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International Consultants Ltd Andrew Leung

China’s Industrial Development:

Challenges and Opportunities in a Changing China

Andrew K P Leung, SBS, FRSA

A presentation to the Danish Chamber of Commerce, Southern China

Hengqin Exhibition Hall, Zhuhai, Guangdong, China

Friday 23 September, 2011

A troubled and transformed world

•Weak Western economies

•US political and economic paralysis – Print more money!

•European sovereign debt crisis threatens the Euro + Europe

•Robust economic performance in emerging markets

•Rise of the middle class in emerging markets

•Rise of mega-regions in the developing world (UN Habitat,

State of the World’s Cities 2010/11)

•Age of Scarcity of resources inc food, water, and minerals

•Global power shift from West to East – National Intelligence

Council Report Project

•Rise of China as a potential global superpower

•China’s global footprint

•US refocussing Asia Pacific – Robert Kaplan, Monsoon :

The Indian Ocean and the Future of American Power,

Random House, New York, 2010.

•Asia hedging - Simon Tay. Asia Alone, John Wiley & Sons

(Pte) Ltd, 2010

•Rise of citizen power – Jasmine or not – MENA to Dalian

•Major changes 2012– new leadership in China (+ HK); US

presidential election

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The shrinking dollar and the strengthening RMB

• Greenspan to MSNBC "Credit rating is not the

issue. We can always print money' "Our

Currency Your Problem― (US treasury sec John

Connally to Richard Nixon)

• QE3? – confidence in dollar as storage of

value collapsing – Gold likely > $2,200 in 2012

• Paul Krugman – China’s „dollar trap‟

• China‟s Houdini act - reserve diversification

(Don’t Sell; Don’t Buy); vigorous RMB

internationalization (trade settlements, RMB

bonds); ODI to acquire overseas assets,

resources, markets + expertise.

• RMB not likely to readily give up protection of

capital account non-convertibility

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The Triffin Dilemma

• Article by Zhou Xiaochuan, Governor, PBOC

• 1960s USD glut (Marshall Plan + exuberant US

economy) led to abandoning the Gold Standard

• Triffin Dilemma – Conflict of Goals or Interest

between national v global monetary requirements

• Reinforced SDRs to be managed by IMF; supported

by a pool of currencies; SDR-denominated

securities and assets; SDRs as medium of

international trade

• China expected to be given third largest voting

right in the IMF reform plan after US and Japan but

US to retain veto power

o China, France agree to form a task force to include

the yuan in the IMF's special drawing rights (Wall

Street Journal, 28 August 2011)

Who have fared best out of the financial crisis?

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The Economist, 18 August 2011

Swing of the world pendulum Economist 4 August 2011

World Bank - Global middle-class > x2 , from 430 m in 2000 to 1.2 billion in 2030 (or from 7.6%

of world‟s population to >16%); 93% from developing countries, especially China and India, up

from 56% in 2000

Trade rapidly growing amongst emerging markets . Heart of the global production chain, China

now the largest trading partner of more and more countries including Japan, India and Brazil.

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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

• PEW economic satisfaction index (7/2011)- China

88%, US 18%, Germany 67%, UK 17%, France 15%

• > 40 m Chinese Disapora

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

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Uncertain East Asia dynamics

•Complex China-centred supply chain; ASEAN + 3; ACFTA (ASEAN + China

largest FTA with 2b people); 2003 Treaty of Amity & Cooperation; Chiang Mai

Initiative (currency swaps)

•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)

•Australia double benefit – rising resource export and cheap imports

•Taiwan more accommodating

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

•RMB regional currency?‘Asian Dollar? Asian Monetary Fund; East Asia

Economic Union? A future Asian Commonweath?

•But increasing Asian fear of Rising China (Asia Alone, Simon Tay, John Wiley &

Sons (Asia) Pte 2010)

•Taiwan relations

•Territorial disputes

•US military return to the Asia Pacific (Monsoon, Robert Kaplan, Random House,

New York, 2910)

Sobering Realities

• UN Population Forecast 3.05.11 – revised from 9 to

10 b by end century (15.8 billion if highest fertility

regions average ½ child more)

• Hot, Flat and Crowded, Thomas Friedman, Penguin,

November 2009

• China‟s Five Year Plan (2015-11) still needs 10 m

extra jobs a year. Massive urbanization demands huge

resources to be acquired worldwide, against increasing

scarcity including food and water, Climate Change,

competition and geopolitical rivalry

• Sustainable for whole world to embrace the American

Dream all at once as in Three Billion Capitalists,

Clyde Prestowitz, Basic Books, 2005 ?

• Human survival begs the need for different mindset

and lifestyles - Ecological Civilization (Pan Yue, Vice

Minister of Environmental Protection) - Minimalism,

Less is More, Golden Mean is the New Normal?

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Environmental Constraints

• 100 yrs of industrialization/pollution into a few decades

• National Assessment Report on Climate Change (Dec

2006) + 1.3 - 2.1 degrees C by 2020. Glaciers Qinghai-Tibet Plateau dwindling 131.4 sq km p.a. (by 27.2% by 2050.) Extreme weather conditions - floods and droughts – water + food scarcity + diseases.

• 10 NPC, March 2007, Premier Wen -'unstable,

unbalanced, uncoordinated, and unsustainable'. Five Imbalances - Rural/Urban; Growth v Environment; Economic v Social; National v Local; Inward v Outward

• UN Report Cost of Pollution in China, Feb 2007 –

3.8% GDP; World Bank – 5.8%; others – 8 – 12% or even higher

• China threatening the world – „When a Billion

Chinese Jump‟, Jonathan Watts, Faber and Faber, July 2010

• Endless ecological degradation and disasters – quick

profits, greed, vested interests and corruption – uphill battle for the Ministry of Environmental Protection

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Water Crisis

• Water availability severely limited – 1/3 world average @,

uneven 36% (80%) South/North distribution; all 7 main rivers

and 25/27 largest lakes polluted; 300 m drinking water unsafe;

25% desertification rate; Yellow River running dry (When the

Rivers Run Dry, Fred Pearce, Random House, 2006)

• World Bank ‘Addressing China‟s Water Scarcity’, 2009,

Agriculture = 65% usage, but lowest water productivity – only

45% used on crops; Industry 24% usage but only 40% recycled

v 75-85% in the West

• Water pollution severe – only 46% municipal sewage treated;

2/3 rural population no piped water; northern aquifers sucked

dry – lowering water tables, drying lakes and wetlands,

increasing urban subsidence

• UN Report Cost of Pollution in China (ibid.) water crisis

costing 2.3% GDP (1.3% = scarcity, 1% = water pollution)

• South-to-North Water Diversion Project – concerns about

volume, quality and ecology. Delayed since Beijing Olympics –

now Eastern route 2013; Middle route 2014, Western route (>

10,000 – 13,000 ft-high Tibetan Plateau, judged too difficult)

• Proposed diversion from Tibet‟s Yarlung Zangbo River to the

Yellow River feared to spell disaster for downstream

Brahmaputra River affecting 500 m people in India,

Bangladesh, Nepal, Bhutan and Myanmar.

• State Council 19 May 2011 admitted problems of resettlement,

ecology and seismic geology with the Three Gorges project

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Energy and other resource bottlenecks

• IEA July 2010, China > US as largest energy consumer;

but @ personal consumption = 1/15 American, 1/5

Japanese, but 2x Indian; energy intensity 50% >

industrialized countries; efficiency much lower than Japan,

UK and US

• Labour and energy intensive industries 50% reliant on

external proprietary technologies and brands (Japan and

US each 5% reliant); only 3% manufacturers own

proprietary technologies; only 15% value-added in being

biggest IT exporter; $1 dollar net profit from a DVD player

and only 1.65% value captured of an iPod. (How much to

buy a Boeing 747 or an Airbus?)

• 40% GDP directly and indirectly reliant on export (US11%)

• Standard and Poor’s June 2010 report - lion‟s share of

global demand for resources - copper (39%), aluminium

(43%), steel (42%), iron ore (60%), and coking coal (52%) –

urbanization, transportation, Middle-Class lifestyles

• Vulnerable to external crisis, energy prices, competition,

rivalry, geopolitics, and increasing scarcity.

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Energy Security

• Need to grow reasonably fast before onset of aging profile in a few

decades

• 94% energy self sufficiency (OECD average 70%) of which Coal 77%.

• Oil for urbanization. 8% of world crude oil demand (US 25%) but 1/3

of global demand growth.

• 40% dependent on oil import (hope to reduce to 12-15% eventually) v

Japan almost 100%, India – 60% - 70%

• Choke points of Hormuz (Iran) and Malacca Strait (7th Fleet)

• Vice Premier ZengPeiyan, China needs strategic reserve equivalent to

90 days consumption (e.g. Zhenhai, 160 km S of Shanghai + Qingdao)

• ME – Saudi Arabia 17% China’s imports; Iran - $70 billion deal in

November 2004 to develop the Yadavaran; OPEC President visited

Beijing in late December 2005 to discuss oil price modalities

• Central Asia – 1,200 km pipeline Kazakhstan to North Xinjiang

completed, 10 million barrels of crude oil a year; SCO – China,

Russia,Kazakhstan, Kyrjystan, Tajikistan and Uzbekistan. Observers -

Iran, India, Pakistan, Afghanistan and Turkey.

• Africa – 1/3 China’s oil import, mainly from unstable and problematic

countries like Angola and Sudan

• South America – Oil from America-bashing Venezuela and soybeans

from Brazil, both in the US backyard

• Russia – trans-Siberia pipeline bypassing China except a southern link

to Xinjiang but still much potential for energy cooperation with China

• Australia – a major minerals and gas supplier to China but contracted

with Osaka Gas to supply 1.5 m tonnes LNG for 25 years from huge

Gorgon field off NW coast of Australia, operated jointly by Chevron,

Royal Dutch Shell and ExxonMobil. 2.5 m tonnes separately for US

West Coast annually for 20 years.

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Geopolitics and Geo-economics

• China’s Rise - Security Dilemma, Realpolitik, Zero-Sum Game - Robert D Kaplan, Monsoon- The Indian Ocean and the Future of American Power, Random House, 2010; Gideon Rachman, Zero-Sum World, Atlantic Books, 2010, and Niall Ferguson, Civilization: The West and the Rest, Penguin Press, Nov 2011

• US shifts from Iraq and Afghanistan to Asia-Pacific • US Pacific Fleet capitalizing on ‘1st and 2nd island

chains‟ + South China Sea territorial disputes, and ‘alliance of democracies of India, Australia and Japan v China’s response of „String of Pearls‟, military access-denial capabilities plus alternate land routes through Central Asia and Pakistan to break the ‘’island chains’’

• Energy geopolitics and geo-economics re-defining

China’s relations with Central Asia, Africa, Latin America, Iran, Australia and Russia

• Energy and food security - Africa‟s newfound dynamism

• Energy security top of US and Europe’s political

agendas • Global warming may change the balance of the world’s

economic gravity dramatically towards the Arctic within this century (Trausti Valsson, How the world will change with Global Warming, University of Iceland Press, 2006) 14

Food Security

• With Climate Change unchecked, China’s production of wheat, rice and

corn to decrease by 37% by latter half of 21st century (March 2007 Joint

government report)

• Population growth, global industrialization and urbanization, use of

arable land for bio-fuels

• China only 7% of world‟s arable land to feed 20% of world population, not

helped by water scarcity and pollution. Western agriculture heavily

subsidized US-50%, EU 60% and Japan 76.7% against 1.23% in China. In

face of Western imports, 20 million farmers have left their land to seek

alternative likelihood.

• Results of Five Year Plan (2005-2010) „Building a Socialist Countryside‟ –

(Morris Goldstein and Nicholas Lardy, The Future of China's Exchange Rate

Policy, The Petersen Institute, Washington D.C., July 2009, pp.36-37 )

• (a) Partial reimbursement (about 30%) of healthcare costs - 20-fold increase

by 2007, covering 730 m people, quadruple the number covered in 2005;

• (b) Better health insurance (2009-2011) to cover 90% of population by

2011. (Government pays half or more , up from 16% in 2001);

• (c) Old Age Pensions averaged RMB 1,173 in January 2009 (higher than

national average wage, although still well below going wage in cities);

• (d) Minimum living standard guarantee program with dramatically-

increased monthly payments from RMB50 in 2002 to RMB140 by 2008.

• Oil-rich but food-poor countries to invest in agricultural and livestock

projects overseas. Saudi Arabia. Libya talked to Ukraine on growing wheat.

• Chinese companies acquiring farm land in Africa, Brazil and Argentina

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China’s Megatrend (1) Green Revolution

• China formulated ‘Agenda 21 – A White Paper on Population,

Environment and Development in the 21st Century’ following

UN Conference on Environment and Development in 1992 -

‘common but differentiated responsibilities‟ for mitigation and

adaptation measures adopted at the United Nations Framework

Convention on Climate Change (UNFCC).

• According to IEA, China‟s per capita CO2 emissions improved

to 3.65 tons in 2004 = 87% of world average and 33% of OECD

levels. Emission intensity also fell from 5.47KgCO2/$ in 1990 to

2.76KgCO2/$ in 2004, a reduction of 49.5% v world average

reduction of 12.6% and OECD’s average of 16.1%.

• June 2007, NDRC National Climate Change Program for the

coming decades up to 2050.

• World Energy Council - China, highest energy intensity in 1980,

strongest improvement in energy productivity - around 7.5% p.a.

between 1990 and 2000. This trend has since drastically declined

to only 1% p.a. China's energy intensity is now slightly above

world average v 80% higher in 1990.

• In industry and businesses, China’s energy efficiency @GDP

very low: 146 % less efficient than Japan, 73% less efficient

than the US, and even 47% less efficient than India (Primary

Energy Intensity, World Map by Country (2009) - Trends in

Global Energy Efficiency 2011: An Analysis of Industry and

Utilities, researched and written by Enerdata and the Economist

intelligence Unit, under the aegis of The ABB Group,

headquartered in Switzerland )

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Solar Energy

• World's largest solar-panel manufacturer, 70 % global

solar-energy market, capacity of 18 GW in 2010.

• NYSE-listed Suntech founder China's 4th richest > $1.4 b

• Worldwatch Institute, Washington DC - China has 30 m solar

households, 60% of world‟s installed capacity

• New generation of energy-efficient buildings incorporating

solar energies for application nationwide.

• China now a leader in advanced solar technology. 2009, US

Applied Materials Inc., one of world's largest photovoltaic

equipment suppliers, established solar technology centre in

Xi'an, Shaanxi, one of the world's biggest and most-advanced

private solar energy R&D facilities.

• 2/3 of China‟s land area receives > 2,000 hrs sunlight

annually, > many other regions of similar latitude, including

Europe and Japan - a potential solar energy reserve = 1,700

b tons of coal.

• China’s single time-zone covers 3 time zones. When

electricity is at peak in early evening in eastern areas, west

China can still supply solar energy available in the daytime.

• Grid parity in China by 2018,, two years ahead of US.

• Current installed capacity < 1 GW. To double target capacity

from 5 GW to 10 GW by 2015 and 50 GW by 2020. 17

Wind Energy

• CHINA > America as the world

leader in wind energy in 2010,

Global Wind Energy Council.

• China's installed wind capacity

increased exponentially from

0.3GW in 2000 to 42.3GW in

2009, now 22% of world‟s total.

• In 2010, more turbines were

installed in China than America

(The Economist, 3 February 2011)

• Wind power, much in Gansu,

Xinjiang and Inner Mongolia,

expected to grow from 1 GW to 30

GW, to power some 13-30 million

households by 2020.

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Hydroelectric Power

• China's hydropower generating capacity reached

200GW as of 2010 > 20% of total power-

generation capacity, revising target of 380GW to

430 GW by 2020

• Three Gorges Dam to increase hydroelectric power

from 108 GW to 290 GW by 2020.

• 12th Five-Year Plan (2011-15) to increase

conventional hydropower plants by 1/3 to 83GW

and to raise pumped-storage hydro-capacity by 60

% to 80GW. (Pumped-storage uses low-cost, off-

peak electric power, released during peak demands

when prices are higher.) New projects mainly in

mountainous south-western provinces such as

Yunnan and Sichuan

• Hydropower capacity ranks as the world's biggest.

However, utilization rate still lags behind other

countries.

• On-grid tariff charged by power producers to grids

for hydropower lower than energy produced by

coal-fired plants. Parity is a long-term aim.

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Nuclear Energy

• Installed capacity 10.08 GW in 2010, 14 reactors in

operation, > 25 under construction, nearly ½ total

under construction worldwide

• 2 new plants annually for next 15 years. Reactors

planned include world's most advanced, for > ten-fold

increase to 80 GW by 2020, 200 GW by 2030, and

400 GW by 2050.

• Aiming to become self-sufficient in reactor design

and construction, plus other aspects of fuel cycle.

• Total investment (China National Nuclear

Corporation (CNNC) controlling stake) will reach $75

billion by 2015. Subsidiary, CNNC Nuclear Power

Co Ltd expected to list in 2011.

• Following Japan‟s Fukushima nuclear fiasco in

March 2011, China first country to call a halt to

review safety standards. Program likely to resume

after new safety measures put in place. This could

include safer fuel like thorium.

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Bio-fuels

• 2005 China was world’s third largest biofuel

producer. 2006, NDRC set a target of meeting 15%

of transportation energy needs with biofuels by 2020

• 2009, China‟s ethanol projects had a total capacity of

2.2 m metric tons or some 47,000 barrels per day in

Heilongjiang, Jilin, Henan, Anhui, Guangxi, and

Chongqing. China the world’s third largest ethanol

producer, generating 1 b gallons annually .

• Gasohol, a mixture of petrol and and ethanol, has

been made mandatory. in Heilongjiang, Julin,

Liaoning, Ahhui, and Henan.

• China has a large and growing biodiesel producing

capacity. 2009 - 2.1 million tons, or 41,000 barrels

per day. 2005 biodiesel output capacity was 300,000

metric tons, almost double 2004, from almost zero in

2000.

• December 2007, economic incentives to encourage

bio-fuel production by non-food agricultural

products e.g. biomass, sweet sorghum and cassava.

• Since 2007, 26 million households have switched to

methane gas generated by human and animal waste. 21

Natural Gas

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• Coal 2x CO2@ kwh as natural gas; but SO2 due to

coal shades and cools atmosphere

• IEA World Energy Outlook 2011– ‘Golden Age of

Gas?‟

Annual world production rising by 1.8tcm to reach

5.1tcm by 2035; Gas to surpass Coal by 2030

• China 6 LNG coastal terminals ready by 2015 to

consume 260bcm = x3 (2008)

• New pipeline from Turkmenistan.

• Shale = 23% US natural gas, up from 4% in 2005 –

technology + export markets.

• Other nonconventional gas - “tight gas” in sandstones

+ coal-bed methane

• Fracking groundwater pollution risks

• Shell investing in SA and looking at China

• Shale gas to significantly diminish Russia, Venezuela

and Iran gas geopolitical clout - if fully exploited,

Gazprom’s share of west European market to fall from

27% in 2009 to 13% by 2040.

• China has world‟s largest reserve (36.1 tcm) and US

2nd (24.4 tcm)

• 26% of the world’s LNG still coming from Venezuela,

Iran and Nigeria by 2040

Making coal energy cleaner

• Proportion in primary energy consumption dropped from 72.2 % in 1980 to 69.4% in 2007.

• In 2004, China’s coal industry > 35 % of world’s production

, 80% of coal-mining deaths. Stands to benefit hugely from cleaner, safer, and more affordable coal extraction and liquefaction technologies.

• Closure of small, inefficient, and often unsafe coal-fired

facilities < 10m KW completed by 2007. Next those with capacity < 50m KW. 70 GW of obsolete capacity phased out 2006 – 2010. 8 GW more to be scrapped in 2011.

• South Africa’s SASOL to build Coal to Liquid (CTL) plants

in Ningxia and Shaanxi at a total cost of $10 billion. The target will rise from 10 m tonnes of crude oil in 2010 to 30 m tonnes by 2020, equivalent to about 16% of China’s overall crude oil output (now pending review as SASOL shifts emphasis to Gas to Liquid technologies).

• World Bank‟s International Finance Corp has signed an

equity-and-loan deal with Xinao Group to convert coal into dimethyl ether, a cleaner gas used for cooking and heating or as a substitute for diesel fuel.

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Forests

• Forests a powerful carbon sink. Since 1978 a

forestation belt of 4,480 km, the Green Great

Wall, the world’s largest single ecological project,

is absorbing 1 billion tons or 20% of China‟s

carbon dioxide emissions by 2010.

• Afforestation needed to counteract 2.6 m sq km

desertification threatening the livelihood of some

400m people in China.

• China's forest coverage reached 20.36 % or 195

m hectares by end 2008, beating a goal of

creating 20 % coverage by 2010.

• Five Year Plan (2011-15) - forest coverage to rise

to 21.66 % and forest stock to increase by 600 m

cubic meters.

• China has been cracking down hard on illegal

logging and illegal trade of timbers.

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Emerging green civil society

• Both local and international environmental NGOs.

• Greenpeace invited by the Chinese government to

contribute suggestions for China’s Renewable Energy

Law, enacted on 1 January, 2006. It has also delivered a

climate change project for the past years.

• WWF active in China since 1980, invited by the

Chinese government as the first international NGO to

work on nature conservation. More than 120 staff on

broad range of conservation programmes including

species, freshwater, forest, marine, climate change and

energy, the green economy and footprint.

• Govt sponsored - All China Environmental Federation

• Burgeoning grass-root groups e.g. Friends of Nature

(founded 1994), Green Earth Volunteers, since founded

2002, Xinxiang Environmental Protection Volunteers

has collected >70 tons of waste batteries

• China Green NGOs doubled in 3 yrs by 2008.

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Blueprint 2006-10

• State Council , October 2008

• ‘Less input, consumption, and emission and High efficiency’, - energy optimization, conservation and eco-preservation.

• Science and technology and international cooperation -‘Common but differentiated responsibilities’.

• Expand renewable energy by 10% and extraction of coal-bed gas by 10 b c meters.

• Build water-conserving society, anti-flood systems and drought resistance of farmlands.

• Expand service sector value-added GDP contribution by 3%

• Expand proportion of hi-tech industries by 5% - IT, bio-engineering, aeronautics, space aviation, new energy, new materials, and marine industries

• Promote energy efficiency, conservation, and emission reduction in production, projects and buildings, including clean coal, poly-generation and CO2 sequestration; and restrict energy-and-emission intensive industries.

• Renewable energies including biomass, marsh gas, solid and liquid bio-fuels, hydroelectric, solar , wind, and nuclear power

• Recycling Economy. - ‘Circular Economy Promotion Law’ August 2008 - all stages of utilization, consumption and reuse of resources including water, building and materials

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A roadmap for Sustainable Industrial Development State 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-cities (now 30 in progress), towns and villages; 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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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

Five Year Plans

• Five Year Plan (2006-10) narrowly

delivered reduction of energy input @GDP

by 20% and CO2 emission by 10%.

• Five Year Plan (2011-15) - non-fossil fuel to

rise to 11.4% of total primary energy

consumption, energy intensity to reduce by

16%, and CO2 emission by 17%.

• IEA - China investing $2.3 trillion in energy

development 2001-30. $200 billion for

renewable energy within next 15 years, to

grow from 7% to 10% annually by 2010 and

20% annually by 2020.

• National Development Reform Commission

- 15% renewable energy by 2020.

Government said to be planning to boost

renewable energies target to 20% of

China’s total energy needs.

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Megatrends (2) Urbanization & (3) Rising Middle Class

• McKinsey Global Institute, Preparing for China‟s Urban Billion, March 2009 : by 2025, 350 m more urbanites, 221 new cities @> 1m v 35 in Europe; 5 b more sq. m of roads, 170 extra MTRs, , 40 b sq. m office space, 5 m new buildings, 50,000 skyscrapers (= 10 NYCs); 1 b urbanites by 2030, 75% urbanization rate by 2050

• McKinsey Quarterly, The Value of China‟s Emerging Middle Class, 2006 – 77.3% < RMB 25,000 p.a to drop to 9.7% by 2015, when 79.2% lower and upper middle class up to RMB 100,000 p.a. (ppp = US$ 40,000 p.a.) 11% mass affluent with RMB100,000 – RMB200,000 and global affluent > RMB200,000. Mass affluent to to 36.4% by 2025.

• McKinsey Quarterly, Understanding China‟s

Wealthy, July 2009 - $36,500 p.a. (ppp = $100,000) – 30% in Shanghai, Beijing, Guangzhou, and Shenzhen—50% in top 10 cities. 2008 –2015, growth in Tier-1 cities 25%, in Tier-2 cities 32% and in Tier-3 cities 43%. 80 % 45 years of age, v 30 % in US and 19 % in Japan.

• 2015, China become a leading consumer market, annual turnover RMB 20 trillion, about the size of Japan‟s market today

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(4) Rapid Mobility

• In 30 years, 2 trillion yuan, China to build 3,000 km roads p.a., to create a „7-9-18‟ network of 85,000 km national expressways, > US interstate by 10,000 km. 7 major arteries to radiate from Beijing: 9 north to south and 18 east to west.

• Car ownership 50 @1,000 in June 2011 < world average of 131.64. Already = ¼ of global growth (Worldwide Passenger Cars, The World Bank Group, March, 2011 ) To jump to 267 @1,000 by 2030.

• ½ finished the world‟s longest high-speed rail (HSR) network with the world‟s fastest trains. Test runs some over 400 km/h (249 mph), a world record. In the interest of better safety, 300 km/h to reach 350 km/h in due course.

• Grand plan - a global „HSR revolution’ e.g. Beijing-

London in 2 days in a 17-country China-Europe network. To extend to India, Pakistan and the Middle East, south to Singapore and northeast into Mongolia and Russia. Survey work in Europe undertaken. Central and eastern European countries keen to start. Construction for the Southeast Asia link commenced. Myanmar to begin building its portion of the link. China said to prefer funding the whole project in exchange for natural resources. Whole to complete in 10 years.

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(5) 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

• 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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(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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(7) China goes Global

•3 world 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; Geely bought Volvo from Ford for $1.8b and majority stake in Magnanese Bronze (London Black Cab)

•Controlled outflow - $10b (Deutsche Bank); Liberalising QDII - 50% overseas investment quota for approved equity funds

•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. Local incorporation of foreign banks – Citibank, HSBC, SCB, BEA

•China to grow RMB private equity – Wu Xiaoling, Dep Gov, PBoC, 2007 China M & A Annual Conference, Tianjin. Launch of stock index futures – approved in principle (08.01.2010)

•RMB as storage of value and stable means of exchange. RMB-denominated transactions and financial products more acceptable for China-related businesses. Eventual full convertibility.

•China to build 3 transnational high-speed (200-350 km/hr) rail links by 2025 (a) Kunming to SE Asia (Vietnam, Thailand, Myanmar, Malaysia, Singapore); (b) Urumqi to Kazakhstan, Uzbekistan, Turkmenistan, - Germany?) (c) Heilongjiang – Siberia – W Europe (BJ/Lon in 2 days) (SCMP 8 March 2010)

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(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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(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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(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.

Opportunities for Danish enterprises

• 80% of Danish investors in capital-intensive industries

• 25% $10-100m; 25% $1-10 m; 50% $1 m – in 5 yrs 10% > $100m, 50% > $1-10 m

• 70% employ university graduates

• Danish “Export Ambassadors” appointed for each of BRIC countries

• WFOE model preferred

• Business Objectives: (a) global market share (+ China) (b) service in-situ global customers

(quality) (c) corporate cost competitiveness

• Opportunities

– Environmental technologies; Water treatment and management; Electric Cars ; Wind Turbines; Solar

Photovoltaics; Smart Grids

– Energy technologies; Deep-sea exploration and drilling technologies; New chemicals and materials

– Precision and high-end engineering; Aeronautics

– Ship-building and naval technologies

– Artic technologies

– Agriculture + Food technologies

– Pharmaceuticals and advanced medical equipment

– Finance and banking

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Andrew Leung International Consultants Ltd

Thank you

Andrew K P Leung, SBS, FRSA

www.andrewleunginternationalconsultants.com