Going Out activity -Tourism agriculture -Emerging manufacturing
Source National Bureau of Statistics of China
7
Chinas Top 15 Outward Direct Investment (ODI)

Ranking ODI from China by Countries USD million USD million USD million
Ranking ODI from China by Countries Overseas Direct Investment from China Overseas Direct Investment from China Overseas Direct Investment from China
Ranking ODI from China by Countries 2010 2011 Change
1 Hong Kong 38505 35654 -7
2 France 26 3482 13292
3 Singapore 1118 3268 192
4 Australia 1701 3165 86
5 United States 1308 1811 38
6 United Kingdom 330 1419 330
7 Luxembourg 3207 1265 -61
8 Sudan 30 911 2937
9 Russia 567 715 26
10 Iran 511 615 20
11 Indonesia 201 592 195
12 Kazakhstan 36 581 1514
13 Kampuchea 466 566 21
14 Canada 1142 554 -51
15 Germany 412 512 24
Source CEIC China Premium Database Source
8
Majority of China enterprises have the intention
to expand their business overseas
  • Considerations for expanding to overseas
  • Convenience for foreign trade (69)
  • Expansion of sales/networks (59)
  • Brand image improvement (46)
  • Effectiveness of introducing products into new
    markets (40)
  • Existing locations of the overseas offices


Asia
North America
US
Europe
Africa
South America
Oceana
Chosen for its lower trade barriers, investment
incentive and favorable political environment
Chosen for its tremendous market potential,
advanced technologies and strong RD
Source China Enterprise Going out Survey
(4Q2012) with N250 companies interviewed
8
9
Whilst low price is main advantage for overseas
competition, economic slowdown becomes the major
concern for carrying out expansion plans
Top 3 challenges for overseas expansion
Strengths for overseas competition


Fluctuation of local currencys exchange rate
Slow economic development
Intense competition from local players
Low price
Advanced technology/ production line
Strong cash flow
Major strengths and challenges for expanding
overseas business in US
Source China Enterprise Going out Survey
(4Q2012) with N250 companies interviewed
9
10
Most companies appear to be optimistic about the
growth on revenue from their US offices in the
next three to five years

20 and above
15-20
10-15
5-10
Below 5
Increasing contribution from US offices to the
revenue
Source China Enterprise Going out Survey
(4Q2012) with N45 companies with branches in US
10
11
Chinas Currency Renminbi (RMB)
Internationalisation 3-phase Path
Trade and investment legs support each other
A global trade currency
A global investment currency
A global reserve currency
1
3
2
Investment and savings options make RMB useful
and attractive
Reserve use signals arrival of RMB as a world
currency
Trade helps establish pools of RMB liquidity
worldwide
  • By the 2020s, HSBC expects RMB will be accepted
    across the world
  • 1) for investment, financing and payment purpose
  • 2) as a reserve, intervention and anchor currency
  • 3) full RMB convertibility

Convertibility RMB has been convertible under
current account since 1996. It is partially
convertible for certain capital items Capital
control Gradual introduction of RMB FDI and
ODI Exchange rate A managed float system pegged
to a currency basket, becoming progressively more
market sensitive
12
Potential Benefits of RMB Trade Settlement
Customers switching to RMB may reap various
benefits, which will depend on their trading role
and commercial bargaining power.
  • Foreign Exchange Cost
  • Currency fluctuation premium
  • Administrative Process
  • SAVE
  • Potential RMB Appreciation
  • Onshore / Offshore Investment Returns
  • Importer/Exporter Relationship
  • HEDGE
  • GAIN
  • Payables and Receivables
  • Asset and Liabilities
  • DIVERSIFY
  • Customer Base
  • Currency portfolio
  • Risk Exposure

13
Permitted RMB Cross Border Flows
RMB cross-border flows are permitted for a
growing range of purposes
PAYMENTS INTO THE MAINLAND
PAYMENTS FROM THE MAINLAND
Trade payments for goods Mainland enterprises with import and export qualifications may import goods in RMB
2. Trade payments for services Allowed (contract and invoice in RMB required)
Intercompany loans Case-by-case approval by PBOC/SAFE Capital investment overseas (ODI) Allowed subject to MOFCOM approval
Dividend Payments / Repatriation of Profit Allowed Expatriates Salaries Allowed

Trade payments for goods Mainland enterprises with import and export qualifications may export goods in RMB
2. Trade payments for services Allowed (contract and invoice in RMB required)
Intercompany loans Allowed subject to SAFE filing
4. Additional Capital Infusion Allowed subject to MOFCOM approval
Foreign Direct Investment (FDI) Allowed subject to MOFCOM approval Expatriates Salaries Not Allowed
Mainland China RMB Area
Overseas-to-overseas RMB transactions are not
regulated by Peoples Bank of China (PBOC), but
may be subject to the local regulations elsewhere
14
Contacts at HSBC China
  • Calvin MAN
  • Head of International Business, Commercial
    Banking, HSBC Bank (China) Company Limited
  • Email calvinman_at_hsbc.com.cn
  • Jason HUCK
  • SVP Head of North America LATAM, Commercial
    Banking, HSBC Bank (China) Company Limited
  • Email jason.a.huck_at_hsbc.com.cn
  • International Banking Centre
  • Email china.cmb.ibc_at_hsbc.com.cn

15
Disclaimer
This presentation is not intended as an offer of
solicitation for business in the United States of
America. The purpose of this presentation is to
provide factual information on China for
corporate clients operating in or have an office
operating in China, or for clients who wish to
expand their operations into China.
16
Questions?
17
Appendices
18
HSBC in China
The Leading Foreign Bank in China
  • Established in Hong Kong and Shanghai in 1865 a
    continuous presence in mainland China for 148
    years
  • In April 2007, HSBC completed locally
    incorporation in China with HSBC Bank (China)
    Company Limited becoming a local bank
  • The largest and most active international banks
    in China .
  • Over 5,000 employees (Feb13), over 99 recruited
    locally and international staff from 15 different
    countries.
  • Registered Capital RMB12.4billion, one of the
    highest for a foreign bank in China
  • Moodys Rating Foreign and local currency
    deposit and issuer ratings are A2/Prime 1 (as of
    Jun12)
  • One of the largest investors in China in the
    growth of its own operations and selective local
    financial institutions, including a 19 stake in
    Bank of Communications, an 8 stake in Bank of
    Shanghai.
  • Provides RMB banking services to corporate
    customers in 45 mainland cities. Our network in
    mainland China comprises 144 outlets. (as of
    Feb13)
  • All of our branches and sub-branches can provide
    RMB and FCY services.

IFC Shanghai, HSBC China Headquarters since April
2011
19
HSBC China Largest network among foreign banks
  • HSBC China has 144 outlets across 45 cities in 21
    provinces / municipalities

Harbin
Shenyang
Beijing
Dalian
Tangshan
Tianjin
Qingdao
Jinan
Taiyuan
Zhangjiagang
Nanjing
Changshu
Wuxi
Zhengzhou
Kunshan
Xian
Suzhou
Shanghai
Hefei
Ningbo
Hangzhou
Wuhan
Chengdu
Chongqing
Changsha
Shaoguan
Xiamen
Qingyuan
Heyuan
Guangzhou
Chaozhou
Foshan
Shantou
Huizhou
Panyu
Kunming
Nanning
Shenzhen
Zhaoqing
Dongguan
Jiangmen
Zhongshan
Zhuhai
Panyu
Yangjiang
Maoming
Zhanjiang
20
Awards for Excellence in China
21
Chinas 7 Key Industries Under the 12th Five-Year
Plan
Emerging Strategic Initiatives Main policy content
Energy-saving and environmental protection Develop high-efficiency, energy-saving technical equipment and products. Develop recycling of industrial resources and improve the overall use of resources. Play a leading role in promoting environmental protection equipment and raise standards for pollution control. Promote commercialization of energy-saving environmental protection services.
Next generation information technology Speed up construction of an integrated and safe broadband information network Extend RD into next-generation mobile communication and next-generation internet equipment. Develop technologies such as digital virtualization and promote development of cultural creativity.
Bio-technology Develop innovative areas of medicine such as biological medicine, new vaccines, diagnosis agents, Western medicine and modern Chinese herbal medicine. Promote green agricultural products and further the development of biological agriculture.
High-end manufacturing Strengthen and expand the aviation industry. Promote construction of space infrastructure and the development of the satellite industry. Develop rail transportation. Develop ocean engineering equipment for exploration of ocean resources.
New energy Develop new-generation nuclear energy technology and advanced reactors. Promotion and application of solar thermal energy. Further large-scale wind power development.
New materials Develop new materials such as rare earth, high-performance membranes, special glass, functional chinaware and semiconductor illumination materials. Actively develop new structural materials such as high-quality special steel and engineering plastics.
Clean-energy vehicles Promote the use of plug-in hybrid-power vehicles and battery-only electric vehicles. Develop high-efficiency, low-emission, energy-saving automobiles.
Source HSBC Global Research
22
Theme A Lower carbon intensity and green growth
Objectives Government plan Outlook
1. Cultivate the Emerging Strategic Industries (ESIs) Seven emerging strategic industries (ESIs) will be the primary drivers of a new phase of economic growth and lower carbon intensity for the 12th FYP Energy-saving and environmental protection Next generation information technology Bio-technology High-end manufacturing New energy New materials Clean-energy vehicles Target to increase the share of these sectors from 3 of GDP in 2009 to 8 in 2015, and 15 in 2020. The State Council outlined various measures to promote the development of the ESIs Make funding including bank credit and land more easily accessible to investment in these industries. Increase government spending in these areas, via RD spending, providing necessary infrastructure support, and providing tax incentives. Provide incentives by changing the price structure and setting industrial standards and quotas to direct development. HSBC forecasts that the global climate business market could be worth USD 2 trillion by 2020. Based on governments targets, HSBC estimates the size of the ESIs to grow to RMB 5 trillion (USD 751 billion) by 2015 - CAGR of 35 for next 5 years - and to RMB 15 trillion (USD 2.3 billion) by 2020 CAGR of 29 for the next decade. HSBC estimates the ESIs will require about USD 800 billion in investment by 2015. Local media reported that the government may set an investment target of RMB 10 trillion (USD 1.5 trillion) in public and private investment including financial incentives and subsidies. The government has since refuted such claims. Detailed policies with specific targets and guidance across sectors will be released overtime. Provincial energy-intensity reduction targets will also be issued. Possible market mechanisms for low-carbon initiatives include Proposed energy-trading market as an alternative to centrally-set prices for oil, gas and electricity. Fiscal measures / subsidies that use taxation and pricing to pursue environmental and energy goals. Establish Energy Service Companies (ESCOs) to provide energy-efficient services to industries. Sector-specific and economy-wide carbon trading schemes. New energy quota system for energy-intensive industries and power companies alike.
ESCOs is a commercial business providing a broad
range of comprehensive energy solutions. The
ESCOs also install the required elements and
maintain the system to ensure energy savings
during the payback period. The business grew in
the late 1970s at the peak of the energy crisis
in the US. Carrier, Chevron and Honeywell are
example of players which have entered the
market. Source HSBC Research and The Climate
Group Delivering Low Carbon Growth A Guide to
Chinas 12th Five Year Plan, MAR11
23
Theme A Lower carbon intensity and green growth
Objectives Government plan Outlook
2. Industry upgrading Improve energy and emission efficiency Technological upgrade via automation and better equipments, more spending on RD both by the government and corporate sector. Speed up consolidation to eliminate industry overcapacity (e.g. coal, cement), cut back on high pollution and energy consuming sectors. Deepen reform of resource pricing and environmental protection charges to establish a resource products pricing mechanism reflecting market supply and demand, resource scarcity and environmental costs. Achieve new energy targets of lower energy consumption and reduced pollutant emissions by 2015 (from 2010). Energy consumption per unit of GDP to fall by 16 CO² emission volume to fall by 17 Non-fossil fuels in primary energy consumption to increase by 11.4 Total discharge of major pollutants fall by 8 Overall, the low-carbon tilt of the 12th FYP will have two major implications More efficient industrial energy use Production growth in energy-intensive industries (e.g. metals, cement and chemicals) are likely to slow as overcapacity is eliminated. Stricter compliance with energy efficiency measures will promote consolidation among leading players in metals (e.g. steel, non-ferrous metals) and the cement sector will benefit the most. Renewable energy sector will exceed government targets By 2015, coal will fall as share of primary energy from 70 to an estimated 63 and the coal industry will also see more consolidation (from 11k enterprises in 2010 to 4k in 2015e). Gas consumption will increase, rising from 4 to 8 by 2015, and will slowly be a viable substitute for coal and oil. Renewable energy (wind, nuclear, solar and biomass) is expected to expand significantly to meet the target of 15 share of primary energy by 2020, from 7 in 2010.
3. Accelerate development of service sectors The government will allow and encourage private sector entry in all service sectors including health care, tourism, utilities, culture and entertainment, and logistics. Aim is to raise the share of services sector to GDP from 45 to 47 by 2015. Consulting company APCO Worldwide identified the following service sectors poised to benefit i) Education (domestic and overseas) ii) Health care (bio-tech, health care system, pharmaceuticals) iii) Technology (RD, Intellectual Property Rights)
Source HSBC Research, Decarbonising Chinas
Growth, MAR11
24
Theme A Appendix I Market mechanisms for
energy efficiency and low-carbon energy
The following market mechanisms are proposed in
the 12th FYP, aimed at complementing existing
regulations and standards directed at its energy
systems and carbon emissions, shifting from a
centrally-driven system to one better shaped by
market forces.
Proposed energy-trading market as an alternative to centrally-set prices for oil, gas and electricity Small changes to align energy and electricity prices are gradually being put in place to improve the efficiency of electricity supply. A proposed price ladder approach to address the demand of electricity consumers under consideration by the NDRC would set consumer prices for different levels of energy consumption, in an effort to regulate residential energy demand and encourage efficiency.
Fiscal measures / subsidies that use taxation and pricing to pursue environmental and energy goals The introduction of fiscal reform measures that use taxation and pricing in pursuit of environmental and energy goals is also set to be gradual. The initial focus is likely to be on increased subsidies and tax breaks for industries meeting energy-intensity targets. Also under consideration are gradual price increases for electricity, natural gas, water and fossil fuels to reflect social and environmental impacts.
Establish Energy Service Companies (ESCOs) to provide energy-efficient services to industries ESCOs use performance-based contracts with client firms to implement energy-efficiency measures, deriving revenue from the resulting cost savings. The ESCO sector is still nascent in China and dominated by a handful of companies that have hitherto been unable to meet the needs of small and medium enterprises (SMEs) in the energy-intensive industries. An ESCO policy was established in APR10, setting tax breaks to encourage growth in the sector.
Sector-specific and economy-wide carbon trading schemes China is currently assessing the relative benefits of sector-specific and economy-wide carbon trading schemes with an eye on EU experience. Carbon trading schemes are expected to be carried out in 3 domestic pilot areas i) Select low carbon pilot regions (there are currently five nationally-recognized, low carbon provinces and eight low carbon cities). Guangdong has already proposed a regional carbon-trading pilot in 11 of its cities ii) Energy-intensive industrial sectors (such as electric power, chemicals and oil) and iii) SOEs. In JUL10, NDRC selected provinces of Guangdong, Liaoning, Hubei, Shaanxi and Yunnan and the cities of Tianjin, Chongqing, Shenzhen, Xiamen, Hangzhou, Nanchang, Guiyang and Baoding as National Low Carbon Economy Pilots.
New energy quota system for energy-intensive industries and power companies alike The quota will be accorded by regions and will require energy intensive industries to acquire a certain percentage of electricity from new-energy sources, as well as power companies to meet a percentage of generation capacity from new energy.
Source HSBC Research and The Climate Group
Delivering Low Carbon Growth A Guide to Chinas
12th Five Year Plan, MAR11
25
Theme B Overseas development and Going out
Objectives Government plan Outlook
1. Encourage and support PRC companies in Going out The government remains committed to helping PRC companies to Go out and Go global by Supporting major PRC enterprises and financial institutions in their international expansion to be multinational. Supporting overseas RD investment. Help promote the international standing of PRC brand and network. Continuing to promote cooperation in energy, mineral resources and agricultural sectors overseas. Improving the facilitation of overseas investment. Safeguard PRC investment overseas. Outward non-bond investment by PRC companies was USD 69 billion in 2011. They were targeted at emerging markets including Asia Pacific (27), Latin America (16), Africa (16) (as well as Australia and Canada) due to concentration in energy and commodity related investments. Future investments will follow government directive targeting commodity, energy and agriculture related investments. Chinas investment in emerging markets should grow steadily. More MAs are expected, and PRC investment will be increasingly welcomed in emerging markets, and depending on political climate, in developed economies.
2. RMB internationalisa-tion The government has committed to expanding the use of RMB in cross-border trade and investment (RMB trade settlement was introduced in JUL09, a trial programme that allows qualified Mainland enterprises to use RMB in overseas direct investments was launched JAN11). Other impetus derived from the 12th FYP that will contribute to RMB development Interest rate liberalisaton Exchange rate reform Convertibility of RMB under capital account (also refer to Theme C, section 2) State Administration of Foreign Exchange (SAFE) Director Yi Gang indicated that the medium term strategy for the globalization of RMB is to achieve capital account convertibility on a progressive basis during the 12th FYP period. SAFE also aims to boost the use of RMB in trade and investment, and further develop its foreign exchange market. Singapore aspires to be a second RMB offshore centre after Hong Kong. PBOC will appoint a PRC bank for RMB clearing in Singapore, allowing the country to have direct access to onshore RMB.
Source HSBC STG Research, MOFOM
26
Theme B Overseas development and Going out
Objectives Government plan Outlook
3. Role of Hong Kong / Taiwan For the first time, the government included a dedicated chapter in the 12th FYP on the functions and position of Hong Kong Consolidate and enhance Hong Kong's position as an international financial, trade and shipping centre. Develop as an offshore RMB business centre and an international asset management centre. Nurture emerging industries and develop the six industries (services, medical services, testing and certification services, environmental industries, innovation and technology, cultural and creative industries) where Hong Kong enjoys clear advantage. Deepen cooperation between Guangdong, Hong Kong and Macau, and promote regional development. Deepen the economic co-operation between Mainland China and Hong Kong through the Closer Economic Partnership Arrangement (CEPA). On Macau Support Macau as a centre for tourism and leisure. On Taiwan and cross-straits economic relations Deepen cross-Straits economic cooperation through the Economic Cooperation Framework Agreement (ECFA). Promote bilateral investment and strengthen cooperation in emerging industries, finance etc. Support the development of the Western Taiwan Straits Economic Zone. Hong Kong Continued support of Hong Kongs positioning as offshore RMB centre, platform for Mainland enterprises Going out. Significant growth of RMB deposits in Hong Kong and appetite for RMB-denominated bonds is indicative of demand and space for RMB product innovation. Peoples Bank of China (PBOC) Shenzhen has issued guidelines on RMB cross-border lending in Qianhai, effective 28DEC12. The new guidelines allow corporations registered in Qianhai to borrow RMB from Hong Kong banks for the purposes of developing Qianhai, with a reported aggregate lending quota of RMB 50 billion (USD 8 billion). Taiwan China Securities Regulatory Commission (CSRC) has announced a series of market entry and capital flow liberalisation policies in JAN13, including Securities JV Allow one full license securities JV with up to 51 Taiwanese ownership in each of Shanghai, Fujian and Shenzhen, with no business nature requirement on the Mainland partner Allow one full license securities JV with up to 49 Taiwanese ownership in each of the (unspecified) pilot financial reform areas, with no minimum ownership and business nature requirement on the Mainland partner Fund management JV Allow Taiwanese institutions to own 50 or more of a fund management company JV in the Mainland RQFII Allow Taiwanese entities to invest up to RMB 100 billion (USD 15.9 billion) in Mainland capital markets under the RQFII scheme.
27
Theme C Structural reforms
Objectives Government plan Outlook
1. State-owned enterprise (SOE) reform Improve income distribution by strengthening the state asset revenue sharing mechanism (likely a reference to increasing dividend payments of the SOEs, and adjusting certain taxation structure). SOEs are implicitly addressed in various themes under different industries such as encouraging PRC companies Going out, consolidation in energy- intensive industries. SOE reform in corporate governance, operations etc. will likely make them larger with greater growth potential in the medium to long-term. Opportunities for advisory services will prevail among SOEs in different industries i.e. MA and consolidation in energy-intensive industries, IPOs domestically and overseas etc. A separate supervisory commission may be established to oversee state-owned financial institutions in the form of a second China Investment Corporation (CIC)-type entity.
2. Financial market reform Deepen the reform of state-controlled financial institutions and improve corporate governance and risk management, establish deposit insurance scheme. Accelerate the development of multi-layer financial market system. Increase the share of direct financing. Actively develop bond market and promote financial derivatives market development. Improve financial control mechanism (in relation to managing liquidity), establish a sound early warning financial risk prevention system, and improve the monetary policy mechanism and environment. Steadily promote interest rate liberalisation. Improve managed floating exchange rate scheme. Expand overseas expansion of RMB and gradually achieve convertibility of RMB under capital account. Improve regulatory supervision of financial sector. Support for Shanghai to be an international financial centre (no further details / changes to existing policies in 12th FYP). As domestic corporates and industries expand in scope and size, they will demand more diverse funding sources and complex products. China's financial system will have to move beyond traditional bank lending to more market-efficient equity / debt capital markets and private sources i.e. private equity. PBOC Governor Zhou Xiaochuan has indicated that Chinas interest rate will gradually be more liberalised for a more effective monetary policy. He envisages a lending environment where the best-run banks receive better interest rate pricing power than less efficient ones. On the regulatory governance front, talk of creating a super-regulator responsible for supervising the entire financial services sector (in particular, the supervisory responsibilities will shift from PBOC to CBRC) has come and gone. It remains unclear if this will be seriously considered under the 12th FYP period. Major state-owned PRC banks are moving to establish 2nd headquarters in Shanghai.
28
Theme D Driving income growth
Objectives Government plan Outlook
1. Stimulate consumption through income growth Double-match income growth i.e. household income growth matching GDP growth, and wage growth matching productivity growth. Achieve a more than 7 growth rate p.a. for household income in the next five years to increase annual urban per capita disposable income towards RMB 26,810 p.a. in 2015 and rural per capita net cash income towards RMB 8,310 p.a. in 2015. Speed up income distribution reform via better wage systems, increasing minimum wages¹ and reform personal income tax system² etc. The government also aims to build 36 million subsidized public housing. McKinsey's forecasts 76 million households in the upper middle class (incomes between RMB100k-200k pa) by 2015. And the number of middle-class households in China could quadruple over the next 15 years, to reach nearly 280 million. Meanwhile, HSBC Research believes The government will shift spending from new construction to education and healthcare. Consumer finance will be the alternative engine to driving domestic consumption and loan growth in the next few years in the form of mortgages, car loans, credit cards and student loans. According to HSBC Research, household savings rate as a percentage of household income (35 and still rising) will fall with rising cost of education and medical care.
2. Establish better social safety net Significantly increase the coverage of social safety net to include both urban and rural residents, mainly pension and health insurance system. Reform the current pension system to establish a basic pension system pooled at the national level, fully fund the individual pension schemes, and make pension portable across provinces. Encourage the development of company annuity schemes and commercial insurance as supplements. 357 million urban population to be covered by basic pension. Ideally, this will drive national disposable income up and savings rate down. As China grows wealthier with an aging population, people will increasingly demand longer-term solutions including pensions, insurance and asset management products. According to market research company RNCOS, Chinas life insurance market is expected to grow at 25 CAGR between 2011 and 2014.
1. Minimum wages differ according to regions,
Shanghai being the highest at RMB 1,120 per
month 2. The current personal tax system is a
9-grade progressive system ranging from 5 to 45
(in excess of RMB 100k). Source HSBC Research
Chinas Consumer Wave, JAN10 RNCOS, China
Insurance Market Sector Analysis, FEB11
29
Theme E Urbanisation and regional development
Objectives Government plan Outlook
1. Accelerate urbanisation and regional development Accelerate urbanisation process and raise the urbanisation ratio by 4 percentage points to 51.5 by 2015. Implement regional development strategy Western region First strategic priority to further develop the region, focusing on Chongqing, Chengdu, Xi'an economic belt and other regions including Tibet, Ningxia, Yunnan. Northeast China Modernise industrial base, focus on development along belt of Liaoning and Shenyang. Central region Improve investment environment to allow for transfer of industries from eastern region. Focus on city clusters including Taiyuan, Wanjiang, Wuhan, Zhongyuan. Eastern region Continue to be the region leading development, focus on technology and innovation and be more internationally competitive. Promote the development of Bohai Rim, Yangtze River Delta and Pearl River Delta. The economic push further inland to Tier-2 and 3 cities has begun, especially in lower-end manufacturing that is driven by rising costs and wages in coastal areas. Other factors include aggressive courting by inland provinces to attract investment. Analysts expect the government to promote the development of industries close to the natural resources in inland areas through infrastructure and transportation development. Transportation planning (railways and high-speeds trains) may give a relatively accurate indication of which regions / counties will develop and urbanise more quickly.
2. Improve agriculture / rural infrastructure and rural income Accelerate agricultural modernisation and ensure national food security through improving the agricultural production capacity, risk management and market competitiveness. Increase farmers income by supporting efforts to improve income-generating capacity and vocational skills of farmers, increase rural income channels. Improve rural productivity and environment via better rural development planning and rural infrastructure, especially the transportation of agricultural products. Improve rural subsidies system and education allowances. Develop new types of rural financial institutions. Agricultural and rural infrastructure will continue to receive major support in investment and funding. Promoting access to financing in rural areas remains a key priority. PRC banks are required to meet quotas to build new rural banks which will increase competition in rural banking. According to Agricultural Bank of China Chairman Xiang Junbo, government subsidies and investment in rural areas totalled about RMB 1 trillion (or 2.5 of GDP) in 2010 alone, which is expected to increase in 12th FYP period.
30
Summary of 11th FYP Achievements vs 12th FYP
Targets
Indicators 11th FYP (2006-10) Target 11th FYP (2006-10) Actual 2010 Actual 12th FYP (2011-15) Target 2015 Target
Economic      
GDP (RMB trn) 7.5 pa 11.2 pa 39.8 7 pa 55.8
Service sectors as of GDP 3 pcpt 2.5 pcpt 43 4 pcpt 47
Urbanisation ratio () 4 pcpt 4.5 pcpt 47.5 4 pcpt 51.5
Science and education          
RD spending as of GDP 0.7 pcpt 0.5 pcpt 1.8 0.4 pcpt 2.2
Emerging Strategic Industries (ESIs)
ESI sectors as of GDP () na na 3 8 8
Resources and environment          
Arable land (bn hectares) 120 121.2 121.2 121.2 121.2
Non-fossil fuel as of primary energy consumption n.a n.a 8.3 3.1 pcpt 11.4
Reduction of energy consumption per unit GDP () 20 19.1 na 16 na
Main pollutant emission reduction () - sulphur dioxide 10 14.3 na 8 na
Main pollutant emission reduction () - chemical oxygen demand 10 12.5 na 8 na
Forest coverage ratio () 1.8 pcpt 2.2 pcpt 20.4 1.3 pcpt 21.7
Source HSBC Global Research
31
Summary of 11th FYP achievements vs 12th FYP
Targets - continued
Indicators 11th FYP (2006-10) Target 11th FYP (2006-10) Actual 2010 Actual 12th FYP (2011-15) Target 2015 Target
People's livelihood    
Urban disposable income (RMB) 5 pa 9.7 pa 19,109 7 pa gt 26,810
Rural net cash income (RMB) 5 pa 8.9 pa 5,919 7 pa gt 8,310
Urban residents covered by basic pension scheme (m) 223 or 5.1 pa 257 or 8.1 pa 257 100 357
Urban public housing (m units) na na 5.9 36 41.9
Total population (m) 1,360 1,341 1,341 lt 0.7 pa lt 1,390
Source HSBC Global Research
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