Sustainability and Innovation inChina’s 12th Five-Year Plan

David Nieh, AIA AICP LEED AP

General ManagerShui On Development, Ltd.

Confidential – not for distribution

Content

The five-year plan – a strategic approach to long-term development

Five key themes in the 12th Five-Year Plan

Tapping China’s market opportunity

The five-year plan – a strategic approach to long-term development

4

GDP growth yoy

9.5%f

14.2%

10.3%

9.2% 9.6%f

0%

2%

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6%

8%

10%

12%

14%

16%

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Average real GDP growth rate of 10.0% since the Open Door policy began in 1978

Timely and effective stimulus programme – China grew by 9.2% in 2009 and 10.3% in

2010

The IMF forecasts real GDP growth of 9.6% in 2011 and 9.5% in 2012, as China tackles

inflation through tightening monetary policy

Source: National Bureau of Statistics, IMF (2011 and 2012 forecasts)

China’s impressive economic track record

Strategic approach to long-term development – China’s five-year planning process

Chinese government leaders have demonstrated their ability to confront

important challenges and solve difficult problems

China is one of the very few socialist countries that have made a smooth

transition from a centrally planned to market economy and is a model for

other transition economies such as Vietnam

As China switched from central planning to a mixed market economy, the five-

year plan evolved from detailed instructions into a set of guidelines and broad

social and economic goals

The national five-year ‘plan’ represents a complex web of Chinese policy-

making containing regional and long-term development plans and targeted

policy initiatives

The plan is subject to constant review and revision over the course of the

five-year cycle

GDP growth usually exceeds the official target

GDP growth target lowered from 7.5% to 7.0% in the 12th Five-Year Plan

This reflects an emphasis on “higher quality growth”

China consistently exceeds the official growth targets

Average growth rate during 9th Five-Year Plan period : 　　　　

　　　　　　　　

8.6%

Average growth rate during 10th Five-Year Plan period :　　　　　　　　　　　　

9.8%

Average growth rate during 11th Five-Year Plan period

Average growth rate during 12th Five-Year Plan period

11.2%

Target: 8%Target: 7%

Target: 7.5%Target: 7%

Real GDP growth and targets

11th Five-Year Plan (2006-2010) Most targets achieved or exceeded

Key economic targets in the 11th Five-Year Plan

Item Target ActualMacro economy  GDP growth (%, real) 7.5 11.2

  Unemployment rate (%) <5 4.1

Economic structure

  Service sector share of GDP (%) 43.5 43

  Service sector share of total employment (%) 35.4 34.9

  R&D spending as a share of GDP (%) 2 1.8

  Decline in energy consumption per unit GDP (%) around 20 19.1

  Urbanization rate (% ) 47 47.5

  Urban pension system coverage (mn persons) 220 260

Living standards

  Urban disposable income per capita growth (%) >5 9.7  Rural net income per capita growth (%) >5 8.9

China’s 12th FYP is the national blueprint to achieve medium-

term economic, social and environmental objectives

China’s 12th FYP builds in sustainability

China’s 12th FYP marries environmental and energy challenges with huge economic opportunities

Five key themes in the 12th Five-Year Plan

Important features of the 12th Five-Year Plan

Chinese government determined to de-emphasize quantitative

growth and focus on the quality of economic growth

Plan provides for increased expenditures for education and

healthcare, especially in rural areas, environmental protection,

and air and water pollution control

Transformation of the Chinese economic growth model

From export-oriented to domestic demand-oriented

From input-driven to innovation-driven

Five key themes in the 12th Five-Year Plan

I. Adjust growth model

II. Enhance innovation and upgrade economic structure

III. Speed up growth in inland provinces

IV. Improve living standards

V. Strengthen environmental protection

0%

10%

20%

30%

40%

50%

60%

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

% share of GDP

Source: National Bureau of Statistics

I. Adjust the growth model – boosting the role of services

Services (tertiary sector) share of GDP has increased by 2.1 percentage points over the past five years to 43.0% in 2010

The new target is to increase services’ GDP contribution by 4 percentage points to 47% in 2015

This will require services to grow more quickly than manufacturing, especially high-value services areas such as finance and business services

Secondary sector

Tertiary sector

I. Adjust the growth model – global rebalancing entails switch to domestic-led growth

In 2009, China successfully deployed an aggressive stimulus, including

infrastructure investment, to cushion the economy from the impact of the global

financial crisis

China now aims to rebalance the economy and ensure that growth is based on

a broad mix of consumer spending, investment and exports

％

Source: National Bureau of Statistics

II. Enhance innovation

China aims to develop higher value-added products and services, while

moving away from excessive dependence on low-wage manufacturing

Innovation is a key plank of this strategy, and two targets explicitly relate to

innovation

R&D spending to increase to US$177bn (2.2% of GDP) in 2015 from

US$106bn (1.8% of GDP) in 2010*

Number of new invention patents to double from 228,00 to nearly 459,000 by

2015**

While some international companies view ‘indigenous innovation’ policies as

protectionist, many others have invested in China R&D centers or taken part in

venture capital/private equity investments

•*Estimates based on GDP forecasts from the IMF World Economic Outlook April 2011 database

•**Target is to increase from 1.7 new invention patent per 10,000 population in 2010 to 3.3 patents per 10,000 population in 2015, while total population is targeted to rise from 1.34bn to (no more than) 1.39bn in 2015

III. Speed up growth in inland provinces

Central and Western China are entering a take-off growth period

Huge infrastructure investment, including a 7,531 km high-speed rail network to date, is connecting inland provinces to the national market

Strategic designation of Chongqing Liangjiang New Area as a new development zone (similar to Shanghai Pudong) will help create a West China economic hub on the western stretch of the Yangtze river

Preferential policies in Central and Western China for foreign investors are expected, especially in favored industries

IV. Improve living standards – ensuring ordinary people enjoy the fruits of growth

Concerns about widening income inequality - targeting per capita income growth

of at least 7% a year for both urban and rural residents in 2011-2015

36mn units of social housing to be built over the next five years, covering about

one-fifth of the urban population, according to Premier Wen Jiabao

Additional targets for healthcare coverage, pension system coverage and

employment

6%

8%

10%

12%

14%

16%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP Average Per Capita Disposable Income

10.3%

7.8%

GDP and Per Capita Disposable Income

Source: National Bureau of Statistics

V. Environmental protection becomes a major priority area

Greenest five-year plan in China’s history

• One-third of the plan’s targets relate to resources and the environment

• 7 of the 8 targets are mandatory, a higher proportion than in the other areas

Key resource and environmental targets in 12th Five-Year Plan

Item 2010 2015 Target Target type

Resources and environment

  Total agricultural land (mn commercial acre) 362 362 [0] Mandatory  Reduce water consumption per unit of industrial added value (%) [30] Mandatory  Efficiency index for use of water in agriculture 0.5 0.53 [0.03] Non-mandatory  Non-fossil energy as a share of primary energy consumption (%) 8.3 11.4 [3.1] Mandatory  Energy consumption reduction per unit of industrial added value(%) [16] Mandatory  Carbon dioxide emission reduction per unit of GDP (%) [17] Mandatory 

Reduction of pollutants emission volume (%)

Carbon dioxide [8]

Mandatory  Sulfur dioxide [8]  Ammonium nitrogen [10]  Nitrogen oxide [10] 

ForestryForest coverage (%) 20.4 21.7 [1.3]

Mandatory 

Total forest volume (mn cubic yards)

17.8 18.6 [6]

Mandatory targets are ones to which the government accords absolute priority

Key targets in the 12th Five-Year Plan

Key economic targets in 12th Five-Year Plan

Item 2010 2015Annual GrowthRate (%)

Target type

Economic development (3 items)  GDP (RMB trn) 39.8 55.8 7 Non-mandatory  Service sector share of GDP (%) 43 47 [4] Non-mandatory  Urbanization rate (%) 47.5 51.5 [4] Non-mandatoryScience, technology and education (4 items)  R&D spending as share of GDP (%) 1.8 2.2 [0.4] Mandatory  Invention patents per 10,000 people 1.7 3.3 [1.6] MandatoryResources and the environment (8 items)  Reduction of energy consumption per unit GDP (%) [16] Mandatory  Reduction of carbon dioxide emissions per unit GDP (%) [17] MandatoryLiving conditions

  Urban disposable per capita income (RMB) 19,109 26,810 >7 Non-mandatory

  Rural net per capita income (RMB) 5,919 8,310 >7 Non-mandatory  Construction of social housing (mn units)     [36] Mandatory

Selection from a total of 24 quantitative targets

Mandatory targets are ones to which the government accords absolute priority

Tapping China’s market opportunity

Urbanization on an epic scale creates consumer demand

China’s urban population will increase by 12mn-16mn every year

This will create huge demand for urban housing, shopping, workplaces, transport, education, healthcare and other civic amenities

％ Chinese urbanization rate

Source: National Bureau of Statistics and 12th Five-Year Plan

Growth sectors under China’s rebalancing

While some industrial sectors are in overcapacity, huge swaths of economic activity and employment are virtually missing from the Chinese marketplace.

Healthcare: China has 1.6 doctors per thousand people; the US has more than 23. Reaching the US ratio would mean adding almost 30mn doctors and other healthcare professionals

Manufacturing White Collar: China's manufacturers are focusing more on R&D, quality control, brand management, financial planning, environmental-health safety. China would need 60 million more white-collar workers to be comparable with the US on this score, or 30mn if we adjust for relative development levels.

Education: China has 10 teachers per thousand people, as opposed to 22 in the US. China needs another 16mn teachers to reach the US ratio in the US.*

* Source: Daniel H. Rosen is the principal of Rhodium Group, an advisory firm focusing on China, and is also a visiting fellow with the Peterson Institute for International Economics and an adjunct associate professor at Columbia University.

Opportunities in seven emerging strategic industries

Value-added output of seven emerging strategic industries to grow to account for 8% of GDP by 2015, according to the official highlights of the draft plan distributed prior to the National People’s Congress in March 2011

Under the 2011 Foreign Direct Investment Industry Guidelines, ‘encouraged’ sectors for foreign investment include high-tech, clean energy, aerospace and aviation, new materials, high-end manufacturing, advanced logistics, vocation and training

Long-term plan for new-energy vehicle industry

The State Council is reviewing a US$15.3bn development plan for the new-energy vehicle industry

Goal of becoming a leader in the new-energy vehicle sector over the next 10 years

Targeting sales volumes of 5mn units by 2020

• Electric car prototype developed by Shanghai Automotive Industry Corp Motor

• Due to be launched in October 2012

Source: China Daily

Opportunities in next-generation IT

China has 50% more internet users (475mn) than the entire US population and is forecast to reach 750mn by 2015 (McKinsey)

Government plans to invest in R&D of the "Internet of things" and cloud computing, and develop digital and virtual technologies.

Silicon Valley Bank and EMC Corp come to the Knowledge and Innovation Community in Shanghai

EMC CorporationSilicon Valley Bank

KIC Vision and Mission

…weaving together the resources of universities and research institutions nearby, domestic and international high-tech corporations, venture capital firms and government services to create a world class knowledge and commercialization center for high added value sectors such as Creative Media, Life Science and Cleantech.

KIC / Knowledge Community Developments (KCD) as a part of China’s push towards innovation

Innovation – a supportive environment for creativity

Education System – a bridge between international, local universities and industry to share best practices and latest research

Entrepreneurial Culture – business model encourages entrepreneurship

IPR – a catalyst in addressing and debating IPR issues

Financial – investor platforms for angels, PE and VC’s

Environment – a model example of an environmentally friendly community: green “LEED” certified buildings and ample green space

Real Estate – an innovative mixed-use master planned community helping shape China’s built environment.

LOCATIONS

Shanghai

Beijing

DALIAN

SHANGHAI

BEIJING

N. Korea

S. Korea

Japan

Taiwan

Russia

India

Nepal

Myanmar

Mongolia

Hong Kong

C H I N ANANJING

KUNSHANWUHAN

SHENZHEN

CHENGDU

Australian firms in China post impressive results and are optimistic about the market outlook

AustCham Shanghai's survey of business performance in China shows Australian companies' revenue, profitability and market share shot up in 2010

Optimism regarding the China market continued in 2010, despite concerns over the regulatory environment favoring local enterprises China is the No.1 priority for 20% of Australian companies About nine out of 10 Australian companies in China forecast a revenue increase for 2011 The percentage of companies expecting to increase investment in China by more than 15%

more than doubled in 2010

Source: AustCham-Shanghai website, January 20, 2011

AmCham Shanghai Survey of Business Performance in China

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5247

65

40

8779

61

010

2030

405060

7080

90100

Revenue growth Profitable Gained market share

% of respondentsanswering

affirmatively

2008

2009

2010

AusCham Survey of Business Performance in China 2010

Thank You

David.Nieh@shuion.com.cn

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Discussion