CHINA—GROWTH PROSPECTS ANd CHAllENGES FOR …ftp01.economist.com.hk/ECN_papers/China2013.pdf ·...

CHINA—GROWTH PROSPECTS ANd CHAllENGES FOR 2013

1© Economist Corporate Network 2013

China—Growth Prospects and Challenges for 2013

Introduction

Every year, the Economist Corporate Network—the emerging markets advisory businessof The Economist Group—conducts a survey of its 500 clients in Asia Pacific. These 500firms are some of the world’s largest multinationals, and their collective views providecritical insights into the world’s fastest growing region.

The latest Asia Business Outlook Survey (ABOS) was carried out in December 2012. Some 207 respondents completed the survey, with an even spread from India in the west to Japan in the east, and from China in the north to Australia in the south. Respondents were all senior executives, many of them with overall responsibility for the Asia Pacific region. The majority came from Western multinational companies.

Expectations among survey respondents are highest for China. Indeed, one of the broad themes of the ABOS report is how important China is to company plans, in spite of the many challenges that respondents say they increasingly face. Not only is it the biggest market in Asia, and the fastest growing, it is also the number one investment destination for companies. For many firms, China is reaching a point where it is being managed separately from the rest of Asia Pacific.

This report looks in more detail at the China-specific responses to the Asia Business Outlook Survey as well as macro factors affecting the business environment in China, and new destinations for investor interest.

2 © Economist Corporate Network 2013


China’s economic performance in 2012

The country’s GDP growth slowed to 7.8% in 2012, from 9.3% in 2011. Weak demand for Chinese exports and decelerating growth in property investment (as well as decreased activity in associated sectors) held back economic expansion in 2012. The third quarter

of 2012 was particularly difficult, with growth slowing to 7.4%. However, looser monetary policy and investment in government-backed infrastructure projects drove an acceleration in the fourth quarter of 2012, and overall strong growth in incomes continued to support private consumption.

Responses to the ABOS survey were in alignment with this pattern. The difficulties

Trend of GDP growthYear on year growth, %

3

6

9

12

Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q12010

11.9

10.39.6 9.8 9.7 9.5

9.1 8.9

8.17.6 7.4

7.9

2011 2012

Source: National Bureau of Statistics

Sales growth forecast vs actual sales growth for 2012(%, simple average of all respondents)

China

India

South-east Asia

South Korea

Japan

11.88.9

106.3

8.28.8

4.94.5

3.75.2

Source: Economist Corporate Network ABOS 2013

2012 forecast 2012 actual



experienced in 2012 by many companies operating in China were illustrated by shortfalls in their actual sales performance for the year compared to their more optimistic expectations when the year began.

The main drivers for China’s growth in 2012 were consumption and infrastructure investment. Consumption, as measured by retail sales figures, grew by 14.3%, a slowdown in nominal terms but essentially the same pace as in 2011 once inflation was taken into account. Rates of increase were at about the same pace for both urban and rural consumers, but their respective volumes were dramatically different, underscoring the spending power of city dwellers. Urban consumers outspent their country cousins by a whopping margin, spending RMB 17.9trn, while rural consumption was only RMB2.8trn. China’s per capita urban disposable income rose by 12.6% in 2012, and is now Rmb24,565. Rural per capita incomes grew faster, at 13.5%, but still lag far behind at only Rmb7,917.

China’s outlook for 2013The EIU forecast is that following on the favourable economic results in the fourth quarter of 2012, growth momentum in China should be sustainable throughout 2013. This will result in an accelerated economic expansion. Investment will further benefit from a modest upturn in real-estate development and external demand will pick up slightly, in line with marginally faster global GDP growth.

The EIU’s outlook for private consumption is also positive, as rapid job creation and rising wages should ensure strong private consumption growth. In fact, the relationship between urbanization and consumption will be a key determinant in rebalancing the economy.

As local demand increases rapidly, growth in imports will outpace export expansion, and the foreign balance will consequently subtract from GDP growth. Export growth will nevertheless remain impressive, largely owing to emerging-market demand, despite the negative impact on overseas sales of an appreciating renminbi and rising costs in China.

This more favourable outlook for 2013 is borne out by the ABOS survey results, which point to better revenue growth for the year ahead:



How did your revenues grow (or decline) in 2012 and what do you expect in 2013?(%, simple average of all respondents)

China

South-east Asia

Indian subcontinent

Japan

South Korea

Australia/New Zealand

9.78.9

9.28.8

7.76.3

5.05.2

4.74.5

4.84.3


2013 2012

Productivity issues in ChinaAccording to the ABOS survey results, companies overall are expecting their revenues to grow at a faster rate than the size of their workforce. Indeed, for most parts of Asia, the expected growth rate for revenues in 2013 is around twice the expected growth rate for staff numbers. This implies that firms are expecting their revenue per worker to increase in 2013.

Two possible conclusions follow from this observation. One possibility is that firms expect most of the increase in their revenues to come from price rises, while the volume of underlying business increases at the same rate as the growth in their workforce. Alternatively, if price increases are only modest, then that means firms are expecting the productivity of their workers to rise in order to meet sales targets.

In the case of China, where annual increases of 13% to the minimum wage rates are mandated in the country’s 12th Five Year Plan, companies face the challenge of squeezing more productivity out of their increasingly expensive labour force. Certainly companies in China can no longer rely on business models built on big pools of cheap labour. Instead, they are investing heavily in capital and technology. Many firms—especially those in manufacturing—are shifting towards greater automation, thereby reducing the need to hire more workers. For instance, Foxconn, the world’s largest maker of electronic components, announced in 2011 that it would deploy as many as one million



robots in its Chinese factories by 2013 to do much of the work currently done by human hands.

Human capitalFinding and retaining staff remains a perennial headache for managers in China. The shortage of workers with the right skills and experience has resulted in stiff competition for talent. In the past year, however, it seems that the jobs market has been less volatile. Comparing the results from our ABOS surveys in 2011 and 2012, executives report that staff turnover has come down in all markets across Asia. In China staff turnover in 2012 averaged 10.8%, far below the 14.3% reported in 2011.

One reason for the lower churn in 2012 might have been the weaker economy. Given the uncertainty surrounding the health of the global economy, firms have been less willing to offer high-pay packages to lure talent from rival companies, and workers have prioritised the security of their existing jobs rather than seeking out new opportunities. As the economy improves in 2013, we expect to see staff turnover rates edge back up again – and with the overall workforce in China now shrinking due to demographic factors, skilled workers will be in ever-increasing demand.

Expectations for sales growth and workforce growth in 2013(%, simple average of all respondents)

China

South-east Asia

Indian subcontinent

Australia/New Zealand

South Korea

Japan

9.75.3

9.24.9

7.74.1

4.81.9

4.71.7

5.01.7


Sales growth Workforce growth



What is your staff turnover in these territories?(%)

China

Indian subcontinent

South-east Asia

Australia/New Zealand*

Japan

South Korea

10.814.3

9.912.6

8.310.8

6.6

4.74.8

4.45.1

* No data for Australia and New Zealand for 2011Source: Economist Corporate Network ABOS 2013

2012 2011



Investment priorities in 2013China and India remain the top two investment destinations. Indonesia is a closethird, while Vietnam has lost its shine

Given the economic growth rates in Asia Pacific, the region is clearly a place of great promise. But which markets and countries are attracting the greatest commitments for new investment? Top of the list of investment priorities is China. As the world’s second largest economy, and with growth rates that remain impressive, China’s gravitational pull appears undiminished. Nearly three-quarters of the companies in the ABOS survey say they will increase their investment there in 2013.

Actual foreign direct investment (FDI) into China decreased by 3.7% in 2012, compared to 2011’s tally. Nevertheless at US$ 111.7bn in 2012, foreign investment remains a significant driver of China’s economic growth. However changes in recipient sectors illustrate the ongoing economic restructuring within China: foreign investment into China’s textile sector decreased by 19%. Another trend gaining significance in the global economy is the growing scale of China’s outbound investment, which grew by 28.6% in 2012 to US$77.2bn.

How will your level of investment change in the following markets during 2013?(%)

China

Indian subcontinent

Indonesia

Malaysia

Thailand

Vietnam

Singapore

South Korea

Philippines

Australia

Japan

Hong Kong

Taiwan


We will increase our level of investment We are in the market, but will not invest moreWe will reduce our investment in this market We have no plans to invest

73.8 20.6 0.7 5

54.1 32 13.9

53.5 27.1 0.8 18.6

43 38.5 2.2 16.3

38.6 33.9 2.4 25.2

37.7 32.8 3.3 26.2

34.8 53.9 0.7 10.6

28.9 46.1 3.1 21.9

28.1 45.5 0.8 25.6

27 47.6 5.6 19.8

26.2 55.4 3.1 15.4

21.4 58.8 1.5 18.3

15.2 51.2 3.2 30.4



Who is investing?According to China’s Ministry of Commerce (MOFCOM), the top ten investors in China in 2011 (measured by utilised FDI) were: Hong Kong(US$77.01bn); Taiwan (US$6.73bn); Japan (US$6.35bn); Singapore (US$6.33bn); US(US$3.00bn); South Korea (US$2.55bn); UK(US$1.61bn); Germany(US$1.14bn); France (US$802m); and the Netherlands(US$767m). These countries accounted for 92% of all utilised FDI. MOFCOM claims that these figures include FDI inflows into China from these countries via the free

ports of the BVI, Cayman Islands, Samoa, Mauritius and Barbados.

The use of tax havens and “round tripping” of China-based capital flows have long complicated accurate measurements of foreign investment in China. With the post-WTO harmonisation of tax treatment for foreign and domestic investors, the tax advantages of “round tripping” have decreased for domestic investors.

However, a new complication has arisen. MOFCOM has traditionally based its tally of inbound foreign investment on filings of new FDI projects registered. It has not expanded the definition of FDI to include reinvestment of local earnings on the part of a foreign enterprise already based in China – thus the “official” FDI figures most likely understate the foreign investment aggregates.

Where to invest?Favoured destinations within China for foreign investors have undergone some changes, thanks to increased geographical diversification of China’s market opportunities. Production centres are drifting inland, and new markets are rising rapidly in Tier Two, Three and Four cities, most of which lie inland from the established markets of China’s eastern and southern provinces. Consumption patterns are also changing, as growing affluence has opened new consumer markets in the interior.

Top-25 sources of utilised FDI, 2011(US$ m)

Country/region Utilised FDI Share % Projects (no.) Share %

Hong Kong 70,500.2 60.8 13,889 50.1

British Virgin Islands 9,724.9 8.4 758 2.7

Japan 6,329.6 5.5 1,859 6.7

Singapore 6,096.8 5.3 740 2.7

South Korea 2,551.1 2.2 1,375 5.0

United States 2,369.3 2.0 1,426 5.2

Cayman Islands 2,242.0 1.9 135 0.5

Taiwan 2,183.4 1.9 2,639 9.5

Samoa 2,076.2 1.8 476 1.7

Germany 1,129.0 1.0 458 1.7

France 768.5 0.7 188 0.7

Netherlands 761.4 0.7 121 0.4

Macau 680.4 0.6 283 1.0

United Kingdom 581.5 0.5 246 0.9

Switzerland 554.7 0.5 97 0.4

Luxembourg 514.5 0.4 34 0.1

Canada 468.3 0.4 378 1.4

Italy 387.8 0.3 214 0.8

Malaysia 358.3 0.3 213 0.8

Australia 309.5 0.3 280 1.0

Spain 270.7 0.2 99 0.4

Philippines 111.9 0.1 52 0.2

Austria 104.8 0.1 44 0.2

India 42.2 0.04 130 0.5

Russia 31.0 0.03 51 0.2

Source: China Monthly Statistics



How fast can they emerge? Indeed the challenge for many foreign investors keen to move inland is which destination to choose. Based on growth indicators, the EIU expects that the strongest overall performers will be found in central China, which is benefiting from an extended population boom alongside a frenzied pace of industrial and infrastructure investment. According to the EIU emerging city ranking for China,1 the top cities overall in the list—Hefei, Changsha and Zhengzhou—are expected to benefit from robust expansion in their populations and consumer markets.

Population growth in these cities is generated by the migration of rural workers from the central provinces themselves. As local job opportunities improve, those who would have migrated east in the past in the classic “migrant labour” tradition are now opting to

Breakdown of types of foreign-invested businesses

2003 2004 2005 2006 2007 2008 2009 2010 2011

No. of companies 41,081 43,664 44,019 41,485 37,888 27,537 23,442 27,406 27,712

Joint ventures (%) 30.5 26.5 23.8 24.7 20.2 16.8 18.3 18.1 18.1

Co-operative ventures (%) 3.8 3.1 2.7 2.5 1.7 1.7 1.7 1.1 1.0

Foreign enterprises (%) 65.8 70.3 73.4 72.7 78.0 81.4 79.9 80.6 80.8

Foreign-invested share holding enterprises (%) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1

Source: China Monthly Statistics

5 The EIU emerging city ranking for China included only cities with a minimum population of 1m people by 2016. The 96 cities that remained were then ranked according to an index that included growth in infrastructure and property, consumer markets, population and economic output

FDI* by sector, 2011

SectorsEnterprises

(No.)Annual change

(%)Amount

(US$bn)Annual change

(%)

Total 27,712 1.1 116.01 9.7

Farming, forestry, animal husbandry & fishery

865 -6.9 2.01 5.1

Manufacturing industry 11,114 0.6 52.10 5.1

Electricity, gas, water 214 1.9 2.12 -0.3

Transportation, storage, post & telecommunication

413 4.3 3.19 42.2

Information technology 993 -5.1 2.70 8.5

Wholesale and retail industry 7,259 7.0 8.42 27.7

Property 466 -32.4 26.88 12.1

Leasing, commercial services 3,518 2.9 8.38 17.6

Residential services and other services 212 -2.3 1.88 -8.2

* Non-financial FDI

Source: Statistical Communiqué on the 2011 National Economic and Social Development



work closer to home. Zhengzhou saw the number of people residing in its metropolitan area rise by more than 50% between 2005 and 2010. The figure will rise by another 25% by 2016, as workers from elsewhere in Henan find opportunities in the city. At the same time, industrial clusters have been built up around a wider variety of sectors, including white goods and construction equipment, largely targeting the domestic market and generating new employment opportunities. Many of these clusters are located in sectoral-specific investment parks.

Investment in manufacturing industries now accounts for roughly 50% of FDI – this has decreased from a 70% share in 2002. Investments in retail and property have grown in the past decade, while investments in business services have also thrived.

The value of industrial parks to emerging metropolitan areasIn line with the increase in investment in business services, the business park sector across a number of secondary and tertiary cities is also growing rapidly. Market leaders include Chengdu, Dalian, Suzhou and Hangzhou, where local governments have aggressively targeted this sector. Initially driven by the requirements of high-tech industries, demand is now more varied and includes R&D centres, as well as BPO (business process outsourcing) and KPO (knowledge process outsourcing) space. New competition in this field is coming from other inland metropolitan regions such as

Changes in FDI* by sector(%)

* Non-financial FDISource: Statistical Communiqué on the 2011 National Economic and Social Development, China Statistical Yearbook

US$116.0bn US$52.7bn

Manufacturing44.9%

Leasing andbusiness services7.2%

Trade 7.3%

Real estate23.2%

IT2.3%

Manufacturing70.0%

Construction1.3%

Agriculture1.9%

Trade 1.8%

Utilities 2.6%

Real estate10.7%

Others10.0%

Transport1.7%

2011 2002

Utilities 1.8%

Transport2.7%

Others10.6%



Chongqing, Xi’an, Wuhan, Shenyang, Zhengzhou and Wuxi, all of which are combining strong manufacturing bases with concerted local government promotional campaigns to strengthen their competitive advantage.

Dreams, plus a dose of realismThere are many other urban centres trying to emulate these success stories. China’s top three emerging municipal administrations assessed by the EIU solely on the basis of forecast GDP growth—Urumqi, Guiyang and Zunyi—are all in China’s impoverished west. These cities are benefiting from strong support from the central government, which has put the region at the centre of national development policy. For example, in 2012 German carmaker Volkswagen announced that its joint venture in China would set up a plant in Urumqi, the provincial capital of Xinjiang province. Urumqi has also been designated as the new national hub for coal production, which is also expected to drive intense investment activity, benefitting Urumqi in much the same way that Baotou grew on the back of Inner Mongolia’s coal boom.

A flurry of recently established special policies that impact Lanzhou, Guiyang and Chongqing will also spur high levels of infrastructure investment over the next five years. For example, the five-year plan of Gansu (Lanzhou is its provincial capital) includes Rmb200bn (US$32bn) in infrastructure spending, to include a metro system, several new rail links and major roads. GDP growth in these cities is forecast to reach at least

Utilised FDI in west China(US$m)

2007 2008 2009 2010 2011

Chongqing 1,085 2,729 4,016 6,344 10,529

Sichuan 2,011* 3,340* 4,130* 7,010* 11,030*

Guizhou 127 149 134 295 673*

Yunnan 395 777 910 1,330

Shaanxi 1,195* 1,370* 1,511* 1,820* 2,355*

Gansu 118 128 134 135 70

Qinghai 310 220 215 219 169

Ningxia 170* 121* 142* 232* 202

Xinjiang 125 190 216 237 335

Inner Mongolia 2,149 2,651 2,984 3,385 3,838

Guangxi 684 971 1,035 912 1,014

0.1 0.1 0.1 0.2 0.1

* include foreign loans

Source: local government estimates; National Bureau of Statistics



28

133.6

2

Guangzhou

8133.6

2

Shenzhen

258.8

1

Xiamen

350.4

1

Hangzhou

18.3

1

Shanghai

516.8

1

Qingdao

117.6

1

Shenyang

361.0

1

Changchun

112.8

1

Harbin

356.2

1

Shijiazhuang

342.2

1

Taiyuan

230.9

1

Lanzhou

222.9

2

Chengdu

Population (a)(m)

GDP (b)(Rmb bn)

215.5

1

Xi’an

118

1

Tianjin

265.6

22

Suzhou45.7

12

Changzhou33.7

1

Ningbo

17.0

Shenzhen

Greater Guangzhou25

20

15

10

5

0

2,000

1,500

1,000

500

0

Chang-Zhu-Tan

Chongqing

Chengdu

Greater Xi’an

A subway bonanza announced in September 2012Number of new subway projects approvedNumber of new subway lines approvedSubway investment (¥ billion)

Greater Zhengzhou

Hefei economic circle

Wuhan

GreaterBeijing

GreaterShenyang

Shandongpeninsula

GreaterShanghai

(a) 2010 estimates, metropolitan area.(b) 2009 figures, metropolitan area.Source: Economic Intelligence Unit, National Bureau of Statistics.



12% a year on average over 2011-16, well above the national rate of around 7.5%. When assessed against growth in consumer markets, population and infrastructure and property, however, these cities perform more poorly. Guiyang falls to 48th in the overall rankings, as its weaknesses in income and population growth become clear. Lanzhou falls to 64th.

Despite these challenges, municipal governments remain very ambitious. Infrastructure investment, particularly in the form of urban transport projects, is a prized asset for strengthening a city’s competitive advantage for investment. China recently announced a 30% increment to the Ministry of Railway’s budget for 2013, bringing it to RMB650bn. This presents further opportunities for regions to benefit from improved inter-city transport links.

RetailChina is now a majority “urbanite” economy. This is helping the consumption outlook and changing the retail landscape. The rapid expansion of retailers (both domestic and international) into China’s interior cities in search of new consumers has resulted in the proliferation of key shopping mall “chains” providing retail space of varying quality. Retail market structures are changing from traditional state-owned department stores to large-scale shopping malls, while e-commerce is growing at an exponential rate and outlet malls are becoming fashionable. Jones Lang Lasalle estimates that the stock of modern retail space in China’s fifty key urban markets reached 25 million sq m in 2011, and will grow to 46 million sq m by 2014 – by which time two-thirds of the country’s modern retail stock will be outside Tier One cities. Major retail markets have emerged in such hubs as Tianjin, Nanjing, Xi’an and Changsha while satellite cities and towns are developing shopping malls in central business districts and along key transport routes.

LogisticsThe shift of manufacturing and retail operations into the interior has required supporting services, notably logistics and distribution, which in turn have developed in tandem with new transport infrastructure investments. While supply chains have expanded inland from the coastal areas to serve the new manufacturing bases and local consumer markets, the relocation of export-oriented manufacturing to inland cities such as Chengdu and Chongqing has presented specific logistical challenges. Improvements to the investment environment and supporting infrastructure in such regions will enhance the comparative advantages of these new investment destinations.



Sources:Asia Business Outlook Survey 2013, Economist Corporate Network

FDI in China: A Tale of Two Statistics, Rhodium Group January 2013

China Hand (Investment chapter), Economist Intelligence Unit

China Country Report, Economist Intelligence Unit

China50—Fifty Real Estate Markets that Matter, Jones Lang Lasalle

The EIU’s Emerging City Ranking for China, Economist Intelligence Unit

About Economist Corporate Network Asia

Economist Corporate Network (ECN) is The Economist Group’s advisory, briefing and networking service for Asia-based senior executives seeking insight into economic and business trends in key growth markets. Through a tailored blend of interactive meetings, high-calibre research, and private client briefings, ECN Asia delivers country-by-country, regional, global and industry-focused analysis.

Follow us on Twitter @ecn_asia

Economist Corporate Network AsiaBeijing, Hong Kong, Kuala lumpur, Shanghai, Singapore, TokyoFor enquiries, please contact us at [email protected]

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