Evolution in China s economy, regions, and politics

IHS ECONOMICS & COUNTRY RISK Presentation IHS Global Economics & Country Risk Conference Evolution in China s economy, regions, and politics 11 November 2014 ihs.com Todd C. Lee, Senior Director, IHS, +1 781 301 9026, todd.lee@ihs.com Brian Jackson, Senior Economist, IHS, +86 10 6533 4567, brian.jackson@ihs.com Chris Christopher, Director, IHS, +1 781 301 9113, chris.christopher@ihs.com David Yang, Principal Analyst, IHS, +1 703 236 2403, david.yang@ihs.com

Agenda Evolution in China s Economy, Regions, and Politics / November 2014 Introduction Economic evolution Regional development Political outlook Todd C. Lee, Senior Director, Global Economics Brian Jackson, Senior Economist, Asia Economics Chris Christopher, Director, Global Consumer Service David Yang, Principal Analyst, Asia Country Risk Q&A 2

Introduction Todd C. Lee 3

China s economic development since economic reform began 16 16000 14 14000 12 12000 10 10000 8 8000 6 6000 4 4000 2 2000 0 1980 1990 2000 2010 0 Real per capita GDP growth (annual % ch, left) Real per capita GDP level (1990 PPP$, right) Source: Maddison (2013)

China s economic development during its march to modernity in 30-year spans 1830-1860 1860-1890 1890-1920 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0 1000 1.0 800 600 0.0 0 10 20 30 400-0.2 0 10 20 30 Opium War (Hong Kong ceded to Britain) 200-0.6 0 0.8 0.6 0.4 0.2-0.4-0.8-1.0 Taiping Rebellion 1000 1.0 800 600 400 200 0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0 0 10 20 30 1 st Sino-Japanese War (Taiwan ceded to Japan) Qing Dynasty ends Warlord Era 1000 800 600 400 200 0 1920-1950 1950-1980 1980-2010 20 1600 20 1600 20 20000 15 1400 15 1400 15 10 1200 10 1200 10 15000 5 1000 5 1000 5 0-5 0 10 20 30 800 600 0-5 0 10 20 30 800 600 0-5 0 10 20 30 10000-10 400-10 400-10 5000-15 200-15 200-15 -20 0-20 0-20 0 Warlord Era Nanjing Gov. 2 nd Sino-Japanese War (WWII) Birth of PRC Real per capita GDP growth (% ch, left axis) Great Leap Forward Culture Revolution Market Reform Per capita GDP level (1990 PPP USD, right axis) Source: Maddison (2013) 5

Economic evolution Brian Jackson 6

Economic restructuring 7

Over three decades China experienced radical changes in the composition of production and income 8

Massive changes in China s domestic economy mirrored by important shifts globally 9

Ownership and efficiency 10

Changing ownership and incentives in the economy played a key role in the economic boom 11

but the shift towards a private economy is not strictly one way 12

SOEs remain major players in some sectors, despite clear inefficiencies 13

Economic reform and growth 14

Reform: The speed we re used to 1978 Third Plenum 1993 Third Plenum Reform Opening for foreign investment projects Duel Track Currency Exchange Town-Village Enterprise Sino-Foreign Equity Joint Ventures Law Special Economic Zones: Shantou, Shenzhen, Xiamen, Zhuhai Household Responsibility Reform (rural farm reform) 14 coastal cities and three provinces designated as open to foreign investment General Principles of Civil Law: legal support for private market activity Exchange rate unification and reform Approved FDI permitted nationwide Fiscal reform Central bank reform Industrial state owned enterprise reform Price Law - price reform WTO entry Year 1978 1979 1980 1981 1984 1986 1994 1995 1995 1995 1997 2001 15

Reform: The speed we re seeing today 2013 Third Plenum Reform Finance Shanghai FTZ foreign deposit interest rate liberalization Shanghai FTZ cross-border Chinese Yuan (CNY) payment services Private banking trial Deposit insurance Interest rate liberalization Monopolies and market competition National and regional SOE reform plans issued Simplified business registration and financial barriers to entrepreneurship Red tape cutting 500+ central approvals canceled or devolved Increasing competition in service sectors (bank cards, express delivery, hospitals ) Foreign investment SH FTZ negative investment list revisions 12 new FTZ feasibility studies launched, 3 approved, more in pipeline US-China Bilateral Investment Treaty negotiations begin Provinces instructed to prepare negative investment lists Government, society and the environment Budget Law revision Environmental Law revision Hukou reform plan Year 2014 2014 2014 2015(F) 2016-2017(F) 2014 2014 2013-2014- Annual review 2014-2015 2014 2014 2014 2014 2014 16

Outlook and challenges Near-medium term challenges are numerous and substantial, but not insurmountable. Setbacks have occurred and will occur in some areas. Much implementation remains to be seen but policy momentum is consistent with a rigorous decade-long reform agenda. Indicator 1984 2013 2014 2043 GDP growth (average) 10.1% 5.4% Services/GDP 25% 46% 60% GDP per capita (USD) 300 6,700 65,000 Urban population (share) 23% 53.7% 75% Exports (share of world) 1% 12% 14% Imports (share of world) 1% 10% 14% 17

Regional development Chris Christopher 18

China: Regional classification map Northeast Central Coast West 19

Coastal region consumer spending fuels global consumption Share of the China regional consumer spending in global consumption 25 20 15 10 5 0 2000 2005 2010 2015 2020 2025 2030 Source: NBS, IHS Coast Central Northeast West National 20

Sources of growth of global GDP and consumer spending - production and consumption balancing (Percent of world GDP and consumption, US dollars) GDP Consumer Spending 2004 2014 2024 2004 2014 2024 U.S. 28 22 19 33 27 23 India 2 3 6 2 3 6 China 4 14 22 3 8 15 Coast 3 8 12 2 5 8 Central 1 4 6 1 2 4 Northeast 1 2 3 0 1 2 West 0 1 2 0 1 2 Western Europe 31 23 18 30 24 19 21

Coastal provinces growth slowing down, inner regions development picking up Real GDP GDP per per capita capita index (National average = = 1.0) 1.0) 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Coast Central Northeast West Source: NBS, IHS 22

China s regions over the 1980-2013 period Real GDP per capita growth vs Real GDP per capita Real GDP per capita growth, CAGR (Percent) 20 16 12 8 4 0 Source: NBS, IHS 0 5 10 15 20 25 30 35 40 45 50 55 Real GDP Per capita (Thousand 2000 Yuan) 1980, 1980-1989 1990, 1990-1999 2000, 2000-09 2007, 2007-13 23

China s population by region Total population (1996) Total population (2013) 14.6% 14.2% 12.7% 37.6% 12.2% 41.5% 35.2% 32.1% Source: NBS, IHS Coast Central Northeast West Coast Central Northeast West Source: NBS, IHS 24

China s GDP by region Real GDP (1996) Real GDP (2013) 8.6% 7.6% 10.3% 10.6% 24.5% 56.6% 24.1% 57.7% Source: NBS, IHS Coast Central Northeast West Source: NBS, IHS Coast Central Northeast West 25

China s private consumption by region Real private consumption (1996) Real private consumption (2013) 10.7% 10.7% 9.4% 9.0% 27.9% 50.7% 24.6% 57.0% Source: NBS, IHS Coast Central Northeast West Source: NBS, IHS Coast Central Northeast West 26

Coastal region no longer leads growth, the Western region has the most dynamic consumer markets Real GDP per capita, CAGR (percent) GDP Real GDP per capita per capita, (Thousand compound yen) annual growth rate 16 14 12 10 8 6 4 2 Real consumption per capita, CAGR GDP Real consumption GDP per capita per capita, (Thousand per compound capita, yen) compound annual growth annual rate 16 14 12 10 8 6 4 2 0 1995-99 2000-04 2005-09 2010-14 2015-20 0 1995-99 2000-04 2005-09 2010-14 2015-20 Source: NBS, IHS Coast Central Northeast West National Source: NBS, IHS Coast Central Northeast West National 27

Urban population central region growing faster Urban population (millions) 450 400 350 300 250 200 150 100 50 0 2005 2010 2015 2020 2025 2030 Coast Central Northeast West Source: NBS, IHS Urbanization rate rate (percent) 80 70 60 50 40 30 20 2005 2010 2015 2020 2025 2030 Coast Central Northeast West National Source: NBS, IHS 28

Over three decades, China experienced radical changes in the composition of income Rising per per capita capita income income and inequality and inequality Nominal USD 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500-1978 1983 1988 1993 1998 2003 2008 2013 Source: NBS, IHS Chen, Jiandong (2010), IHS Rural income Urban income 29

Consumer spending to GDP is picking up across all regions Private consumption to GDP to GDP (percent) (percent) 60 55 50 45 40 35 30 25 20 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 Source: NBS, IHS Coast Central Northeast West National 30

Coastal regions still on top in terms of consumption per capita levels Real Consumption private consumption per capita per (Thousand capita (Thousand 2000 Yuan) 2000 Yuan) 20 16 12 8 4 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: NBS, IHS Coast Central Northeast West National 31

Political outlook David Yang 32

Overview: Domestic politics Pres. Xi Jinping has achieved high centralization of power Legal reforms emphasized at recent 4 th Plenum Administrative reforms to reduce local gov t interference But local leaders have other levers to indirectly influence judges Anti-corruption campaign still ongoing Instrument to remove obstacles to further economic reforms? 33

Overview: External relations High-level dialogues with Japan resumed after 4-yr gap Military exchanges with Vietnam resumed after May standoff Current One Belt, One Road campaign - response to U.S. pivot? 34

The anti-corruption campaign: Targeting both Tigers & Flies Current anti-corruption drive unprecedented in reach Former Politburo Standing Committee member Zhou Yongkang Former Central Military Commission Deputy Chair Xu Caihou Number of senior officials censured in the first 20 months of Xi s tenure more than the previous five years combined Figure 1: Number of officials formally investigated for corruption 60000 50000 40000 30000 20000 30 25 20 15 10 10000 5 0 2003 2005 2007 2009 2011 2013 Total Provincial/Ministerial level (RHS) 0 Notes: 2014 based on reports through August 2014. Source: IHS 35

The anti-corruption campaign: Effect on businesses Some evidence that intensity of crackdown negatively correlated with GDP growth & FDI at provincial level Crackdown has slowed project approvals Reduced flow of funds has depressed real estate prices Figure 2: GDP growth vs. investigation rate by province 2014 Q1 GDP growth rate Source: IHS 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 10 20 30 40 50 60 Officials investigated per million IHS expects negative impact of the campaign to be only temporary 36

The anti-corruption campaign: Outlook Current campaign will continue until at least 2017 Intensity may slacken over the next 3 years We do not expect the current campaign to significantly reduce corruption risks beyond the next three years Xi s position will be unassailable after the next Party Congress 37

The anti-monopoly campaign: Selective enforcement against MNCs? Multiple sectors affected since 2013 Jan. 2013: Samsung and 5 other LCD makers fined $57M Aug. 2013: 5 foreign & 1 local baby formula makers fined $110M Nov. 2013: Qualcomm investigation began, w/ potential $1B fine May 2014: 5 foreign optometric makers fined $3.1M Jul. 2014: Microsoft offices raided in anti-trust probe Aug. 2014: Audi, Chrysler, Mercedes-Benz & Toyota investigated 38

The anti-monopoly campaign: Selective enforcement against MNCs? Some domestic firms have been investigated Luxury distillers Maotai & Wuliangye Jewelry retailers such as Laofengxiang China Unicom & China Telecom (ongoing since 2011) Automaker FAW Group (ongoing since 2012) Major SOEs more likely to avoid fines through negotiation Similar enforcement bias in U.S. Sherman Act cases? 39

The anti-monopoly campaign: Outlook Cases against foreign firms do not always benefit domestic producers who compete on price Sectoral struggles may be more important (e.g. insurers vs. auto-parts makers) Gov t more sensitive to perceptions of selective enforcement MNCs that sell directly to consumers remain vulnerable LT 40

The Occupy Central protests: Key issues Basic framework laid down by PRC National People s Congress on 31 August: HKSAR Chief Executive to be elected by universal suffrage in 2017 2 3 candidates to be nominated by pro-beijing nominating committee Opposition Pan-Democrats demand direct nominations But nominating committee is stipulated under Basic Law NPC framework must be adopted by HK Legislative Council 41

The Occupy Central protests: Key players The protests involve a range of groups, united in their dissatisfaction with the NPC framework, but unclear on specific demands: Student groups (e.g. Hong Kong Federation of Students, Scholarism) form the core Opposition parties have not played a leadership role Labor union participation is minimal A number of fringe groups are likely to be more militant 42

The Occupy Central protests: Key players Student groups such as the Hong Kong Federation of Students & Scholarism form the core of the protests Opposition parties support the protests, but have not played a leadership role The participation of labour unions has been minimal A number of fringe groups are likely to be more militant Groups are united in their dissatisfaction with the NPC framework, but unclear on their specific demands 43

The Occupy Central protests: Locations and numbers Protest sites in Hong Kong November 2014 Hong Kong & Vicinity Number of Occupy protesters as of late October Admiralty/Central: ~4,000; ~2,000 tents Mongkok: ~2,800; 100 tents Source: AFP Causeway Bay: 200; 37 tents 44

The Occupy Central protests: Prospects for resolution Direct Chinese intervention is unlikely No compromise is likely on Beijing s basic framework Economic impact of the protests will be relatively minor the HK gov t can afford to be patient No clear consensus among protesters, a resolution will likely have to be brokered by opposition party leaders Some police coercion may be needed to remove hold-outs 45

Appendix Additional slides on China regional development 46

The long-term trend in world trade is expected to flatten World imports as a percent of GDP 40 35 30 Percent 25 20 15 10 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024

Sources of growth of global GDP and consumer spending - production and consumption balancing (Percent of world GDP and consumption, US dollars) GDP Consumer Spending 2004 2014 2024 2004 2014 2024 North America 33 26 23 37 32 27 U.S. 28 22 19 33 27 23 Asia-Pacific 24 31 39 22 26 35 Japan 11 6 4 11 7 5 China 4 14 22 3 8 15 India 2 3 6 2 3 6 Western Europe 31 23 18 30 24 19 Emerging Europe 5 7 8 5 7 7 Latin America 3 6 6 3 7 7 ME & Africa 4 7 8 3 4 5 48

Lower wages give Vietnam a cost advantage Average annual manufacturing wages, USD 12,000 10,000 8,000 6,000 4,000 2,000 0 Source: General Statistics Office, Vietnam, China s NBS Note: China data refers to urban manufacturing wages, VNM data is manufacturing wages in state sector

Province mapping classification coast & central Region Province 2013 Real GDP per capita Population (2000 Yuan, 1000s) (millions) Real GDP/pop 2008-2013 CAGR Beijing 55.6 21.2 8.8% Tianjin 66.9 14.8 15.3% Shanghai 72.1 24.2 8.3% Jiangsu 49.7 79.7 11.1% Zhejiang 45.0 55.2 9.2% Coast Guangdong 43.0 106.9 9.7% Liaoning 45.6 44.1 11.5% Hebei 27.0 73.6 10.3% Shandong 40.0 97.7 10.9% Fujian 43.7 37.9 12.1% Hainan 22.9 9.0 11.7% Chongqing 26.7 29.8 14.8% Jiangxi 19.4 45.4 12.1% Hunan 23.3 67.2 12.4% Central Hubei 31.8 58.2 12.6% Sichuan 21.8 81.4 13.4% Anhui 21.8 60.5 12.7% Henan 22.8 94.5 10.7% 50

Province mapping classification northeast & west Region Province 2013 Real GDP per capita Population (2000 Yuan, 1000s) (millions) Real GDP/pop 2008-2013 CAGR Heilongjiang 32.7 38.5 10.8% Jilin 30.1 27.6 12.2% Northeast Inner Mongolia 38.2 25.1 13.3% Shanxi 18.8 36.4 10.2% Shaanxi 21.1 37.8 13.2% Ningxia 16.9 6.6 11.7% Tibet 17.0 3.1 12.3% Qinghai 20.4 5.8 12.4% West Xinjiang 22.3 22.7 10.7% Gansu 15.0 25.9 11.5% Yunnan 16.2 47.1 12.6% Guizhou 8.1 34.7 13.0% Guangxi 19.1 47.4 12.4% 51

Chinese government subsidized inner-land provinces economic growth Government spending to GDP to GDP (percent) (percent) 25 20 15 10 5 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: NBS, IHS Coast Central Northeast West National 52

Foreign investment drove coastal regions economic growth Foreign direct investment to GDP to GDP (percent) share (percent) 12 10 8 6 4 2 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: NBS, IHS Coast Central 53

Regions GDP growth and GDP per capita - Legend Region Province Symbol Region Province Symbol Beijing Heilongjiang Coast Tianjin Jilin Shanghai Northeast Inner Mongolia Jiangsu Zhejiang Guangdong Liaoning Hebei Shandong Fujian Hainan Chongqing Jiangxi Hunan Shanxi Shaanxi Ningxia Tibet Qinghai Hubei West Xinjiang Central Sichuan Gansu Anhui Henan Yunnan Guizhou Guangxi 54

China s regions over the 1980-89 period Real GDP per capita growth vs Real GDP per capita 20 Real GDP per capita growth, CAGR 1980-89 (Percent) 16 12 8 4 0 0 5 10 15 20 25 30 35 40 45 50 55 1980 Real GDP Per capita (Thousand 2000 Yuan) Source: NBS, IHS Coast Central Northeast West 56

China s regions over the 1990-99 period Real GDP per capita growth vs Real GDP per capita 20 Real GDP per capita growth, CAGR 1990-99 (Percent) 16 12 8 4 0 0 5 10 15 20 25 30 35 40 45 50 55 1990 Real GDP Per capita (Thousand 2000 Yuan) Source: NBS, IHS Coast Central Northeast West 57

China s regions over the 2000-09 period Real GDP per capita growth vs Real GDP per capita 20 Real GDP per capita growth, CAGR 2000-09 (Percent) 16 12 8 4 0 0 5 10 15 20 25 30 35 40 45 50 55 2000 Real GDP Per capita (Thousand 2000 Yuan) Source: NBS, IHS Coast Central Northeast West 58

China s regions over the 2007-13 period Real GDP per capita growth vs Real GDP per capita 20 Real GDP per capita growth, CAGR 2007-13 (Percent) 16 12 8 4 0 0 5 10 15 20 25 30 35 40 45 50 55 2007 Real GDP Per capita (Thousand 2000 Yuan) Source: NBS, IHS Coast Central Northeast West 59

China s regions over the 1980-2013 period Real GDP growth vs Real GDP per capita Real GDP growth, CAGR 1980-89 (Percent) 20 16 12 8 4 0 0 5 10 15 20 25 30 35 40 45 50 55 Source: NBS, IHS 1980 Real GDP Per capita (Thousand 2000 Yuan) 1980, 1980-1989 1990, 1990-1999 2000, 2000-09 2007, 2007-13 60

China s regions over the 1980-89 period Real GDP growth vs Real GDP per capita Real GDP growth, CAGR 1980-89 (Percent) 20 16 12 8 4 0 0 5 10 15 20 25 30 35 40 45 50 55 1980 Real GDP Per capita (Thousand 2000 Yuan) Source: NBS, IHS Coast Central Northeast West 61

China s regions over the 1990-99 period Real GDP growth vs Real GDP per capita Real GDP growth, CAGR 1990-99 (Percent) 20 16 12 8 4 0 0 5 10 15 20 25 30 35 40 45 50 55 1990 Real GDP Per capita (Thousand 2000 Yuan) Source: NBS, IHS Coast Central Northeast West 62

China s regions over the 2000-09 period Real GDP growth and Real GDP per capita Real GDP growth, CAGR 2000-09 (Percent) 20 16 12 8 4 0 0 5 10 15 20 25 30 35 40 45 50 55 2000 Real GDP Per capita (Thousand 2000 Yuan) Source: NBS, IHS Coast Central Northeast West 63

China s regions over the 2007-13 period Real GDP growth and Real GDP per capita Real GDP growth, CAGR 2007-13 (Percent) 20 16 12 8 4 0 0 5 10 15 20 25 30 35 40 45 50 55 2007 Real GDP Per capita (Thousand 2000 Yuan) Source: NBS, IHS Coast Central Northeast West 64

Regional growth vs. GDP per capita level Real GDP per capita growth and Real GDP per capita 14 Real GDP growth, CAGR (Percent) 13 12 11 10 9 8 7 6 0 7 14 21 28 Real GDP Per capita (Thousand 2000 Yuan) 1980,1980-89 1990,1990-99 2000, 2000-09 2007, 2007-13 Source: NBS, IHS Coast Central Northeast West National 65

Coastal provinces no longer China s hub for economic growth GDP Real per GDP capita per per (Thousand capita, compound yen) annual annual growth growth rate (percent) rate (percent) 16 14 12 10 8 6 4 2 0 Source: NBS, IHS 1980-1985 1985-1990 1990-1995 1995-2000 2000-2005 2005-2010 2010-2015 2015-2020 Coast Central Northeast West National 66

Real GDP per capita in coastal regions is still above the rest of China Real GDP per capita (Thousand 2000 Yuan) 80 70 60 50 40 30 20 10 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: NBS, IHS Coast Central Northeast West National 67

Coast and central regions lead the pack in terms of population growth Breakdown of China s population by region Population GDP Real GDP per capita per share capita, (Thousand compound yen) annual growth rate (percent) 100% 80% 60% 40% 20% 0% Source: NBS, IHS 1980 1985 1990 1995 2000 2005 2010 2015 2020 Coast Central Northwest West 68

Western provinces progressively becoming China s most dynamic consumer markets GDP Real GDP per consumption capita per capita, (Thousand per compound per capita, capita, yen) compound annual compound growth annual rate annual growth (percent) rate growth (percent) rate (percent) 10 8 6 4 2 0 Source: NBS, IHS 1996-2001 2001-06 2006-11 2011-16 2016-21 Coast Central Northeast West National 69

Breakdown of China s GDP by region Nominal GDP (1996) Nominal GDP (2013) 8.7% 8.6% 10.5% 11.6% 25.0% 55.8% 24.4% 55.4% Source: NBS, IHS Coast Central Northeast West Source: NBS, IHS Coast Central Northeast West 70

Breakdown of China s private consumption by region Nominal private consumption (1996) Nominal private consumption (2013) 10.8% 10.9% 10.3% 9.6% 51.1% 54.8% 27.2% 25.3% Source: NBS, IHS Coast Central Northeast West Source: NBS, IHS Coast Central Northeast West 71

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