IHS ECONOMICS & COUNTRY RISK IHS Financial Seminar...•2015-17 – transparency campaign at local government level •Increase foreign investment access •2015 – revised FDI catalog

© 2016 IHS

IHS ECONOMICS & COUNTRY RISK

IHS Financial Seminar The Road to Growth Dealing with China’s Overcapacity:

A Five-Year Outlook

19 April 2016 | Tuesday | Hong Kong

© 2015 IHS

Presentation

ihs.com

IHS

China’s Economic Transition: Separating Fact

from Fiction

China Regional Service

Brian JACKSON, Senior Economist, +86(0)10 65334515, [email protected]

April 2016

ECONOMICS

mailto:[email protected]

© 2016 IHS

Restructuring during China’s economic

slowdown

3

China’s Economic Transition: Separating Fact from Fiction

© 2016 IHS

Slowing growth concentrated in China’s traditional

industrial and construction sectors

4


-1

1

3

5

7

9

11

13

2008 2011 2014

Services Industry and construction Agriculture

Chinese economic growth by sector, non-cumulative

Source: IHS

Co

ntr

ibu

tio

n t

o r

eal G

DP

gro

wth

,

perc

en

tag

e p

oin

ts

© 2016 IHS

© 2016 IHS

Industrial sector output and profit growth mismatch

reveals distortions in state-led industries

5

-20

-10

0

10

20

30

40

50

60

2007 2010 2013 2016

Utilities Light manufacturing

Heavy manufacturing Mining

Total growth

China industrial profits growth, nominal

Source: IHS © 2016 IHS

Perc

en

tag

e p

oin

t co

ntr

ibu

tio

n


0

1

2

3

4

5

6

7

8

2007 2010 2013 2016

Construction Utilities

Light manufacturing Heavy manufacturing

Mining

Contributions to Chinese GDP growth


Perc

en

tag

e p

oin

t co

ntr

ibu

tio

n

© 2016 IHS

Investment in underperforming traditional sectors

slowed markedly since 2011

6


0

10

20

30

40

50

60

70

-2

0

2

4

6

8

10

12

14

16

18

2004 2007 2010 2013 2016

Construction Utilities Light manufacturing Heavy manufacturing Mining Secondary sector share of FAI growth

China fixed-asset investment growth


Perc

en

tag

e p

oin

t co

ntr

ibu

tio

n

Sh

are

© 2016 IHS

Year on year growth returns for real estate activity,

levels data less encouraging to upstream suppliers

7


-40

-20

0

20

40

60

80

2009 2012 2015

Completions Under construction Starts Sold

Residential floor space indicators

Source: NBS Notes: floor space under construction is for all floor space; residential acounts for about 90%.

Perc

en

t ch

an

ge y

ear

ag

o

© 2016 IHS

0

2000

4000

6000

8000

10000

12000

14000

2009 2012 2015

Completed Sold Starts

China's residential floor space activity, levels


10,0

00 S

qu

are

mete

rs, 12M

MA

© 2016 IHS

China’s service sector relatively stable, but not immune

to slowdown and restructuring

8


0

1

2

3

4

5

6

7

2007 2010 2013 2016

Other services Real estate Finance Accommodation, catering Wholesale, retail Transport, storage, post

Contributions to Chinese GDP growth


Perc

en

en

tag

e p

oin

t co

ntr

ibu

tio

ns

© 2016 IHS

Slowing service sector investment is primarily due to

real estate sector correction

9


0

10

20

30

40

50

60

70

80

-5

0

5

10

15

20

25

2004 2007 2010 2013 2016

Other services Real estate Finance

Accommodation, catering Wholesale, retail Transport, storage, post

Tertiary sector share of FAI growth

China fixed-asset investment growth


Perc

en

tag

e p

oin

t co

ntr

ibu

tio

n

Sh

are

© 2016 IHS

Reform during China’s economic slowdown

10


© 2016 IHS

Reform priority 1: supply side correction

2020 capacity reduction targets:

• Steel: cut 150-200 million tonnes,

consolidate ownership from 300

to 5 conglomerates by 2025

• Cement: cut 200 million tonnes

• Glass: cut 200 million cases

• Coal mining: cut 700 million

tonnes

CNY 100 billion fund established

for unemployment during 2016-17

alone, 1.8 million steel and coal

sector layoffs confirmed, rumors

that layoffs will reach 6 million

11


0

1

2

3

4

5

2003 2005 2007 2009 2011 2013 2015

Cement Glass Pig iron Crude steel

China heavy industrial output volume


2002=

1, 12M

MA

© 2016 IHS

Reform priority 2: SOE reform

Ownership reform

• Competitive SOEs – state takes

a absolute minority ownership,

exit from SASAC system

• Public SOEs – state maintains a

relative majority

• Strategic/“functional” SOEs –

state maintains absolute majority

Managerial reform

• Professionalize management,

increase authority of board,

increase linkage between

salaries and profitability

12

-

5

10

15

20

25

30

35

Agriculture Industry Services

Functional Public Competitive

China state assets by classification, sector

Source: SASAC, NBS, IHS

CN

Y t

rillio

n

© 2016 IHS


© 2016 IHS

Reform priority 3: market entry

• Reduce barriers to market entry

for private domestic investors

• 2014 – Company Law Reform

• 2013-? – central government

campaign to reduce approval

bottlenecks in Beijing, canceling or

delegating to local authorities

• 2015-17 – transparency campaign

at local government level

• Increase foreign investment

access

• 2015 – revised FDI catalog

• 2014-20 – bilateral trade and

investment agreements

13

-20

-10

0

10

20

30

40

50

60

2007 2010 2013 2016

Services Industry and construction Agriculture

China foreign direct investment growth


Perc

en

tag

e p

oin

t co

ntr

ibu

tio

n


© 2016 IHS

China’s 13th Five Year Plan an admission of a weaker

growth outlook, shift towards new but small sectors

Growth targets 2016-20 (2011-15

actual):

• Real GDP: 6.5% (7.8%)

• Labor productivity: 6.6% (7.5%)

• Services share: 56% (50.5%)

Implied targets:

• Nominal GDP: 6.5% (10.6%)

• Nominal services: 8.7% (13.6%)

• Services share of growth: 70%

(60%)

14


0

5

10

15

20

25

30

2007 2010 2013 2016 2019

Primary Secondary Tertiary

Growth under China's 13th Five Year Plan


Year

on

year

no

min

al g

row

th

© 2016 IHS

China economic outlook

15


© 2016 IHS

China economic outlook

16


-4

-2

0

2

4

6

8

10

12

14

16

18

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Services Non-manufacturing industry Manufacturing Agriculture

Contributions to China's real GDP growth

Source: IHS

© 2016 IHS

Sources

• IHS Country Intelligence • IHS China Regional Service

China’s

Economic

Transition:

Separating

Fact from

Fiction

17

© 2016 IHS

Q & A

18


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IHS ECONOMICS & COUNTRY RISK IHS Financial Seminar...•2015-17 – transparency campaign at local government level •Increase foreign investment access •2015 – revised FDI catalog

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