Transcript The Latest Business Trends in China 8 April 2013 PUBLIC

The Latest Business Trends in China
By: Montgomery Ho, Head of Commercial Banking, HSBC China
8 April 2013
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China in a nutshell
1.3 Billion People
2
nd
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)
2
Largest Foreign Direct
Investment (FDI) recipient in 2012
nd
2
Outward Direct Investment
(ODI) source in 2011*
nd
* 2nd ODI source when combined with Hong Kong
Source: CIA Factbook; National Statistic Bureau;
International Monetary Fund; UNCTAD
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China’s Economic Growth
15
China GDP growth breakdown
%
Pcpt
13
11
9
7
5
3
1
-1
-3
-5
2005
2006
2007
Consumption
2008
2009
Gross Capital Formation
2010
2011
2012
Net Exports
Source: CEIC China Premium Database
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Looking ahead - China’s 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 Overseas development and “Going out”
E Urbanisation and regional development
1. Accelerate urbanisation and
regional development
2. Improve agriculture / rural
infrastructure and rural income
D
Transform China’s economic
growth model to focus on quality,
balanced and sustainable growth
Drive domestic demand
C
1. Stimulate consumption through
income growth
2. Establish better social safety net
Source : China Parliament, National People’s Congress
1. Encourage and support mainland
Chinese companies in “Going out”
2. Renminbi (RMB) internationalisation
3. Role of Hong Kong / Taiwan
Structural reforms
1. State-owned enterprise (SOE)
reform
2. Financial market reform
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China’s Top 15 Foreign Direct Investment (FDI)
USD million
Ranking
Foreign Direct Investment into China
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
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The Regional Economic Hubs
Pearl River
Delta
Regions
Population
2011 million
GDP per capita
2011 (USD)
Main
Economic
Themes
Source: National Bureau of Statistics of China
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Yangtze River
Delta
Bohai
Rim
Western
China
9 cities in
Guangdong
Including
Shanghai
Including
Beijing &
Tianjin
Including
Chongqing /
Chengdu /
Xi'an
105
157
246
362
7,524
9,515
7,216
4,111
Traditional
manufacturing
Heavy
industrial
Petrochemical,
automobiles,
steel
Heavy
manufacturing
Economic
integration
with Hong
Kong;
CEPA
Shanghai:
An int'l
financial &
shipping
centre by
2020
Beijing :
China's
domestic
financial
centre
Mining
Progressing
up the value
chain to cover
R&D, 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
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China’s Top 15 Outward Direct Investment (ODI)
USD million
Ranking
ODI from China by
Countries
Overseas Direct Investment from China
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
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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
85
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North America
US
22
Europe
22
Africa
15
South America
14
Oceana
Chosen for its lower trade barriers, investment
incentive and favorable political environment
Chosen for its tremendous market potential,
advanced technologies and strong R&D
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Source: China Enterprise “Going out” Survey (4Q2012) with N=250 companies interviewed
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Whilst low price is main advantage for overseas competition, economic
slowdown becomes the major concern for carrying out expansion plans
Strengths for overseas competition
Top 3 challenges for overseas expansion
%
%
Low price
Advanced technology/
production line
Strong cash flow
50
40
40
Fluctuation of local
currency’s exchange rate
Slow economic
development
Intense competition from
local players
48
46
42
Major strengths and challenges for expanding overseas business in US
Source: China Enterprise “Going out” Survey (4Q2012) with N=250 companies interviewed
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9
Most companies appear to be optimistic about the growth on revenue
from their US offices in the next three to five years
18
20% and above
15%-20%
10%-15%
5%-10%
Below 5%
11
11
2
Increasing contribution
from US offices to the
revenue
9
4
18
18
29
51
Expected contribution in next 3-5 years
Current contribution
Source: China Enterprise “Going out” Survey (4Q2012) with N=45 companies with branches in US
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China’s Currency Renminbi (RMB) Internationalisation – 3-phase Path
Trade and investment legs support each other
1
A global trade currency
Trade helps establish
pools of RMB liquidity
worldwide
2
A global
investment
currency
Investment and savings
options make RMB useful
and attractive
3
A global reserve
currency
Reserve use signals
‘arrival’ of RMB as a world
currency
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
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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
GAIN
HEDGE
Payables and
Receivables
Asset and Liabilities
DIVERSIFY
Customer Base
Currency portfolio
Risk Exposure
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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
1. Trade payments for goods
1. Trade payments for goods
Mainland enterprises with import and export
qualifications may import goods in RMB
Mainland enterprises with import and export
qualifications may export goods in RMB
2. Trade payments for services
2. Trade payments for services
Allowed (contract and invoice in RMB required)
Allowed (contract and invoice in RMB required)
3. Intercompany loans
3. Intercompany loans
Allowed subject to SAFE filing
Mainland China
RMB Area
4. Additional Capital Infusion
Case-by-case approval by PBOC/SAFE
4. Capital investment overseas (ODI)
Allowed subject to MOFCOM approval
Allowed subject to MOFCOM approval
5. Dividend Payments / Repatriation of Profit
5. Foreign Direct Investment (FDI)
Allowed subject to MOFCOM approval
Allowed
6. Expatriates Salaries
6. Expatriates Salaries
Allowed
Not Allowed
Overseas-to-overseas RMB transactions are not regulated by People’s Bank of China (PBOC),
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but may be subject to the local regulations elsewhere
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Contacts at HSBC China
Calvin MAN
Head of International Business, Commercial Banking, HSBC Bank
(China) Company Limited
Email: [email protected]
Jason HUCK
SVP & Head of North America & LATAM, Commercial Banking,
HSBC Bank (China) Company Limited
Email: [email protected]
International Banking Centre
Email: [email protected]
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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.
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Questions?
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Appendices
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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

Moody’s 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.
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IFC Shanghai, HSBC China Headquarters since April 2011
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HSBC China – Largest network among foreign banks
 HSBC China has 144
outlets across 45 cities in 21 provinces /
Harbin
municipalities
Bohai Rim and Northeast China
Yangtze River Delta
Pearl River Delta and South China
Central Region of China
West China
Shenyang
Beijing
Dalian
Tangshan
Tianjin
Qingdao
Jinan
Taiyuan
Xi’an
Total branch numbers in China as at end-FEB13
Wuhan
Total branch
numbers
Chengdu
180
150
120
90
60
30
0
144
Changshu
Kunshan
Hangzhou
Shanghai
Ningbo
Chongqing
115
99
53
46
Kunming
HSBC
Zhangjiagang
Nanjing
Wuxi
Zhengzhou
Suzhou
Hefei
BEA
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SCB
Citi
HACN
Panyu
Changsha
Shaoguan
Xiamen
Qingyuan
Heyuan
Guangzhou
Chaozhou
Foshan
Shantou
Huizhou
Panyu
Nanning
Shenzhen
Zhaoqing
Dongguan
Jiangmen
Zhongshan Zhuhai
Yangjiang
Maoming
Zhanjiang
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Awards for Excellence in China
Best Risk Management Bank
in China 2010-2012
Best Foreign Bank in China
2001-2006, 2008-2011
Best Cash Management Bank
in China 2010-2012
Best Foreign Retail Bank in
China 2009-2013
Best Trade Finance Provider
in China 2011
Best Sub Custodian in China
2012
Best Domestic Cash
Management Bank in China
2011
Best Foreign Private Bank in
China 2011-2012
Rated China No. 1 Leading
Clients Top-rated Agent Bank
2009-2012
Best International Trade Bank
in China 2008-2009, 2011
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China’s 7 Key Industries Under the 12th Five-Year Plan
Emerging
Strategic
Initiatives
Energy-saving
and
environmental
protection
Main policy content
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 R&D 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
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Theme A: Lower carbon intensity and green growth
Objectives
1.
Cultivate
the
Emerging
Strategic
Industries
(ESIs)
Government plan

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:
1. Energy-saving and environmental protection
2. Next generation information technology
3. Bio-technology
4. High-end manufacturing
5. New energy
6. New materials
7. 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:
i. Make funding including bank credit and land more
easily accessible to investment in these industries.
ii. Increase government spending in these areas, via
R&D spending, providing necessary infrastructure
support, and providing tax incentives.
iii. Provide incentives by changing the price structure
and setting industrial standards and quotas to
direct development.
Outlook
 HSBC forecasts that the global climate business market
could be worth USD 2 trillion by 2020.
 Based on government’s 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 crisisPUBLIC
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 China’s 12 th Five Year Plan”, MAR11
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Theme A: Lower carbon intensity and green growth
Objectives
2. Industry
upgrading;
Improve energy
and emission
efficiency
Government plan
 Technological upgrade via automation and better
equipments, more spending on R&D 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).
Outlook

i) 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.
i) 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.
- 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%
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.
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Source: HSBC Research, “Decarbonising China’s Growth”, MAR11
Overall, the low-carbon tilt of the 12th FYP will have two
major implications:
-
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.
 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 (R&D,
Intellectual Property Rights)
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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) Energyintensive 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’.
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Source: HSBC Research and The Climate Group “Delivering Low Carbon Growth: A Guide to China’s 12 th Five Year Plan, MAR11
Theme B: Overseas development and “Going out”
Objectives
1. Encourage
and support
PRC
companies in
“Going out”
Government plan
Outlook
 The government remains committed to helping
PRC companies to “Go out” and “Go global” by:

Outward non-bond investment by PRC companies was
USD 69 billion in 2011.
- Supporting major PRC enterprises and financial
institutions in their international expansion to be
multinational.

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. China’s investment in emerging markets
should grow steadily.

More M&As are expected, and PRC investment will be
increasingly welcomed in emerging markets, and
depending on political climate, in developed economies.
- Supporting overseas R&D 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.
2. RMB
internationalis
a-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
 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.
- Convertibility of RMB under capital account
(also refer to Theme C, section 2)
Source: HSBC STG Research, MOFOM
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Theme B: Overseas development and “Going out”
Objectives
3. Role
of Hong
Kong /
Taiwan
Government plan
Outlook
 For the first time, the government included a
dedicated chapter in the 12th FYP on the functions
and position of Hong Kong:
Hong Kong

Continued support of Hong Kong’s positioning as offshore RMB
centre, platform for Mainland enterprises “Going out”.
- 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.
Significant growth of RMB deposits in Hong Kong and appetite
for RMB-denominated bonds is indicative of demand and space
for RMB product innovation.

- 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.
People’s 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
- Deepen cooperation between Guangdong, Hong
Kong and Macau, and promote regional
development.

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;
-
- Deepen cross-Straits economic cooperation
through the Economic Cooperation Framework
Agreement (ECFA).
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;
-
- Promote bilateral investment and strengthen
cooperation in emerging industries, finance etc.
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
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scheme.
- 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:
- Support the development of the Western TaiwanPUBLIC
Straits Economic Zone.
Theme C: Structural reforms
Objectives
1. Stateowned
enterprise
(SOE)
reform
2.
Financial
market
reform


Government plan
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 energyintensive industries.
 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.


Opportunities for advisory services will prevail among
SOEs in different industries i.e. M&A 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.

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 marketefficient equity / debt capital markets and private sources
i.e. private equity.

PBOC Governor Zhou Xiaochuan has indicated that
China’s 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.
 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
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in 12th FYP).
Outlook
SOE reform in corporate governance, operations etc. will
likely make them larger with greater growth potential in the
medium to long-term.
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Theme D: Driving income growth
Objectives
1.
Stimulate
consumpti
on through
income
growth
Government plan
 “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.
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:
-
 Speed up income distribution reform via better wage
systems, increasing minimum wages¹ and reform
personal income tax system² etc.
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.

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, China’s
life insurance market is expected to grow at 25% CAGR
between 2011 and 2014.
 The government also aims to build 36 million
subsidized public housing.
2.
Establish
better
social
safety net
Outlook
 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.
1. Minimum wages differ according to regions, Shanghai being the highest at RMB 1,120 per month;
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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 “China’s Consumer Wave”, JAN10; RNCOS, “China Insurance Market Sector Analysis”, FEB11
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Theme E: Urbanisation and regional development
Objectives
1. Accelerate
urbanisation
and regional
development
Government plan
 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.
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.
Outlook
 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.

 Increase farmers’ income by supporting efforts to improve
income-generating capacity and vocational skills of farmers,
increase rural income channels.
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.

 Improve rural productivity and environment via better rural
development planning and rural infrastructure, especially the
transportation of agricultural products.
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.
 Improve rural subsidies system and education allowances.
 Develop new types of rural financial institutions.
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Summary of 11th FYP Achievements vs 12th FYP Targets
11th FYP
(2006-10)
Target
11th FYP
(2006-10)
Actual
2010
Actual
12th FYP
(2011-15)
Target
2015
Target
+ 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
+ 0.7 pcpt
+ 0.5 pcpt
1.8
+ 0.4 pcpt
2.2
na
na
~3
8
8
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
+ 1.8 pcpt
+ 2.2 pcpt
20.4
+ 1.3 pcpt
21.7
Indicators
Economic
GDP (RMB trn)
Science and education
R&D spending as % of GDP
Emerging Strategic Industries (ESIs)
ESI sectors as % of GDP (%)
Resources and environment
Forest coverage ratio (%)
Source: HSBC Global Research
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Summary of 11th FYP achievements vs 12th FYP Targets - continued
11th FYP
(2006-10)
Target
11th FYP
(2006-10)
Actual
2010
Actual
12th FYP
(2011-15)
Target
2015
Target
Urban disposable income (RMB)
+ 5% pa
+ 9.7% pa
19,109
+ 7% pa
> 26,810
Rural net cash income (RMB)
+ 5% pa
+ 8.9% pa
5,919
+ 7% pa
> 8,310
Urban residents covered by basic pension scheme (m)
223 or +
5.1% pa
257 or +
8.1% pa
257
+100
357
na
na
5.9
+36
41.9
1,360
1,341
1,341
< 0.7% pa
< 1,390
Indicators
People's livelihood
Urban public housing (m units)
Total population (m)
Source: HSBC Global Research
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