1 20160407_BCS2016_Appendix_v4.pptx Joerg Wuttke President President EU Chamber of Commerce in China Luxembourg June 23 rd 2016 China, Quo Vadis?
120160407_BCS2016_Appendix_v4.pptx
Joerg WuttkePresidentPresident EU Chamber of Commerce in China
LuxembourgJune 23rd 2016
China, Quo Vadis?
Publications
• Third Plenum ‘reality check’: taking stock of the Chinese Government’s reform progress
• Conducted with Roland Berger
Launch of First Three Local Position Papers in 2015
Launch of Two More Local Position Papers in 2016
Tianjin Position Paper published in March 2016
Southwest China Position Paper published in April 2016
Overcapacity in China
• Analysis of eight severely affected industries
• Builds on 2009 report, providing completely updated analysis
• Provides 30 recommendations to tackle the problem
• Received an unprecedented media coverage
620160407_BCS2016_Appendix_v4.pptx
37A. Is there overcapacity in your industry sector?
28% 30% 31% 34%
62%68% 70% 74% 75%
86%
72% 70% 69% 66%
38%32% 30% 26% 25%
14%
N=37
Automotive
and auto
components
N=18
Transportation,
logistics, and
distribution
N=20
IT & Telecom
N=14
Chemicals
and petroleum
N=19
Hospitality
N=35
Media and
publishing
N=23N=13
Financial
services
N=44
Machinery
N=13
Professional
services
Pharmaceuticals
Source: Business Confidence Survey Data, Roland Berger analysis
NoYes
2016
N=371
45%
55%
Note: Excluding Not applicable
4) Your Industry
B Outlook on the Chinese Business Environment
Survey on June 7th 2016
http://www.europeanchamber.com.cn/en/publications-business-confidence-survey
820160407_BCS2016_Appendix_v4.pptx
2) Financial Information
8. How did your company's total Mainland China revenue for 2015 compare to 2014?
Source: Business Confidence Survey Data, Roland Berger analysis
10%5%
13%
25%
37%
33%33%
29% 33% 36%33% 38%
38%
30%
26%
61%
33%
12%
39%44% 40% 40%
38%
40%
24%
6%
28%
47%
18%12% 15% 15% 13%
5% 5%
8%8%12% 8%8%6%
Automotive
and auto
components
N=40
Machinery
N=25N=72
IT & TelecomFood &
Beverages
N=17
Pharmaceuticals
N=18
Media and
publishing
Professional
services
Hospitality Chemicals
and
petroleum
24 20 38N=18 53
Financial
services
Decreased substantially (> 20%)Decreased (5 - 20%)Remained the same (+/- 5%)Increased (5 - 20%)Increased substantially (>20%)
2%
12%
N=506
2016
35%
36%
15%
67%
A Company Profile
920160407_BCS2016_Appendix_v4.pptx
2) Financial Information
10A. Please characterize your company's earnings before interest and tax (EBIT) in Mainland China in 2015.
Source: Business Confidence Survey Data, Roland Berger analysis
20%13%
29%
11%17%
12% 10% 22%
10%22%
21%
6%
26% 33%
33%
80% 80%72% 70% 68% 66% 65% 62% 58%
50%
10% 10%8% 8%6%
Pharmaceuticals
N=18
Chemicals
and petroleum
N=25 N=38
Financial
services
N=18
IT & Telecom
N=24N=17
Professional
services
N=53
Automotive and
auto components
N=20
Hospitality
N=72
Media and
publishing
Machinery Food and
beverage
N=40
A Company Profile
NegativeBroke evenPositive
66%
14%
20%
N=506
2016
Crossing with industry
1020160407_BCS2016_Appendix_v4.pptx
2) Financial Information
10B. How did your company's EBIT in China for 2015 compare to 2014?
Source: Business Confidence Survey Data, Roland Berger analysis
2016
N=506
3%
11%
43%
32%
11%
A Company Profile
Decreased substantially (> 20%)Remained the same (+/- 5%) Decreased (5 - 20%)Increased (5 - 20%)Increased substantially (>20%)
11%
29%
6%11%
36% 38% 35%43% 46%
47% 47%
39%
67% 67%
44% 44% 40% 30%38% 24% 28%
24%6%
22%12% 11% 15% 18%
8%18% 13% 17%
6%5%12%
8% 8%3%
10%7%4%
24 38N=40
Food and
beverage
IT and
telecommunications
Automotive
and auto
components
Media and
publishing
72 20 17 53
Financial
services
3%25
4%
18
Pharmaceuticals
18
Professional
services
Machinery Chemicals
and petroleum
Hospitality
Commonly cited, but weakly supported
in reality:
China has time
Muddling through is a viable option (even
if suboptimal)
China has the tools/resources to deal
with anything slowing down can bring
China’s leaders recognize the problems
China’s Leaders can fast-track reform
The conventional thinking…
The New Normal
Source: The Economist
Source: The Economist
0
2
4
6
8
10
12
14
16
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Sources: NBS, CEIC, The Conference Board *stylized growth outlook, not actual projections
GDP: percent growth, quarterly, y-o-y
The growth trend started
around 6 percent back in
1999The slowdown will
not be linear, but the
growth cycle will
revolve around a
slowing trend
Growth volatility has
eased substantially
since 2013 as policy
support has tempered
the pace of the
slowdown
Economic weakness: but regional differences
The recent improvement in China’s industrial sectors is due to the
government’s fiscal and quasi-fiscal spending ramp-up in the second half
of last year by 16%, or RMB2.4trn
In Q1, increases in total credit exploded to RMB7.5tn, up 58% YoY and
equivalent to 47% of nominal GDP – the highest ratios ever
Considering also swaps of local government debt into local government
bonds, total credit to the non-financial sector actually increased nearly
RMB3tn in March
“China is growing at 6.7% in 1Q16 and
broadly stabilizing”, but …………..
Chinese equivalents – population
Less than 20 20 - < 40 40 - < 60 60- < 80 80 or more
Population2010, millions
BURUNDI
PAPUA NEW GUINEA
CAMERON
ZIMNABWE
VIETNAM
SUDAN
BRITAIN
IRAN
ITALY
CANADA
TEMEN
JORDAN
ROMANIA
ARMENIA
DENMARK
AGENTINA
FRANCE Jiangxi
PHILPPINESSOUTH AFRICASPAIN
POLAND
SAUDI ARABIA
ETHIOPIA
GERMANYMYANMAR
ALGEARIA
KENYA
CHILE
GHANA
WENEZULE
SOLOMON ISLANDS
CONGO
UGANDA
Source: The Economist; Economist Intelligence Unit; CEIC; WTO
Continent China
Source: Access China, Economist Intelligence UnitSource: Economist Intelligence Unit
The two-speed economy
Li Keqiang: 20% of provinces insolvent
The Continent China Real Estate Market
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000
Jan-
2011
Apr
-201
1
Jul-2
011
Oct
-201
1
Jan-
2012
Apr
-201
2
Jul-2
012
Oct
-201
2
Jan-
2013
Apr
-201
3
Jul-2
013
Oct
-201
3
Jan-
2014
Apr
-201
4
Jul-2
014
Oct
-201
4
Jan-
2015
Apr
-201
5
Jul-2
015
Oct
-201
5
Jan-
2016
Apr
-201
6
Net Special Clearing Member
Net National Commercial Banks
Sources: J Capital, The Conference BoardSources: J Capital, The Conference Board
Net lending, RMB bn
0
5
10
15
20
25
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1/2
011
5/2
011
9/2
011
1/2
012
5/2
012
9/2
012
1/2
013
5/2
013
9/2
013
1/2
014
5/2
014
9/2
014
1/2
015
5/2
015
9/2
015
1/2
016
Total social financing, new increase
Money supply (M2) growth, y-o-y
RMB bn
Sources: PBoC, CEIC, The Conference Board
Percent
In urgent response to 2015, Q1 stimulus reached new heights6.6 trillion RMB in new TSF in Q1; and 4x that in interbank lending
By order? SOEs resume investing
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1/2
008
7/2
008
1/2
009
7/2
009
1/2
010
7/2
010
1/2
011
7/2
011
1/2
012
7/2
012
1/2
013
7/2
013
1/2
014
7/2
014
1/2
015
7/2
015
1/2
016
SOE non-SOE
FAI growth: contribution from SOE and Non-SOE
Sources: CEIC, The Conference Board
23.30
5.7
10.7
0
5
10
15
20
25
30
35
40
45
1/2
008
7/2
008
1/2
009
7/2
009
1/2
010
7/2
010
1/2
011
7/2
011
1/2
012
7/2
012
1/2
013
7/2
013
1/2
014
7/2
014
1/2
015
7/2
015
1/2
016
FAI growth, SOE
FAI Growth, Private
FAI Growth, total
FAI growth: SOE vs. private sector, percent
Sources: CEIC, The Conference Board
An increasing share of debt is allocated in excess
capacity sectors. Eventually, such costs will have to be
borne by the financial sector and eventually by savers,
asset prices will have to correct, corporate profitability
may be depressed, and future growth will be hurt.
Assets exploded by a record RMB27trn ($4.1trn) in
2015, rising by 15.7% to RMB200trn.
There are significant limitations to continuing to expand
a $31trn banking system by $3 to 4trn in assets per
year without resorting to increasingly speculative
funding strategies.
China now accounts for 28% of the global stock of M2,
significantly higher than in any other country.
Debt is rising much faster than output
China’s companies have taken on $10trn of
debt in the past eight years (10% in Forex)
Source: FT
In 2007 China’s Total non financial debt to GDP ratio was 147%.
Now it is at 260% and climbing, possibly 300% in 2020.
Total debt RMB152tn ($23tn).
Net debt increase 2015: RMB18trn, 2016: RMB23trn.
$512bn fall in currency reserves in 2015China has a current account and net direct investment surplus of about
$600bn, implied capital outflows must have been close to $1tn
Source: The Economist
Waking up to a critical “loss in translation”….
Reform vs Re-Form Liberalization
Marketization
Institutionalization
De-regulation
Transparency
More Market Driven
Pooling
Recombination
Recapitalization
Control changes
Extraction
More Statist
2) Regulatory Framework
42%
58%
N=506
2016
Source: Business Confidence Survey Data, Roland Berger analysis
26. Has the continued strengthening in measures to tighten Internet control and access restrictions in China been having an evenbigger negative impact on your company?
25% 28% 29% 31%
45% 50% 51% 52% 56%65%
75% 72% 71% 69%
55% 50% 49% 48% 44%35%
Chemicals
and
petroleum
N=24
Food &
Beverages
Hospitality Professional
services
72
Automotive
and auto
components
40
IT & Telecom
38
Financial
services
53
Machinery
25
Media and
publishing
18 20
Yes
No
17
Pharmaceuticals
N=18
Outlook on the Chinese Business Environment
Crossing with industry
4) Your Industry
36. How would you describe the business outlook for your sector in China over the next two years? (1/4)
10% 12%18%
6%
24% 17% 13%
40%
36%38% 44%
41%
38%56%
39% 47% 50%
35%
56% 53% 50% 47% 43% 39% 37% 34% 33%25%
6%8%
Chemicals
and petroleum
N=20
Hospitalit
y
N=24
4%
Financial
services
IT
&
Telecom
N=38
Media
&
publishin
g
N=18
Professional
services
N=72
1%
Food &
Beverages
N=17
Pharmaceuticals
N=18
Automotive
and auto
components
N=40
Machiner
y
N=25 N=53
Source: Business Confidence Survey Data, Roland Berger analysis
1) NA: Not applicable
Not applicablePessimisticNeutralOptimistic
2016
N=506
2%
15%
39%
44%
Growth
Outlook on the Chinese Business Environment
36. How would you describe the business outlook for your sector in China over the next two years? (1/4)
PROFITABILITY
40%
24% 24%33%
23%16%
25%
37%40% 39%
30%
47% 49%
44%55%
64%
58%
45% 48%61%
30% 29% 26% 22% 21% 20%13% 13% 13%
5%
N=72
Media
and
publishin
g
Financial
servicesAutomotiv
e and auto
component
s
N=18N=38N=20
Hospitali
ty
N=24
Machiner
y
N=17
Profession
al services
N=18
Pharmaceutical
s
N=53
4%
N=40
1%
N=25
Chemicals
and
petroleum
IT and
telecommunicatio
ns
Food
and
beverag
e
Source: Business Confidence Survey Data, Roland Berger analysis
Not applicableOptimistic PessimisticNeutral
201
6
N=506
2%
31%
48%
19%
Outlook on the Chinese Business Environment
4) Your Industry
46A. Does your company plan on cutting costs in China this year?
1) The Role of China in Your Business
38% 39% 39%
53% 56%64%
71% 74% 75% 79%
63% 61% 61%
47% 44%36%
29% 26% 25% 21%
Professional
services
Media and
publishing
IT & Telecom Food and
beverage
HospitalityMachinery
N=40 N=18 N=20
Financial
services
Pharmaceuticals
N=18 N=25 N=24N=17
Chemicals and
petroleum
N=72
Automotive
and auto
components
N=53N=38
NoYes
Source: Business Confidence Survey Data, Roland Berger analysis
2016
N=505
41%
59%
Outlook on Company Strategy
Crossing with industry
The Last 6 Months –
Weak 2015 year-end and January offset by a huge
credit surge – and its impacts – in Q1
Resulting uptick of volatility in asset classes and
massive swings in investment flows
Fundamentals continue to deteriorate – investment,
industrial performance, trade
Services and consumption growth rates are also now
slowing
Debt drag is increasing, consuming more of the new
liquidity and shifting the grave risks of credit
expansion into financialization channels
The Near-Term Outlook –
More of the same – credit and liquidity support when
things over-slow; shuffling away of debt problems in
any and every way possible
Depreciation is more and more likely – 7:1 range
expected, accompanied by tightening of capital
account processes to slow outflows
More clamps on re-leveraging
Stronger and stronger macro-prudential measures
and financial innovation to mitigate, mute, obscure,
and suspend defaults
Continued stagnation of the industrial sector
Summary and outlookThe economy looks different to SOEs, POEs, and MNCs
SOEs— Reform pressures increasing
amidst mixed signals
— Continued access to vast
credit leaves little incentive to
reform
POEs— Main source of market-
sourced capital in system
— Aggressive M&A off monopoly
market shares
MNCs— Consumer interest and
demand rising
— Regulatory walls and costs
rising
Source: The Conference Board