csg dbriefs dec2012_submission_final

The Dbriefs China Issues series presents:

China’s Investment

Environment: Trends and

Outlook

Chris Cooper, Partner, Deloitte & Touche LLP

Ken Dewoskin, Senior Advisor, Deloitte Touche Tohmatsu CPA Ltd.

David Hoffman, Vice President and Managing Director, The Conference Board’s

China Center for Economics and Business

December 13, 2012

Copyright © 2012 Deloitte Development LLC. All rights reserved.

China at an inflection point

New leadership

The outlook

Question and answer

Agenda


The lessons of 2012

After a full generation of reform, and three

orderly leadership transitions . . .

Levels and drivers of

growth transforming

Imbalances at ―red

alert‖ level

New external

environment & attitudes

A new team of top Party leaders

Concerns about sustainability—

at home and abroad

Recalibration of China’s prospects

Comprehensive MNC

investor strategic refresh

1

China at an inflection point


Given your recent experience and media reports, has

China’s importance in maintaining your global market

share:

• Become more important?

• Stayed the same?

• Become less important?

• Don’t know/not applicable

Polling question #1


Transformation of growth drivers Big growth vs. quality growth

Net Exports

▼

Investment

▼

Household

Consumption

Sources: The Conference Board, Deloitte Research

Major reform growth driver

Trade surpluses in steady decline

Global demand? Competitiveness?

Rising growth driver since 2003

Largely State-driven

Rapidly declining ROI

Designated growth driver from 2008

Growing but too slowly

Core structural problem

What generates the activity?

Who gets to spend the money?

2


Household consumption Will it rise to the challenge?

Decomposition of China’s GDP (expenditure side)

20

25

30

35

40

45

50

0

5

10

15

20

25

30

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Household Consumption

Government Consumption

GFCF

Net Exports

Real GDP Growth

Household Consumption Share of GDP (RHS)

Percentage points (contribution to growth) Percent of GDP

Sources: PRC National Bureau of Statistics, CEIC Data Bases, The Conference Board

3


China’s middle class on the edge . . .

1. Demographic Shift – Moving toward a 2:1 worker-retiree ratio

2. Social Welfare Deficit – levels of precautionary savings

3. Services Sector “Marketization” – availability and choice

4. Consumer Wealth – options and security

5. Consumer Credit – Will it grow?

6. Inflation– structural drivers, state spending, and money supply

4

ESSENTIALS Move spending power from the state to households

Radically improve wealth distribution


What are your expectations of China’s middle class and

the future of consumer spending?

• Continued strong growth of size and spending power

• Plateauing

• At risk of contracting


Polling question #2

New leadership


New leaders facing new challenges

5

1. Scrutiny and accountability from social media and global

journalism

2. More international experience in elite population

3. More international experience among leaders

4. First heavily hereditary regime

5. Much more complex economy, data weaknesses, and control

weaknesses


Three big decision areas

Moderate

regional

diplomatic

activity

Reform &

expand credit

systems

Implement

SOE reform

Components Obstacles

Japan, disputed islands

China trade practices

In and outbound investment

Capital allocation

Holder of spending power

Investment security

Risk-based returns

Market-based transfer pricing

Curtail monopolistic practices

Bankruptcy and debt constraints

Vested interests

• Large SOEs/LNEs

• Regulators

• Elite families

Immature institutions

State ownership

Politicized private sector

No institutional independence

6


Time frames and outcomes

Moderate

regional

diplomatic

activity

Wave 1: 0-18 months

Reform &

expand credit

systems

Scenario 1:

New Isolation

Scenario 2:

Financial

Cliff

Scenario 3:

Muddle

Kingdom

Scenario 4:

Some Pain,

Some Gain

Wave 2: 12-48 months

No

Yes

No

Yes

Yes

No

Implement

SOE reform

Leadership Choice Point

Scenario results

7


Do you believe the risks of policy failure, and the

potential impacts on your business, in China are:

• High

• Medium

• Low


Polling question #3

The outlook


Five “breaking” stories – December 2012

1. Corruption: China ranked 80th this year on this year’s Transparency

International index, with a score of 39 in terms of perceived corruption.

2. Shadow banking: New wealth management products (WMP) may

represent 13% of all lending, about US$1.9 trillion. Shanghai Huaxia

related WMP default sent shockwaves through the banking system.

3. Capital market performance: ―A‖ share markets worst in world. Wave of

layoffs at securities companies as revenues from underwriting, along

with the number of companies planning IPOs, both hit record lows.

4. China’s property market: A transaction media between the government,

enterprises and citizens. Additions to public and private debt since the

housing boom began in 2006 amount to ~200% of China’s 2011 GDP.

5. Signs of recovery: Proliferation of news articles, global stock market

reactions, and official reports from China celebrating end of slowdown

8

Source: Transparency International Corruption Perceptions Index 2012, Fitch Ratings

http://www.transparency.org/


Bulls and Bears China in the years ahead: complex and unprecedented

Top government

leaders

Government data

collectors Consultants

Worst now

behind us Unprecedented

challenges ahead

International

press

Investment

Bankers

Outlook on China’s

medium-term economy

9

Who’s saying what (and why?)


What many MNC China CEOs report today

• Oil and Gas: Lagging regulations (shale), highly protected sector

• Alternative energy: Vast overcapacity, pricing collapse, LNE stress

• Manufacturing: Soaring factor prices, slow growth domestic demand

• Retail: Steady 8%-10% annual growth, rising payroll, tight margins

• Engineering equipment: Collapse of demand, desperate domestic players

• Banking: Labyrinths of regulations, highly protected markets

• Equity investment: Entry & exit challenges, insider game, rule changes

• Infrastructure (rail, etc): Steady 10%-15% growth, margin pressure

• Catering services: Steady 15%-20% growth, soaring payroll costs:

• Luxury goods: Flat to -10% sales

• Automotive: -5% to +5% growth, move to smaller cars, tough regulations,

Japanese Auto: Freefall

Eleven and a half snapshots

10

Sources: Deloitte analysis,, NBS


Potential responses by MNCs

Prepare for potential increased attention from local tax and compliance

authorities, overcapacity, slowing demand, SOE/LNE competition

Set (or re-set) realistic expectations at corporate level for China market

growth and profitability

Accelerate 21st century new product development (NPD) thinking

regionally as well as nationally

Structure investment in organization and capacity for agility and watch

long-term commitments, accounts receivables and cash flows

Understand and align with local interests/champions to the extent

possible & prudent; explore new kinds of on-shore / offshore cooperation

1. Intense cost management

2. Right products and technologies

3. Super brands

Three themes

And five steps

11


Over the next five years, which of the following do you think

poses the most significant challenge for U.S. companies in

China?

• Increasing competition

• Intellectual property issues

• Rising operating costs

• RMB volatility

• Slower growth

• Human capital/talent shortage

Polling question #4

Question and answer

Join us January 10th at 11 AM ET as our China Issues series presents: Beyond the Commodity Downturn: China's and North Asia's Impact on the Global Mining Industry


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Chris Cooper

[email protected]

+1 408 704 2526

Ken Dewoskin

[email protected]

+86 10 8512 5601

David Hoffman

[email protected]

+86 10 8532 4688

Contact info

mailto:[email protected]






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