China in Transition: 3rd Plenum Outcomes and Economic Outlook

China 2014:
In Transition &
In Transformation
Juha Moilanen, Chinaworks Finland
For the Chamber of Commerce, Tampere
14 Feb.2014 @ Technopolis Yliopistonrinne

50+ YEARS OF EXPERIENCE &
KNOWHOW IN CHINA BUSINESS

CONTENT
CHINA 2013 IN NUMBERS
3RD PLENUM OUTCOMES

DEMOGRAPHIC & ECONOMIC OUTLOOK
YEAR OF THE HORSE: INDUSTRIES IN FOCUS
BOOMING E-COMMERCE
THE END OF THE HEYDAY FOR LUXURY BRANDS?

 Juha Moilanen 2014

CHINA 2013 IN NUMBERS


China 2013 In Numbers
GDP +7.7%
Forecast for 2014: +7.5%

Electricity Consumption 5320 TWh, 3940 kWh/capita,
(+7.5% year-on-year), at price 0.36-0.64 CNY/kWh
Finland: 15740 kWh/capita

CPI +2.6% (Government target: below 3.5%)
Trade Balance: +260 bn USD, +12.6% y-o-y
Forex Reserves 31 Dec.: 3820 bn USD, +17.0% y-o-y

Retails sales based on receipts (fāpiào): 3840 bn USD
Urban consumption 86.4% of this, 3318 bn USD (+12.9% y-o-y)
Rural consumption 502 bn USD (+14.6% y-o-y)

China 2013 In Numbers
Unemployment
Government counts only a subset of those unemployed in
cities and no one at all outside them
Urban: officially 4.1%, excludes private enterprises and
migrant workers (same as 2012)
Total Urban Unemployment: 6.1% (CIA estimate)
A total of 13.1 million new jobs were created in urban areas
Foreign estimates put the overall unemployment incl. rural
areas somewhere in the range of 15-20% (see e.g.
http://thediplomat.com/2014/01/chinas-gdp-growth-says-little)
Potentially the biggest threat for social stability and cause for
unrest


OUTCOMES OF THE 3RD
PLENUM


The 3RD Plenum
The 3rd Plenum of the 18th Central Committee of China's
Communist Party.
Held 9-12 Nov. 2013 behind closed doors
Third Plenums are seen as very important because
the First Plenum introduces each new leadership
the Second Plenum tends to be personnel- and Party constructionfocused
the Third one is usually seen as the first plenary session at which the
new leadership has basically consolidated power and can introduce a
broader economic and political blueprint

High expectations as the new leadership, President Xi Jinping
and Premier Li Keqiang had ahead of the meeting repeatedly
stated that the Third Plenum will introduce comprehensive and
unprecedented economic and social reforms.


The 3RD Plenum
Key economic outcomes:
Markets are allowed to play a “decisive” role in the economy: the
list of factor prices to be liberalized is specified and extended to
include transportation and telecommunication, besides water, oil,
natural gas and electricity.
SOE Reform: e.g. state-owned enterprises will pay 30% of their
dividend to the Social Security Fund by 2020, up from 10-20% at
the moment.

All investors will be allowed to enter any industry other than
those on the “negative list”, which is the new mechanism being
tested in the Shanghai free trade zone and will lead the path of
China's service sector eventual liberalization. More SEZs to come?
Private investors can set up banks.
Common consensus on the main disappointment: No commitment
to a more concrete timetable.

The 3RD Plenum
Key social outcomes:
One child policy further loosened: two child policy?
Hukou system will be further relaxed

Appraisal of local governments' performance will focus more on
aspects other than GDP, such as pollution, excess capacity and
debt.
Rural land for non-agriculture uses that is collectively owned by
farmers will be allowed to enter the land market at same prices
and with same rights as state-owned land. This revolutionary
change would undermine local governments' monopoly over land
markets and boost farmers' income, thus providing them with the
start-up capital to settle in cities.

The labor camp system will formally be abolished.
Vertical integration of the judiciary system.

DEMOGRAPHIC &
ECONOMIC OUTLOOK


Demographic Outlook


China’s Senility Bubble !


Breathtaking Pace of Urbanization
Shanghai alone encompasses about
11 million migrant workers, 9 million
of them long-term, in addition to its
population of 13 million. Over 50% of
the workforce is migrant.

According to McKinsey & Company,
the urban population will grow to 850
million (from the current 730 million)
by 2020 with 20% of that population
comprising of 1st generation migrant
workers from rural areas.


Economic Outlook
The 12th five-year-plan adopted by China’s parliament in
March 2011 spells out 10 major challenges for the country
1.
2.
3.
4.
5.

Resource constraints: energy and raw materials.
Mismatch in investment and imbalance in consumption.
Income disparity.
Weakness in capacity for domestic innovation.
Production structure is not rational: too much heavy industry, not
enough service.
6. Agriculture foundation is thin and weak.
7. Urban/rural development is not coordinated.
8. Employment system is imbalanced.
9. Social contradictions are progressively more apparent.
10. Obstacles to scientific development continue to exist and are difficult
to remove.


Economic Outlook
Before discussing the concrete outline of the plan, the
National People’s Congress sets out a theoretical
approach for guidance:
The Main Line: “China must rapidly engage in a complete transformation
of its form of economic development.”
The idea is not to refine the current system, but to completely transform
the current system in the brief period of five years. This is a bold goal.
The focus of transformation: From excessive reliance on exports to
balance between export, import and domestic consumption.
From reliance on foreign technology to reliance on domestic innovation.
From reliance on “old” energy and materials and industries to creation of
a low-carbon / new-materials based economy.


Economic Outlook
Proposed solutions to recognized problems:
1. Emphasis on R&D and utilization of alternative, renewable energy
sources.
2. Encourage domestic consumption, stricter requirements for FIEs.
3. Strengthen the development of minimum wages, establish a
comprehensive public social welfare system incl. unemployment and
pension benefits & government funded basic medical coverage for all.
4. Improve IPR enforcement and implementation of legislation in line with
WTO engagements.
5. Shift from low value-adding industries into high-tech and services, create
an innovation driven society by encouraging education and training of the
workforce.
6. Improve the welfare of the rural population while building urban
infrastructure, encourage stable urbanization by eliminating distinction.
7. Continue with liberalization and “opening-up” to the outside, but on a new
track, actively participate in international economic governance.

Economic Outlook
Key targets in practice for 2011-2015
Economic:
GDP to grow by 7% annually on average
Urban registered unemployment to be kept at less than 5%
Increased domestic consumption
Breakthrough in emerging strategic industries*
Service sector value-added output to account for 47% of GDP, up 4%
points
Expenditures on R&D to account for 2.2% of GDP
3.3 patents per 10,000 people => implications on IPR legislation


Economic Outlook
Key targets in practice for 2011-2015
Social & Environmental:
Population be no larger than 1.39 billion
Urbanization rate to reach 51.5%, up 4% points
Life span per person to increase by one year
Pension schemes to cover all rural residents and 357 million urban
residents
Minimum wage standard to increase by no less than 13% on average
each year
Improved democracy and legal system
Improved government efficiency and credibility
Non-fossil fuel to account for 11.4% of primary energy consumption
Forest coverage rate to rise to 21.66% and forest stock to increase by
600 million m3

YEAR OF THE HORSE:
INDUSTRIES IN FOCUS


REGULATORY FRAMEWORK FOR FDIs
The government is encouraging foreign business participation in
Strategic Emerging Industries development, but to what extent is
a key question given China’s indigenous innovation drive.
Those seven key SEIs in focus are:

1.
2.
3.
4.
5.
6.
7.

New & Alternative Fuels for the Automotive Industry
Information Technology
Biotechnology
High-End Manufacturing

New Materials
New Energy
Environmental Protection


In terms of incentives, the newly (06/2011) released draft revisions of
the Catalogue for Guidance of Foreign Investment
(http://english.mofcom.gov.cn/article/policyrelease/aaa/201203/20120308027837.shtml)

greatly expanded the list of encouraged industries

Foreign investment is encouraged in e.g. following business areas:
Energy and resource saving
Environmental protection
Hi-tech manufacturing
Transportation infrastructure development
Logistics
Business outsourcing
Improvements in agricultural technology.

The revised tax code allows tax incentives to encourage such
investments.

Industry in Focus: Opportunities for Finnish Clean-Tech companies
State Council released a national plan in September 2011 that calls
for a 15-25 % reduction in particulate matter by 2017 in the three key
manufacturing regions around Beijing, Shanghai and Guangzhou

Investment in the improvement of the air quality alone will exceed 200
bn € during 2012-2017.
By 2020, China targets having 5 million e-cars on her streets
Starting 01/2014, 179 cities in China are releasing real-time information
on their air quality. API avg. for Jan 2014 (PM2.5 = 2.5 µm (µg/m3)):
Beijing 153
Shanghai 140
Guangzhou 161

Chengdu 224
For comparison: Finland: 5-10, Helsinki 2011:20 (= WHO limit)
Beautiful Beijing
(www.finpro.fi/markkinamahdollisuus/beautiful-beijing)


Added to the list of encouraged industries:
Vocational training, provision of consulting or intellectual property
services and establishment of VC enterprises and R&D centers;
Environmental pollution treatment & monitoring technology, high-tech
green battery; construction and operation of renewable water plants;
Unconventional natural gases exploration and development
(encouraged only through joint-ventures);
Key new energy cars’ parts and components: foreign ownership in
such investment shall be limited to 50%;

Production of natural food additives and ingredients


Prohibitions
No projects that rely on cheap Chinese raw materials or energy
No projects that waste energy or raw materials, are excessively
polluting or that rely on outdated technology
No projects that center on low technology, low investment, low value
added and high employment: toys, apparel, furniture, house wares,
shoes…
No support for such projects in the form of VAT or other tax benefits
No projects that are oriented solely towards export
New FDI in real estate prohibited, with remaining foreign investment in
real estate strongly discouraged
FDI through M&A strongly discouraged


Tax neutral FDI policy since 2008
Under the old policy, foreign investors were taxed at a lower rate than
domestic investors. Investors in numerous specific development zones
and industrial parks were provided with various tax exemptions.
All this was eliminated in the new income tax code, which mandates a
neutral FDI investment framework: no incentives based on nationality.
Incentives are instead provided for specific encouraged business
activities.
Regional investment still encouraged in the Central and Western
regions. Regional tax breaks are permitted in this region as an
exception for the general prohibition on regional tax incentives (see:
The catalogue of Priority Industries for Foreign Investment in China's
Central and Western Regions”, revised in 2013).


Rising costs: Foreign businesses can expect a changed
cost structure during the 12th FYP period (2011-15).
Increased costs result from:
VAT hikes
Minimum wage development
Raw material resource price reforms
Tightened legislation

Environment-related taxes
Appreciation of the RMB yuan


RISING COSTS
Reuters has reported that Taiwan’s Foxconn Technology
Group, the major supplier of Apple’s iPhones and iPads, is set
to relocate their high-end manufacturing to the United States
and low-end manufacturing to Indonesia. As manufacturing
prices in China rises, and labor unrest increases, Foxconn
looks to diversify its supply chain.
“Foxconn has no choice but to do it, China is no longer a
manufacturing or sourcing hub for global MNCs, especially in the
IT sector. This trend will continue and affects other industries
such as textiles and light manufacturing. We’ve already seen this
in Vietnam and it is now spreading to other ASEAN nations.
Indonesia is attractive for Foxconn due to its large labor market.”
“If companies are able to bring production levels up to 70 % of
what can be achieved in China, lower wages in India & ASEAN
dictate that it makes better economic and financial sense to
relocate. This is exactly what Foxconn are doing.”
www.reuters.com/article/2014/01/27/us-foxconn-taiwan-idUSBREA0Q01F20140127

VAT
During 2012-13, the Chinese Government was embarking
upon one of the most ambitious tax reform programs in
the recent history.
The grand plan is to replace Business Tax with VAT across the
whole services sector in mainland China (financial and real estate
sectors by 2015).
Impacts also in how VAT can be reclaimed upon exports, and at
what level
Producers of value-added goods receive higher VAT rebates which
encourages exports, whereas producers of basic materials get lower
VAT rebates, thus discouraging exports.
For “deemed self-manufactured products”, the VAT refund rate will be
the VAT levying rate (normally 17%), unless otherwise provided by the
State Administration of Taxation.
Separate treatment for trading companies.

MINIMUM WAGE INFLATION
Shenzhen, RMB/month
2000
1800
1600
1400

1200
1000
800
600
400

200
0
2010 2011 2012 2012 2013 2014

Chart from Dezan Shira


Why is China Expensive?
China’s youth labour supply
has started to decline
China’s wages are rising
China’s currency is
appreciating rapidly
China’s land and other
production costs are rising
rapidly
China’s SMEs find it difficult
to obtain capital

Source: Silk Road Associates: The End of Made-in-China?


Dezan Shira: “Based on the review of minimum labor costs, determined
by the legal minimum amount stipulated in 15 different countries, and
added together with the pertinent mandatory welfare payments due, it is
apparent that since the introduction of the revised labor law in
2008, China’s workers are now amongst some of the best paid in Asia.”


TYPICAL OFFICE SALARIES, 2011
Title

Experience

Qualifications

Monthly salary
range (RMB)

VP, HR

15 years+ in mgmt Master’s degree

70000 – 90000

Director, HR

10 years+ in mgmt University graduate

60000 – 80000+

Manager, HR

5 years in mgmt

University graduate

20000 – 35000+

Office manager

3+ years

University graduate

17000 - 27000

Business
manager

5+ years

University graduate

19000 - 32000

Training manager

5+ years

University graduate

17000 - 26000

Senior secretary

5 – 8 years

College and above

10000 - 14500

Secretary

3 – 5 years

College and above

6500 - 9500

Senior
2 – 4 years
College
receptionist
The table shows typical median cash salaries paid in 2011
by job category for local staff in offices in
Guangzhou, Shanghai and Beijing. Salaries are based on a
13-month per year payment. Source: J.M. Gemini, Guide to
China Market Salaries, Fourth Quarter 2011.

3000 - 5500

1€ = 8.2 RMB
1 RMB = 0.122 €


CNY – EUR CONVERSION RATE

Data from xe.com

CNY – USD CONVERSION RATE

Data from xe.com

IN SPITE OF RISING WAGES…

McKinsey: Vehicle production is projected to soar in China and South Asia
by 2020, reflecting a broader trend where more than two-thirds of global
manufacturing activity takes place in industries that locate close to demand.


BOOMING E-COMMERCE


BOOMING E-COMMERCE
“"I can not separate myself from Taobao now. It is becoming a
lifestyle, or it is life itself”.
-Mei Xiao, a civil servant from Wuhan. May, 2013As the country's largest online shopping platform, Taobao (a C-2-C portal
similar to eBay) alone features nearly one billion products and has nearly
500 million registered users. It sells 48,000 products each minute and its
maximum daily turnover reached 4.38 billion yuan (US$713 million).
Taobao delivers 20 million parcels every day, accounting for 70% of the
country's total.

According to statistics from the Ministry of Commerce, it is estimated that
China's online commerce industry raked in more than 1.1 trillion yuan
(US$175 billion) in revenue in 2012.
Per capita consumption in online shopping estimated to reach 10’000 yuan
(1’220 €) in 2013, according to Alipay.


BOOMING E-COMMERCE

Taobao, a member of Alibaba Group,
overtook Amazon as the world’s
biggest online retailer by sales
volume, netting > 1000 billion RMB =
120 bn. € in 2012.
Taobao is basically a platform for > million
small B-2-C and C-2-C shops: like eBay without the auction aspect
T-Mall is focusing in large-size and luxury brand manufacturers

BOOMING E-COMMERCE

Distribution network is functioning surprisingly well, with
door-2-door-deliveries within a couple of days in most cities


BOOMING E-COMMERCE

Alipay payment
method enables easy
and safe online
payments. The
consumers transfer
funds from their
private bank account
to their Alipay
account, thus not
having to disclose
their credit card
details on the
internet.


BOOMING E-COMMERCE
Chinese customers expect to be able to contact the retailer directly when
online. For this purpose, Alibaba has created a Aliwangwang chat-feature.
This is especially important for retailers to win the shoppers’ trust, since
defected products are rampant in the China market. At the same time, the
shoppers are able to haggle the prices.


BOOMING E-COMMERCE
And of course, these features need to
be available for mobile shoppers, too!


BOOMING E-COMMERCE
WeChat (WeiXin): A mobile apps with 300 mn users in China + 100 mn worldwide
1. Online storefront with minimial fee for opening public account
2. Deeply customazible to meet everyone’s needs
3. Includes a mobile wallet – in-app payment function
4. Can buy anything from movie tickets or taxi rides to online investment funds
5. ”Virtual HongBao” account


BOOMING E-COMMERCE

www.GoGlobe.com
Data from 2013.


CHINA’S E-COMMERCE GOES MOBILE IN 2014
E-commerce becomes M-commerce. Jack Ma (Alibaba’s founder):
“The mission of Alibaba’s mobile department is to eliminate Taobao –
by replacing it with Taobao mobile”. Now all Chinese e-commerce
firms realize that it’s time to move the business to mobile devices,
before rival companies get the chance to steal a lead.
On November 11, China’s largest online shopping festival – the equivalent
of Cyber Monday in the US – took place. On the two Alibaba-owned stores
T-mall and Taobao, Chinese consumers spent $5.7 billion in a single day,
setting a new record for global e-commerce. 25 % of all purchases were
made using mobile devices.
Research from Observer Solutions reveals that China’s retail m-commerce
sales reached RMB 43.3 billion ($7.1 bn) – in Q3/2013, +141.9% y-o-y.
Growing off a relatively small base, m-commerce is expected to explode in
2014 given the rapid increase in mobile internet users, increased internet
accessibility through mobile devices, and constantly improving mobile
payment solutions in China.
460 million mobile web users, 242 million online shoppers (CINIC)

THE END OF THE HEYDAY
FOR LUXURY BRANDS
?


THE END OF HEYDAY FOR LUXURY BRANDS?


Chinese President Xi Jinping has ordered an end to lavish spending
by officials on everything from luxury hotels to lavish funerals. He has
even gone so far as to ban luxury advertising in state media.
Rolex and Zegna no longer appear on government officials after China’s
new railway minister Sheng Guangzu, “Mr. Watch” was arrested, having
appeared in photos wearing watches whose combined value is more than
double his annual salary. Also vice-minister of health and vice-principal
of State Administration Academy are being investigated for alleged
corruption.
According to state media, more than 37,000 government officials have
been placed under investigation. The anti-corruption campaign has
ensnared also executives working for foreign and Chinese companies,
and employees at companies like GlaxoSmithKline, Danone and statebacked oil company PetroChina have all been implicated.



Bain & Co.
Luxury goods
sales:
• 2012: +7%
• 2013: +2%


“Restrained bling-bling” an emerging trend for officials
Swiss watch manufacturers exports to greater China dropped 8.5 % in the
first 11 months of 2013 as the country cracked down on the use of luxury
goods as bribes and illegitimate gifts.

Rémy Cointreau, maker of $3,000-a-bottle Louis XIII cognac, warned
investors that operating profits would fall at least 20 % in 2013 y-o-y as a
result of what it described as “a sharp slowdown in China”.
Premium liquor sales has flopped. Shuijingfang, one of China’s most
exclusive brands of the spirit baijiu, the Communist party’s favourite tipple,
now sells half its product range at Rmb 500 a bottle or less – a price point
at which the company previously sold nothing.
China's catering sector grew at its slowest pace in more than two decades
in 2013 as diners avoided splashing out in luxury restaurants during an
anti-corruption campaign targeting official excess. Catering in China grew
9 % last year, the weakest growth in 21 years, Xinhua news agency reported
Sales of Chinese specialty dishes has plummeted by as much as 70%, and
exotic Chinese dishes like shark fin have been banned from
official functions.

谢谢
THANK YOU !

Finland Office

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China in Transition: 3rd Plenum Outcomes and Economic Outlook

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