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International Consultants LtdAndrew Leung

A Sustainable China in a Turbulent World:

Survival, Adaptation and Transformation

Andrew K P Leung, SBS, FRSA

A presentation to the China Development Society

London School of Economics

Wednesday, 3 February, 2010

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Stage is set in 21st Century• The World is Flat, Thomas Friedman, 2005 – Walmart Just-In-Time; UPS

2% world GDP across the globe; internet sans frontiers (Facebook,

Twitter,LinkedIn etc)

• Global value chain migration (Rolls Royce 60% research and 70%

components); creative destruction and world competition (‘Bear outside

your tent’)

• Communist Manifesto, Karl Marx,‘expanding markets …over the entire

surface of the globe ,,,,, new wants …products of distant lands and

climes …universal interdependence of nations’

• Power shifts into individuals - ‘Cosmocrats’ – A Future Perfect – The

Challenge and Hidden Opportunities of Globalization, John Micklethwait

& Adrian Woodridge, 2000

• Three Billion New Capitalists, Clyde Prestowitz, 2005

• Future profits lie in scale, knowledge, creativity, technology and brands

- $1 profit DVD player; 1.65% value of iPod, Google becoming world’s

most profitable

• China launched ‘Going Global’ strategy 2001

• Globalization and Its Discontents, 2002 + Making Globalization Work,

2006, Joseph Stiglitz; The Theory of Moral Sentiments, Adam Smith

• Global Financial and Economic Crisis and Rising Protectionism

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The swing of the global pendulum

• National Intelligence Council Report Project

2025:

– US leadership capacity weakening (EU

fractious) v rise of BRIC + ME

– New developing countries alliances e.g.

ASEAN + 3, SCO – pose challenge to old-

styled UN, IMF, WB

– Global industrialization - geopolitics and

geo-economics of energy, food, water and

climate security

– Struggle for development in failing states =

Arc of Instability

– China’s dramatic growth – Beijing

Consensus – set to play a key role in new

world order

• Emerging Markets lead contributers to world

growth – China 27% v US 21% to growth: DCs

15% v US/EU@23% world GDP)

Emerging Markets lead contributers to

world growth – China 27% v US 21%: DCs15%

v US/EU@23% world GDP)

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Some New Power Brokers

Foreign assets ($T) MGI, July 2009

2007 2008 2013(est)

Pension Funds 30.4 25

Mutual Funds 26.2 18.8

Insurance assets 18.9 16.2

Oil Producers 5.1 *5 8.9 – 13.2

Asian SWFs 4.35 *4.76 (!) 7.5 – 8.5

Hedge Funds 1.9 1.4 1.5 – 2.4

Private Equity 0.906 0.938 1 – 1.2

(!) Increase virtually all due to China

* Total $4.5b @day

Net capital outflow from surplus

countries ($b, 2006) (Mckinsey & Co)

1995 2006

Oil producers 35 484

East Asia 133 446

West Europe 110 308

Rest of World 4 81

____ ___

282 1319

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East Asia dynamics re-defined(When China Rules the World, Martin Jacques, 2009)

• Complex supply chain centred on China

• ASEAN + 3; ACFTA (largest FTA with 2b people); 2003 Treaty of Amity & Cooperation; Chiang Mai Initiative (currency swaps);‘East Asia FTA’ + ‘Asian Monetary Fund’; ASEAN + 6 ; Process-oriented Constructivism(Socialization of Power – Influence without Authority) Qin Yaqing + Wei Ling, in China’s Ascent, Cornell University Press, 2008)

• China now South Korea’s largest trading partner + Singapore + Philippines + Thailand all closer to China (all formal US allies)

• Intra-NE Asia trade (China, Japan, Taiwan + 2 Koreas) 52% total 5, ASEAN imports + 30-40% p.a.

• 4 x US aid to Philippines; 2 x Indonesia; far > US to Laos, Cambodia, Myanmar (Chinese navy access to Indian Ocean)

• Increasing Mandarin learning + Chinese tourists

• Australia double benefit – rising resource export and cheap imports

• Taiwan more accommodating

• Japan - Manufacturing; trade > US, influence < Japanese nationalism

• US influence declining except for naval power

• East Asia Economic Union? Asian Dollar? RMB regional currency? A future Asian Commonweath?

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Africa becoming more China-centric(When China Rules the World, Martin Jacques, 2009)

• FOCAC 2006 Beijing (48 countries; 2007-9 Action Plan: $5b Development Fund, $5b preferential loans + credits: schools, hospitals, professional training etc )

• China’s % share of Africa’s export of selected commodities

Crude Oil Metals Wood Cotton

Angola 100

Sudan 98.8

Nigeria 88.9

Congo 85.9

Gabon 54.8 42.3

DRC 99.6

Ghanna 59.8

SA 46.5

Cameroon 39.7

Tanzania 24.3 53.8

• Africa’s 3rd trading partner (US, France) > UK; soon 1st

• Africa > 30% of China’s total oil imports

• Angola > Saudi Arabia as China’s largest oil supplier (15%)

• More direct flights Africa/China > few Africa/US

• Chinese Diaspora = 500,000 growing

• Future 100m tourists (Abah Ofon, The New Sinosphere, 2006)

• > IMF/WB – undermining v pathway to development

• Beijing Consensus > Washington Consensus

• Overarching e.g. Zimbabwe (railways, power supply, Air Zimbabwe, ZBC); Zambia (‘a district’– Opposition candidate)

• More Winner > Losers v narrow economic development

• 2007 PEW Global Attitudes 10 Africa countries – China> US

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Threshold of China’s Renaissance(When China Rules the World, Martin Jacques, 2009)

Ranking of economies (Goldman Sachs, 2007)

2025 2050

1. US (~$20T) China (~$70T)

2. China (~$18T)) US (~$38T)

3. Japan (~$5T) India (~$38T)

4. India Brazil

5. Germany Mexico

6. Russia Russia

7. UK Indonesia

8. France Japan

9. Brazil UK

10. Italy Germany

11. Mexico Nigeria

12. Korea France

13. Canada Korea

14. Indonesia Turkey

15. Turkey Vietnam

16. Iran Canada

17. Vietnam Philippines

18. Nigeria Italy

19. Philippines Iran

20. Pakistan Egypt

21. Egypt Pakistan

22. Bangladesh Bangladesh

• Already EU’s and Japan’s largest trading partner;

leading in SE Asia and Africa; Latin America’s 2nd

largest trading partner by 2010

• People’s satisfaction - China 72%, UK 44%, US

39%, France 28%, Germany 25% etc

• > 40 m Chinese Disapora

•‘All roads lead to China ?’ - Pax Sinica?

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Grand Design v Deng’s caution• Grand Design nationalism,中国不高兴 (Unhappy China) 2009

• Global Realities, Risks and Constraints –

Internal –

• Inequalities, 5 Imbalances, Corruption, Rule of (> by) Law, Governance, Checks and Balance, Environment, Ethnic Harmony, Aging (4-2-1)

• Population Burden – now @ GDP < 100 countries, 2025/50 @ GDP => Turkey; 2050 5.4% (86.4m) of projected 1.6 b population still in farming

External –

• Global military reach, energy and resources, technological gap, creativity and innovation, financial expertise, ideas and values, global institutions, conflict with Western norms

• Dangers and Opportunities of Power Transition: Institutionalized International Order > Security Dilemma -China’s Ascent – Power, Security, and the future of International Politics, Robert S. Ross & Zhu Feng (Editors, Cornell University Press, 2008); China’s Rise – Challenges and Opportunities, Bergsten, Freeman, Lardy, and Mitchell, Petersen Institute and CSIS, Washington DC, 2008

• Deng’s 28-word caution : 冷静观察，稳住阵脚，沉着应付，韬光养晦，决不当头, 有所作为 (in line with conclusions of 大国崛起 StudyProject + ‘Neoliberal Defensive Realism’, Tang Shiping, in China’s Ascent, Cornell University Press, 2008)

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MegaTrend 1 – Massive Urbanization

McKinsey Global Institute (Preparing for China’s Urban Billion, March 2008) :

• 1 b urbanites by 2025, + 350 m in 221 cities each > 1 m population (EU=35)

• 15 super-cities each > 25 m population

• 11 hub-and-spoke conurbations each > 60 mpopulation

• Westward Ho! Most new urbanization to spawn in currently-less-developed central, north-east and western provinces

• Concentrated mode of urbanization projected to save 35% of carbon footprint and 2.5% GDP in government expenditure

• A YouTube snapshot

http://www.youtube.com/watch?v=cBqsSrPhyz4

• Global implications: resources, business opportunities, experimentation, civil society

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MegaTrend 2 – Rapid Mobility

• Extensive inter-provincial highwaynetwork 2nd only to US Interstate in 17 years

• Railway (6% of world’ total length, 25% total traffic) to increase from 78,000 km to 100,000 km by 2020 (world’s largest railway expansion since 19th century)

• More city conurbations to be linked by integrated transport infrastructuree.g. $ 1.64b sea-spanning bridge over Hangzhou Bay linking Shanghai toNingbo and other cities in the Provinces of Zhejiang and Jiangsu with a combined population of 72.4 million

• Global implications: rapidly developing Chinese middle-class, changing lifestyles, vast supply chains

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MegaTrend 3 – Rise of the middle-class

• Combined urban disposable income of @annual household income > RMB 100,001 to 200,000 to grow from 0.1% of total 2005 to 36.4% by 2025 (Serving the New Chinese Consumer, The McKinsey Quarterly, 2006 Special Edition).

• Largely come from 100 m ‘single-child’ generation, inc post-80s, post-90s, and 21st century new-comers

• Luxury goods sales already 12% by value of world’stotal, to grow to 33% by 2015

• Car ownership to expand from 11/1,000 towards world average 120/1,000 (<US 500/1,000) 500 m cars by 2050 (Goldman Sachs)

• Young entrepreneurs to jump from current 300,000

• Average 50,000 USD millionaires to be added annually

• A more consumer-oriented economy emerging in coming decades

• Global implications: reducing over-reliance on exports, mitigating economic imbalance with the US.

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MegaTrend 4 – Largest moderate-income economy

• China > US by 2027/28 and > by 75% by 2050 (when India = US) (Goldman Sachs, The Economist, 30.6.2007)

• China’s @GDP ranks < 100 in the world = some poorest countries in Africa. By 2050, @GDP = middle-income nation in Asia or Eastern Europe

• Aging population profile ( > 30% to be aged 60 or over by 2050) Subsidized voluntary basic pension plan for rural population to grow from 60% in 2010 to 80% by 2015

• Legacy of One-Child Policy, 4-2-1 phenomenon, relaxed if both parents single children, likely to be relaxed further

• Still > 100 m with < $1 a day v 800 m such in 1978. Poverty to shrink significantly in coming decades

• Global implications: China will get old before getting rich. Needs a benign internal and external environment to consolidate an economic foundation to face social and financial burden of a looming aged profile

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MegaTrend 5 – Quiet Green Revolution• Green Great Wall 4,480 km forestation absorbing 8% or

500m tons emissions p.a.- 20% or 1 b tons absorption by 2010.

• Small coal-power plants of < 10m kW capacity closed by 2007. Most of < 50m kW likely to be cleared or expanded within a decade.

• To invest $2.3 trillion in energy development 2001-30, inc $200b to increase renewable energies from 8.3% to 10% of primary energy by 2010 and 15% by 2020, + 7% to 10% p.a. by 2010 and 20% p.a. by 2020, inc hydro-electric, nuclear, coal-seam gas, biomass, wind, solar, terrestrial heat and wave energies (IEA)

• Hydro-electric power world’s first in installed capacity 145 m kW and 482.9 billion kWh power generation

• Total of 110 million square meters of solar panels by far the world’s largest

• Wind power has increased 7 x to > 6 m kW, 5th largest

• 2 nuclear power stations p.a. for the next 15 years.

• BYD, (Shenzhen) introduced 15.12.2008 world’s first mass-produced plug-in hybrid electric vehicle @US$22,000, range 100 km on electric engine. Miles XS500, range 120 miles at 80 mph, to launch in Tianjin in 2009 (Iain Carson and Vijay V Vaitheeswaran, Zoom: The Global Race to Fuel the Car of the Future, Hachette Book Group, 2007)

• Dongtan eco-city concept of sustainable housing and urban design on the cards for new cities, towns and villages. Eco-friendly lifestyle catching on with rising middle-class. Methane gas from human and animal waste in villages

• Law on the Circular Economy effective 1.1.2009 mandating energy, water, and material recycling, conservation and emission reduction supported by tax breaks and fines.

• Global implications: an ecologically-conscious society with 1/5 mankind; world’s car industries to be revolutionized

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MegaTrend 6 – Science, Technology and Innovation• Chang’e-1 Moon Probe (2007), Shenzhou-7 Space Walk (2008).

Planned Tiantong-1 small space station in 2010 -11 + docking with Shenzhou 8, 9, & 10; Lunar Rover on moon surface 2013-17; Lunar Rover exploration and return 2017-20; planned satellite Yinghuo-1(+ Russian Phobos-Grunt) to fly towards Mars 2009; possible participation in European Space Agency’s Aurora manned Mars exploration program 2030

• 5m university graduates p.a. mainly engineers and technologists, top in nos.scientific papers. Vast majority no productive research.Still no home-grown Nobel Prize laureates. Committee representation, let alone chairmanship, extremely low in world-class scientific organizations

• But fast developing technologies in energy and water resources, environmental conservation, proprietary technologies, life sciences, aeronautics, and ocean sciences

• Various silicon valleys, leading science parks e, g. Beijing’s Zhongguancun and high-tech cities like Hefei, Anhui. 40% of overseas post-doctoral students in US are from China. Growing numbers of scientific returnees to seek greener pastures

• International corporate R& D centres 750 (100 in India), 35% v UK 47% and US 59%

• Shenyang Aircraft Corporation joint ventures in assembly and fuselage manufacture with Boeing, Airbus and Bombardier. May 2008, Commercial Aircraft Corporation of China formed with capitalization of $2.7 billion to compete with Boeing and Airbus. China’s home-made regional jet ARJ21 maiden flight on 28.11.2008 with an order book > 100 aircraft

• Global implications: China’s aerospace industry, including commercial satellites, is set to grow by leaps and bounds. International space program cooperation. Growing competition in world’s aircraft industries. Advances in life and environmental sciences and commercialization

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MegaTrend 7 – A even more global China• 3 Chinese corporations world’s top 5 by market capitalization

- PetroChina ($1trillion, 2 x ExxonMobile), ICBC (world’s largest bank), and ChinaMobile

• Chinese corporations + SWFs taking equity in financial and energy companies: ICBC 20% in Standard Bank, Africa’s largest bank; CHINALCO (Aluminum Corp of China) planned 30% stake in bauxite mine of Rio Tinto

• Foreign currency reserve + $1.7 billion a day needs outlets > US Treasuries e.g. much needed natural resources, technologies and international business expertise.

• 4 of Big Five state-controlled banks have embraced foreign equity: HSBC 19.9% of BoCom; BoA 10% of CCB; Goldman Sachs 10% of ICBC; RBS’s (recently divested) 10% of BoC

• RMB as storage of value and stable means of exchange. RMB-denominated transactions and financial products to gain even greater acceptance amongst China-related businesses. Eventual full convertibility but still distant until more comfortable with speculative two-way capital flows

• Fuller global integration of Chinese skills and people. Vast developing internal market multiplies global supply chains; Top Tourism Destination before 2020

• Global implications: Full integration of China into global community, future Asia Dollar?, more diversified central bank reserves, linked stock exchanges, IPOs across continents, Chinese M & As, cross-cultural management

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MegaTrend 8 - Defense

• Historical trauma with continental-sized borders and coastline anxious to protect territorial integrity (including Taiwan) + choke-points of life-blood energy supply

• Total defense expenditure (2/3 for personnel, training and maintenance) < UK, Japan, France, and Germany v US expenditure > rest of world combined. As % GDP, much < UK, Russia and France v US (China’s 2006 National Defense White Paper)

• In light of US repeatedly rejection of call from 160 countries, China included, to de-militarize space, China showed capability of killing moving satellite as space defense deterrence

• Already a nuclear power, only major country without a single aircraft carrier, doubt about cost- benefit of blue-water navy + regional diplomatic interests giving way to clear signal (Defense Minster, 20.3.09)

• Likely to to keep up with modern military technology for more cost-effective credible deterrence, including submarines and asymmetric warfare

• Global implications: need for more transparency to ease ungrounded fears (China needs benign environment to continue survival); scope for more international cooperation for peace-keeping and fight against piracy

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MegaTrend 9 – Building a Harmonious World• Best defense is having no enemies – Confucian Harmony Also joining no

blocs.

• Simply cannot afford to be aggressive . Need for benign environment to build solid foundation - numerous challenges and contradictions + looming aging population profile

• US - Leadership accepted except where national interests undermined, but differences on China’s internal issues and international approach to conflict resolution remain

• EU- main trading partner and plenty of scope for economic, trade, investment, technological, and scientific cooperation, but differences on China’s internal issues remain, less so v US

• Russia – Energy partner and balance against uni-polarity

• ME – Main oil supply source – eager to see more stability (geopolitics) but unlikely to intervene in ME politics

• ASEAN and the Asia community growing importance in global supply chain + geopolitical advantages in the Asia-Pacific

• Central Asia - Shanghai Cooperation Organization – harmony in neighboring region and alternative energy supply route – national security

• Africa for 3rd world cooperation and trade/investment in resources

• Latin America – also 3rd world support + Venezuela (energy + support in US backyard); Brazil (soybeans and resources)

• Global implications: Waning dominance + economic symbiosis, US needs China as much as China needs US (Global Trends 2025 – A Transformed World, National Intelligence Council, Washington D.C., November, 2008). China growing global influence likely more active in UN, World Bank and the IMF, dynamics for a more harmonious world best suited to China’s national interests.

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MegaTrend 10 – Civil Society• Vibrant civil society rapidly developing, e.g. spontaneous response to Sichuan earthquake

• Quarter of a million local NGOs campaign for consumer rights + environment + the under-privileged

• 80 to 100 million practising Christians (Jesus in Beijing, David Aikman, 2003)

• Vibrant 36 million blogs.

• More public hearings for major polices, often mandated by law

• Local elections held for all village and county chiefs and urban neighborhood committees

• More party secretaries and senior officials monitor public feedback through the internet

• CPC ‘government for the people’, law-based governance, official accountability, public transparency, public consultation, fight against corruption, more freedom of expression as instruments for legitimacy. Direct entry to government through public examinations. Competitive progression to high office. Confucian ideal of Mandate of Heaven ‘shi ren xinzhe, shi tianxia’ (He who loses the hearts and minds of the people, loses the world).

• CPC think-tank on reform of political system post-17th Party Congress – NPC and CPPCC, centralizing power to appoint judges in the provinces (Storming the Citadel, Professor Zhou Tianyong et al, November 2007).

• Global network of Confucius Institutes, ultra-modern CCTV English channels, ancient culture and architecture, UNESCO-designated world heritage sites, colorful arts and customs all attracting an ever-mounting number of foreign tourists + trade, business, professional, academic, and educational visitors from all corners of world

• Renaissance China defined by 21st C interpretation of the Confucian Golden Mean, calibrated balance between opposites, + prudent harmony between contradictions

• Global failure of market fundamentalism + looming ecological collapse - a blindness to excess and a disregard for prudence. A renaissance China stands a good chance of restoring a measure of global balance and harmony.

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A roadmap for Sustainable Industrial DevelopmentState Council, October 2008

• Value-added hi-tech industries + 5% : IT, bio-eng, aeronautics, space aviation, new energy & materials, marine industries

• Energy efficiency, conservation + emission reduction in processes, projects and buildings; restrict energy-and-emission intensive industries (coal – 77.2% 1980 - 69.4% 2007);Energy Law in draft; 12th FYP 2011-15

• Renewable energies - nuclear, hydro, solar, wind, biomass, marsh gas, solid + liquid bio-fuels as % primary energy by up to 10%; coal-bed gas up to 10 bcm

• ‘Less input, consumption, emission + high efficiency’, including energy optimization, energy conservation and eco-preservation

• Concrete progress building water-conserving society; complete anti-flood systems large rivers + drought resistance of farmlands

• Recycling Economy - Circular Economy Promotion Law 29.8.08

• Accelerate service sector - value-added contribution to GDP by 3%

• S & T + international cooperation ‘C but Differentiated R’

State Council February, 2009

• Light, petrochemical, non-ferrous metals + logistics industries – rural-urban consumption, tech upgrade + innovation, -outdated capacity; environmental protection and energy conservation, M & A to achieve scale, clusters in central & Western provinces, quality and food safety

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China’s Green Opportunity

McKinsey Quarterly, May 2009

• 2005 GHG emissions mgt CO2 equivalent 6.8

• Unrestrained growth + 16.1

• 2030 frozen technology scenario 22.9

• Policy reduction (policies, targets, tech development) - 8.4

• 2030 Policy scenario 14.5

• Full technical abatement potential* - 6.7

• 2030 Abatement scenario 7.8

* Green Power – 2005 % Coal (81) 2030 % Coal (34) hydro (19), nuclear (16), wind (12), solar (8), gas (8), other (4)

* Green Transport – 330m cars by 2030 > US; 100% green cars by 2020 = oil import less 30-40%

* Green Industry – 1/3 of energy consumed 44% emissions; technology, efficiency, standards, conservation, recycling (e.g. coal-bed methane), agric waste, CCS

* Green Buildings – eco-villages, towns and cities; natural gas, CFL (compact fluorescent light-bulbs); green designs, efficient heating and ventilation

* Green Ecosystems – Forest coverage being raised from 11 to 20% by 2010; regulated grazing; widespread use of agricultural methane (already 23m homes); sustainable agriculture – land management, desertification and water management

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Lessons from Financial and Ecological Collapse• Survival, Adaptation, and Transformation

• Global Financial and Economic Crisis

– Overleveraging ($1.4 quadrillion debt, some still underneath the carpet)

– Excessive fundamentalism

– Adam Smith’s missing Visible Hand

– Global economic imbalance

– Who Moved My Cheese? Spencer Johnson, 1999

– GM, Chrysler, IBM, GE, R J Reynolds, BYD, Suntech, Alibaba

• Collapse, How Societies Choose to Fail or Succeed, Jared Diamond, Penguin Books, 2009

– Easter Island – Splendid isolation, 1400 m from nearest habitable island; first settled 900 A.D, original pristine paradise, Giant Palm (80 ft tall, 6 ft diameter); statue (moai) production peaked 1200-1500, @up to 65 ft tall 270 tons; accumulative deforestation; collapse of food chain; by 1700 population crashing + wars, all statues toppled by 1884, today only 2 small trees and 2 small shrubs left

– Greenland Inuit v Norse – Adapted sewn-skin kayak + harpoons with bladder floats as efficient hunting machines for resource-rich whales; Norse tied to European origin: church, walrus tusks for income (wiped out by new supply of ivory from new colonial era)

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Andrew Leung International Consultants Ltd

Thank you

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com