China, Quo Vadis?€¦ · 20160407_BCS2016_Appendix_v4.pptx 1 Joerg Wuttke President President EU Chamber of Commerce in China Luxembourg June 23rd 2016 China, Quo Vadis?

120160407_BCS2016_Appendix_v4.pptx

Joerg WuttkePresidentPresident EU Chamber of Commerce in China

LuxembourgJune 23rd 2016

China, Quo Vadis?

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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


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


2) Financial Information

8. How did your company's total Mainland China revenue for 2015 compare to 2014?


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



10A. Please characterize your company's earnings before interest and tax (EBIT) in Mainland China in 2015.


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



10B. How did your company's EBIT in China for 2015 compare to 2014?


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


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


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


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


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


1) NA: Not applicable

Not applicablePessimisticNeutralOptimistic

2016

N=506

2%

15%

39%

44%

Growth


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


Not applicableOptimistic PessimisticNeutral

201

6

N=506

2%

31%

48%

19%


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


2016

N=505

41%

59%

Outlook on Company Strategy


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

Documents

China, Quo Vadis?€¦ · 20160407_BCS2016_Appendix_v4.pptx 1 Joerg Wuttke President President EU Chamber of Commerce in China Luxembourg June 23rd 2016 China, Quo Vadis?