China The Enigma

China - the enigmaChina - the enigma

• China – potted background

– How big is China?

– Political evolution

– Economic evolution

• Understanding the influence of China

– Demand

• Feeding 1.3 billion people

• size in the market

• Reserve stocks and controlling the economy

• Alternative finance

• Future Outlook

– Fewer surprises – has the mystery been removed?

– China’s economic challenges

China – It’s huge, right? China – It’s huge, right?

• China is only the 4th largest country by land area

• The UK is 39 times smaller

• It is the most populous with 1.34 billion citizens

• It is not the most densely populated

• China’s population growth rate is 0.481% - 152nd in comparison to the world

China – Political Evolution China – Political Evolution

• China has a recorded history of nearly 5000 years

• Organised society began about 1700 BC with the Shang Dynasty

• Ancient china gave the world paper making, the compass, printing, Soybeans and gunpowder

• In 1840 after the opium wars foreign powers occupied ‘concessions’ and divided China into a semi-colonial, semi feudal society

• In 1911 a democratic revolution abolished the feudal monarchy, and established the Republic of China

• After 20 years of civil war Mao Zedong led the communist party to victory in 1949 and established the Peoples Republic of China. Mao dies in 1976

• New government begins ‘Open Door’ policy in 1978 to promote economic growth

• March 2013 - 56 year old Vice-President and Communist Party chief Xi Jinping takes over as president

China – Economic EvolutionChina – Economic Evolution

• Since the late 1970s China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role

• This restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. In 2010 China became the world's largest exporter.

• China overtook Japan in 2009 to become the worlds second largest economy after the United States.

• Biggest asset is the huge pool of cheap manual labour

Feeding 1.3 Billion PeopleFeeding 1.3 Billion People

• The number one priority for the state

• China has to feed a fifth of the worlds population with just 7 percent of the worlds arable land

• China is short of water – it has one of the lowest indexes per capita in the world

• China’s population is currently 47% urban with a 2.7% rate of change, most western country’s are 80% and < 1%

• By 2030 China will have added more new city dwellers than the entire U.S population – 350 million people

• Urban populations are more reliant on being fed, and their diets become more sophisticated = more meat!

• Pork consumption per urban inhabitant is increasing by half a kilo each year

• China’s average annual meat consumption per person has risen from 25 kilos to 54 kilos since 1990

• The resources needed to produce a kilo of meat are the same as those needed to produce several kilos of grain

Feeding 1.3 Billion PeopleFeeding 1.3 Billion People

Feeding 1.3 Billion PeopleFeeding 1.3 Billion People

There are 1100 McDonalds outlets with another 900 planned over the next three years

There are 4200 KFC branches

Pizza Hut and Taco Bell are next

• China wants to remain self sufficient in terms of food such as rice.

• This is not possible with other products such as Soya or Corn which are used to feed animals

• China has three strategies to secure it’s supplies

1. Buy from the global market

2. Acquire shares in international food companies in order to control them

3. Buy land in other countries

• Option 1 is the least desirable for security reasons – what if the U.S or Brazil decided to put a ban on exports?

Feeding 1.3 Billion PeopleFeeding 1.3 Billion People

• In order to protect it’s supplies, China has been aggressively securing it’s raw materials through ownership and investment

• For example China’s leading Soya producer – Beidahuang State Farms Business Trade Group is investing $1.4 billion in a project to develop 320,000 hectares of land in Argentina which is currently unusable

• The farmers ‘benefit’ from loans to buy Chinese farm equipment and seeds depending upon which crop Beidahuang decides needs planting.

• China has exclusive rights to the produce, at market price, for twenty years

Feeding 1.3 Billion PeopleFeeding 1.3 Billion People

China’s livestock industryChina’s livestock industry

• China is the world’s largest livestock producer and consumer

• Pigs and poultry are the most popular meat consumed in China

• Milk and dairy product consumption is increasing significantly, encouraged by the Chinese government as a means of improving national health

Global Feed ProductionGlobal Feed Production

Demand – China’s feed industryDemand – China’s feed industry

*2010

China EU US

Poultry (combined)

48% 34% 52%

Pig Feed 37% 33% 15%

Aquaculture 9% 0.7%

Ruminant 4% 26% 26%

Demand – China’s feed industryDemand – China’s feed industry

Source:USDA

China’s weight in global demand China’s weight in global demand

Source:USDA

Myn mt Corn % of Total Wheat % of Total Soyabeans % of Total

China 207.00 24.18% 120.00 18.31% 76.83 28.49%

EU-27 67.50 7.89% 121.00 18.46% 12.85 4.77%

United States 262.57 30.68% 37.72 5.76% 47.08 17.46%

Brazil 53.00 6.19% 10.90 1.66% 38.70 14.35%

Southeast Asia 32.60 3.81% 15.38 2.35% 7.03 2.61%

Strategic StocksStrategic Stocks

• China keeps a majority share of global grains as strategic stocks

• Used to ensure civil harmony

• China uses a mix of reserve ratio increases and price suppression to control food inflation

Source: USDA

‘‘Alternative’ FinanceAlternative’ Finance

Get paid,

pay back loan

keep 5%

Pay 3% for 365

Days credit

Get paid and

lend to Real

Estate mkt at 15%

Sell beans to

Chinese Crusher

Buy Beans

1. Borrow at 2%

Shadow Financier

The FutureThe Future

• China faces numerous economic challenges

– Reducing it’s high domestic savings rate & correspondingly low domestic demand

– Sustaining adequate job growth for tens of millions of migrants and new entrants to the workforce

– Reducing corruption and other economic crimes

– Containing environmental damage related to the economy's rapid transformation

– Infrastructure

– First nation in history to get old before it gets rich

The Greying of ChinaThe Greying of China

• China is one of the most rapidly aging countries in the world

• The rapidly changing demographic will cause a labour shortage – each new generation is 20% smaller than the last one

• The country's existing pension system cannot support the looming wave of retirees

• This could slow economic growth

• In 2007 China had six people in the workforce for every retiree, this ratio will fall to 2:1 by 2050

• Still huge opportunities for further growth

China, that old chestnutChina, that old chestnut

• Since the open door policy of the late 1970’s the information flow is vastly improved

• With this and increasing experience in dealing with China, our understanding of their demand and decision drivers is much greater

• Sheer size of their market means their demand trend can influence global price trend

• It’s also not how much they buy, it’s how they buy it

• Shocks from China will now surround lack of growth as the new leaders set a path for durable economic expansion

• Far East will be the new China as it develops

China – the enigmaChina – the enigma

‘Observe and analyse calmly, secure our position, tackle changes patiently, hide our abilities and wait for the right moment, keep a low profile, never claim leadership, carry out business modestly.’

Strategy announced by Deng Xiaoping (Chinese Leader 1976-1997) early 1990 as a way of managing the global changes

China – The EnigmaChina – The Enigma

Thank you for your time