德勤咨询 中国市场进入战略

February2006Dr.ShaneTedjaratiManagingDirectorDeloitteConsulting-ChinaChina–AnExecutiveOverview2“Thenext3to5yearsmayrepresentthemostattractivewindowofopportunityforMNC’stowininChina”McKinseyResearch3Contents1ChinaOverview&MarketTrends2IndustryOverview3LessonsfromtheField4Chinahasexpeditedeconomicreforminthepastdecade,fuelingincreaseinGDPpercapitalatarateofover13%between1978to2002From1978whenChinaadoptedtheOpenDoorpolicy,ChineseeconomyhasexperiencedastonishinggrowthLaunchofChina’sOpenDoorPolicyBecomesamemberofIMEAppliestojoinGATTEliminateditsdualexchangerateAcceptedfullconvertibilityforcurrentaccounttransactionAnnouncedanoverallrestructuringofSOEsectorSubmittednewtariffandservicesoffersConcludedbilateralmarketaccessagreementwithUSAConcludedbilateralmarketaccessagreementwithEUBecomesamemberofWTOWorkinGATTWorkinggroupissuspendedfortwoyearsCAGR=13.65%YearRMBForthefirsttimeinhistory,China’sGDPpercapitaexceededUS$1000(year2003)ABriefHistorySource:China-theracetomarket5China’seconomicgrowthin2003isestimatedtobe9.1%,outpacingthegovernmentexpectationGDPGrowsTrend2002GDP%breakdown:52.5%industry,14.5%agricultureand33%servicesChina’sGDPisexpectedtogrowby8.4%in2004and7.8%in2005ThegrowthisboostedbyanupturninOECDgrowthandthecontinuedrelocationofmanufacturingcapacityfromhigher-costlocationsExportswillcontinuetogrowbymorethan15%ayearthroughouttheforecastperiod.However,thiswillstillrepresentaslowdownfromtheunusuallyhighrateofgrowthachievedin2003Investmentgrowthislikelytoslowsharplyin2004-05asthePBCseekstotightenthesupplyofcreditandthegovernmentbeginstoreininitspolicyofusingpublic-sectorinfrastructurespendingtoboostGDPgrowthActualTheEconomistIntelligenceUnitestimatesandforecastsSource:TheEconomistIntelligenceUnit(EIU)Note:Thedataof2003isestimatedbyNationalBureauofStatisticsofChinaSustainedeconomicgrowthisforeseeable,andisforecastedtobebetween7-8%WorldGDPCAGR(97-06)EconomicEnvironment GDP6AsChinatransitionsfromacentrally-plannedeconomytoamarketeconomy,itfacesmanychallenges,leadingtomajorstructuralchangeDriversofTransitionAcceleratedprivatizationandrestructuringofstrategicallyimportantSOEsfocusedonoperationalefficienciesLiquidation/selloffofdistressedassetsofsmallandmediumSOEsGrowthandmanagementinitiativesfordomesticChinesecompaniestocompeteagainstincreasingnumberofforeigncompaniesinChinaEntranceofforeigncompaniesinnewlyderegulatedindustries,especiallyintheservicessectorConsolidationinderegulatedindustrieswherethereisovercapacityAccesstocapitalwillcontinuetobeanissueforSOEsanddomesticprivatecompaniesparticularlyintheshorttomediumtermIncreasingacquisitionofstate-ownedandprivateChinesecompaniesbyforeignentitiesasforeignownershiplawsarerelaxedImprovedcorporategovernance,transparencyofinformationandastrongerregulatoryenvironmenttoprotectinvestorsandprivatefirmswillberequiredStructuralChangesoftheEconomyAccessiontoWTOhasacceleratedmarketderegulationimpactingalmosteveryaspectoftheeconomy-acrossindustries,creatingnewchallengesandincreasingcompetitionKeyshiftsinstructuree.g.lessstatecontrolrequiresaccesstocapitalcreatingaliquiditycrunchBankingandothermacrolevelchangeswilloccurPrivatization,restructuringandclosureofStateOwnedEnterprises(SOEs)haverecentlyacceleratedinresponsetobothmarketandgovernmentpressuresAsaresult,thestructureoftheeconomyischangingrapidlywiththenon-statesectorbecomingamoreprominentpartoftheeconomyEconomicEnvironment SOEReform*SOE=StateOwnedEnterprises7JointVenturesThestructureofthebusinesslandscapeisshiftingtowardsthenon-state,privatesectorEvolution/FutureView*Increasingeconomicimportanceofnon-statesectorGrossDomesticProductCollectiveCompaniesNon-StateSectorStateSectorPrivate

CompaniesPrivateAgricultureDomesticPrivateCompaniesListedCompaniesCentrallycontrolledStateControlledIndustry&Service(PrivateCompanies)StateOwnedLocallycontrolledSharpdeclineexpectedModeratedeclineexpectedStronggrowthexpectedNorealvisibilityintrendsWhollyOwnedForeignCompModerategrowthexpected*shorttomediumtermDomesticPrivateSectorEconomicEnvironment SOEReform8Asagovernmentpriority,SOEreformpolicywillfocusonprofitmakinginpreparingSOEsfortheinevitablecompetitionagainstforeignentrants*Limitedpubliclyavailabledataonthenon-statesector1AsdefinedbytheChinesegovernmentbasedonacomplexclassificationsystem2Source:StateEconomicandTradeCommission3Perthe19994thPlenumDecisionStateSectorNon-StateSector*Decliningstatesectorbutstillrepresentarelativelylarge%ofGDP34%declineinnumberofSOEsasaresultofprivatizations,mergersandbankruptciesbetween1997-2001Approx174,000SOEsatendof2001(5%classifiedaslarge1SOEs)MostofthelargeSOEsinstrategicindustriescentrallycontrolledDecentralizedapproach–90%ofSOEsadministeredbylocalgovernments“StateControlled”companiesrefertopubliclylistedcompanies(somelistedonHKandNYSE),inwhichtheStatemaintainscontrolPrivatecompanies-primaryengineofgrowthinlasttwodecadesDrivenbyprivatizationofSOEs,growthofindividually/family-ownedandforeignfundedenterprises(FFEs)Estimatedtobeincreasing15%-50%perannumApprox2million+non-stateownedenterprisesatendof20012InitiallyforeigncompaniesenteredtheChinamarketprimarilythroughjointventuresduetolegalrestrictionsWholly-ownedforeignsubsidiariesgrowingduetorecentrelaxationofforeignownershiplawsSOEreformisagovernmentpriority–facedwithlargeportfolioofunderperformingSOEs51%ofSOEsunprofitablein2001Acceleratedprivatizationoflocally-administered,small/mediumSOEsGovernmentmandateto“graspthelarge[SOEs]andletgothesmall[SOEs]”3Majorityoftheloss-makersareinefficientsmall/mediumSOEsContinuedprivatizationoflarge,unprofitableSOEsinnon-strategicindustriesGovernmentpromotionoftheprivatesectortogeneratejobs&economicgrowthIncreaseinforeignjointventuresintheshorttermasselectedindustriesslowlyopentoforeigncompetitionButlongertermshifttowholly-ownedforeignenterprises(basedonrecentFDItrends)whenselectedindustriesbecomefullyderegulatedWithliberalizationofthebankingsector,domesticprivatecompanieswillbeabletoaccessmuchneededfundsforgrowthPotentialdifficultlistinginnearfutureduetorecentlyannounceddomesticIPOrestrictionsandlackofsoundregulatorysystemtoimprovecorporategovernancemeasuresCurrentViewKeyShiftinStructureEconomicEnvironment SOEReform9SOEreformwillbringoutstrongerdomesticplayers,yetthepaceofthereformneedstobemanagedcarefullySOEsAreRestructuringToBeStrongerPlayersAutomotive:100carmakerstobeconsolidatedintothree:FirstAutomotiveWorks(FAW);Dongfeng(DF);ShanghaiAutomotive(SAIC)Airline:Airlinestobemergedinto3groups:AirChina;ChinaSouthern;ChinaEasternTelecom:ChinaTelecom&ChinaNetcom(CNC)exchangeassetsanddividedintonorthandsouthoperatorUtility:StatePowerCorporation(SPC)wasbrokeninto11companies,includingfiveindependentnation-widepowergeneration

groups,twopowergridcompanies,andfourancillaryservicecompaniesChallengesFacingSOEReformIncreasingSmall&MiddleSOEWillBankrupt30-50largeandstrongenterprisegroupswillleadmarketsandparticipateininternationalcompetitionEliminationofdifferentpoliciesbetweenSOEsandotherenterpriseswillremovepreviousprotectionsSofar,SOEhaslaidoffmorethan45millionpeople,mostofthisunemploymentlaborforcehasdifficultytofindnewjobandresultininstabilityincertainareasSOEIsTheDominatingComponentinChineseIndustry,whileFIEGrowsFasterSource:TheEconomicIntelligenceUnit(EIU),NationalBureauofStatisticsofChinaNote:Theindustrialoutputisat1990constantpriceForeign-investedState-owned*TotalindustrialoutputRMBbnYearEconomicEnvironment SOEReform10ForeignDirectInvestmentwillcontinuetobeanimportantdriverofeconomicgrowthLessControlofFDIAfterWTOAgradualopeningofpreviouslyprotectedareaoftheeconomyinlinewithWTOcommitmentswilltakeplaceEstimatesarethatentryintotheWTOcouldbringChina$100billionofnewinvestmentannually,comparedto$45billionlastyear,andaddonepercentagepointtoitseconomicgrowthKeepaggressiveinvestmentinwesternregionGovernmentWillStillPutItsHandOnGovernmentstatebondrefundControloverimportantsectorsofChinaeconomyNewrulesandprovisionsforforeigninvestmentsinceChinaenteredWTOEconomyGrowthIsAccompaniedByIncreasedFDISource:OxfordUniversityPress,EIUNote:Figuresfor2003areforecastbyOxfordUniversityPress,04-06areforecastedbyEIUEconomicEnvironment FDI11ForeigninvestmentshavebeenconcentratedalongthecoastalregionsofChina,particularlyintheeconomiczonesoftheYangtzeRiverDelta(YRD)andthePearlRiverDelta(PRD)0–100100–300300–500500–1,0001,000–2,0002,000–4,0004,000–5,000>10,000FDITotalValue(US$million)Year2002ForeignDirectInvestment(FDI)byProvinceHeilongjiangJilinLiaoningHebeiBeijingTianjinInnerMongoliaShandongJiangsuShanghaiZhejiangFujianGuangdongGuangxiHainanHunanJiangxiAnhuiHubeiHenanGuizhouYunnanSichuanChongqingGansuNingxiaShaanxiShanxiQinghaiXinjiangTibetEconomicEnvironment FDI12ForeignDirectInvestment2002(byindustry,Percentage)ForeignDirectInvestment2002(bycountry,US$bn)TheinvestmentsmainlycomefromseveralcountriesandaredirectedintoseveralkeyindustriesSource:MinistryofCommerce,PRCSource:MinistryofCommerce,PRCEconomicEnvironment FDI13China’sinternationaltradeissteadilyincreasing,withWTObeinganimportantdriverforcontinuedgrowthInternationalTradeKeepsIncreasingChina’sinternationaltradevolumehasgrownsteadilyinthepassed5yearsandanannualtradesurplushasbeenachievedinrecentyearsThesurplusofbalanceofpaymenthasbeendecreasingChinahasshiftedandadjusteditstradepartnerstructure;USandEUturnintobiggerpartnersImportWillIncreaseSignificantlyandATradeDeficitwillHappenin2005TheimportvolumewillrisewithmorealignmentunderWTOAtradedeficitwillhappenin2005Chinawillhasamoreinteractivetraderelationshipwithadvancedeconomies,e.g.USandEUMoreDependenceonGlobalEconomyProbleminBalancePaymentofinternationaltradeFacemorerisksoftheworldeconomyfluctuationAllocateresourcestoexportmorecapital-incentiveandtechnology-incentiveproducts,insteadoflabor-incentiveproductsSource:TheEconomicIntelligenceUnit(EIU)Note:1US$=5.22yuan(Year1990),Figuresforyear02-06areforecastbyEIUInternationalTradewillContinuetoIncreaseandaDeficitisforeseeablein2005Chiefexportmarkets,2002%oftotalChiefimportmarkets,2002%oftotalSource:NationalBureauofStatisticsofChinaEconomicEnvironment InternationalTrade14Intheforeseeablefuture,Chinaisexpectedtoemergeasatradingpowerhouse,andbecomingamajordemanddriverfortherestofAsiaImportsUS$billionsSource:5-yearforecast,EIUChinaisforecastedtocatchuptoJapanintermsofimportsvolumebytheyearof2005yearEconomicEnvironment InternationalTrade15RMBisunderrevaluationpressure,howevertheprobabilityofRMBrevaluationintheneartermisratherlow.PeggingtoalargerbasketofcurrenciesisthelikelynextstepExchangeofRMBIsStickingtoUSDollarRMBisunderrevaluationpressureBilateraltradedeficitthattheUSincursversusChina,grewfrom$30billionin1995tomorethan$100billionCurrentlyChina’sforeigncurrencyreservesexceeded$300billionandisstillrisingspectacularlyRisingvoiceswithinAsiaitself,concerningtheRMB’srelativeunder-valueandchargesthatChineseexportsareunfairlycompetitiveAttentionisincreasinglyfocusedontheRMBpegtotheUSD,especiallyafterthedollardeclinedconsiderablyvis-à-vistheeuroandtheyenUS$¥100€(YearEnd)Source:TheEconomistIntelligenceUnit(EIU);WACHoviaNote:(*)calculation,Priceinlocalcurrency/USBigMacprice/Actualexchangerate-1Over/UnderValuationagainstthedollar,%*--3.9-4.8-19.7-46.0-52.9-73.1BigMacIndexTheprobabilityofRMBrevaluationintheneartermisratherlow,as….Chinaeconomyishardlyoverheatingatpresent,giventheCPIinflationrateisonly0.5%EconomicpoliciesinChinaaregearedtowardfosteringconditionsthatwillpreventarapidriseintheranksoftheunemployed,whichcouldleadtosocialinstability;whilecurrencyrevaluationwouldraisethepriceofexports,makesitmoredifficulttoachievearobustgrowthtocreatejobopportunitiesEconomicEnvironment Currency16Chinesebuyingpowerisundergoingsignificantincrease,fuelingconsumptionofimportedandluxurygoodsinurbanareasTheBuyingPowerisComparablyLowThegrowthspeedofbuyingPowerinruralareaisrelativelyslowthanincityandtownBecausetheslowincreaseofincome,thesavingmotivationstrengthenedThetotalconsumptionstylehasn’tentirelygetridofthepatternwhichconcentratesonsurvivalBuyingPowerKeepsIncreasingGovernmentkeepsencouragingprivateconsumptionConsumestructurewillbeoptimizedThebuyingpowerincityandtownwillkeepstrongincreaseinthefuture50yearsBuyingPowerNeedsToBeDirectedHowtodrivethedomesticdemandPayattentiontoinfrastructureconstructionandconsumptionenvironmentimprovementSupporttothelow-incomegroup

Source:NationalBureauofStatisticsofChina(/)InternationalFinanceNews()Note:1US$=8.26yuan(current)BuyingPowerinUrbanAreawillIncreaseDramatically,whileItKeepsStagnantinRuralAreaUrbanarea,disposableincomeRuralarea,totalexpenditureEconomicEnvironment BuyingPower17AccessiontoWTOhasentailedonerouscommitmentsonChina,withgradualbutinevitablechangesSource:TheEconomistIntelligenceUnit(EIU);OxfordAnalyticaCategoryCurrentRateFutureRateAgricultural22.1%17%Car80%25%(parts,10%)Woods/Paper12-18%/10-15%7.5%ChemicalN/A0-6.5%High-Tech(Incl.Semiconductor

)N/A0%CategoryBarrierActionsImportsQuotaLicensingRegistrationrequirementsCommodityinspectionQuarantinerules

Banquotasandotherquantitativerestriction

Phaseoutallquotasonproducts,by2005,withanannualreducerateof15%Licenseexemptionforexport-orientedproductionExportsRebateAveragetaxrebaterateof12.56%,takingeffectatthebeginningof2002ChinaisExpectedtoEliminateitsNon-tariffBarriersChinaWillCutDownitsTariffRateInternalserviceBankingDistribution,retailInsuranceSecuritiesEnergyAutoPharmaceuticalsTelecomservicesProcessedfoods,consumergoodsElectricalequipment,electronicsCurrentdegreeofprotectionismEffectsofWTOmembershipHighLowDramaticNegligibleSectorprotectionismandeffectsofWTOEconomicEnvironment WTOAgricultureagribusinessExcludesliquorandtobaccoindustries,whichhavehistoricallybeenhighlycontrolledandwilllikelycontinuetobe.Source:UnitedStates–ChinaBusinessCouncil;McKinseyanalysis

184thGenerationofLeadersTheyhaveanumberofnewstrengths…YoungandeducatedDistrustofdogmaHavetendencytodemocracyHavefaithintheReformHaverecordsofsuccess…theywillinitiatenewreforms…ContinuemarketliberationExtendBeijing’sinfluenceImproverelationshipwithUSBemoreflexiblewithTaiwanSpeeduppoliticalreform…buttheyfacechallengesandthreatsMorecomplicatedinternationalsituationsandsevereinternalunrestContinuousinfluencefromolderleaders,andthejostlingwithintheleadershipwillcontinueandcouldpossiblytriggerpoliticalinstabilityNeedstoaddressdiscontentamongthedisadvantaged(e.g.farmersandlaid-offworkers);alsoneedstorespondtothedemandsofthemanyurbandwellerswhohavebecomewealthierasaresultofeconomicreformPresidentHuJinTao(Age:59)PremierWenJiabao(Age:59)VicePresidentZengQinghong(Age:62)Social&PoliticalEnvironment ChineseLeadershipThenewleadersareexpectedtocontinuereformsandinternationalrelationsinamoreaggressivemannerthantheirpredecessors19ChinaisbecomingincreasinglymoreintegratedintotheworldcommunityShanghaiCooperationOrganization(SCO)MeetingJune2001ShanghaihostedameetingwiththeleadersofRussia,Kazakhstan,Kirghizstan,Tajikistan,Uzbekistan,aimingatreachingregionalsecurityandstabilityviacooperation.2008BeijingOlympicGamesJune13th,2001TheInternationalOlympicCommitteepickedBeijingoverParis,Toronto,IstanbulandOsakatohost2008OlympicGames,whichmadeanewstepinWorldandChinasportshistory.APECSummitOctober13th,2001APEC(Asia-PacificEconomicCooperation)summitwassuccessfullyhostedinShanghai.LeadersofAPEC21economieshadanin-depthexchangeofviewsonthecurrentmacroeconomicsituationofAsiaPacificregionWTODecember11th,2001With15-year’seffort,Chinabecamethe143rdmemberoftheWorldTradeOrganisation(WTO),theglobaltradegroup.Fromwhen,ChinaisgoingtotakeamoreactiveroleininternationaltradeASEANSummitJuly2002Chinaattendedthe35thASEAN(AssociationofSoutheastAsianNations)MinisterialMeetingintheBrunei,duringwhichChina,togetherwithothercountries,discussedtheissuesonregionaleconomiccooperation,recoveryandreformaswellasanti-terrorism.2010ShanghaiWorldExpoDecember,2002The132ndGeneralAssemblyoftheBureauofInternationalExpositionsgrantedthe2010WorldExpotoShanghai

ChinaHasParticipatedinANumberofInternationalActivitiesRecentlySocial&PoliticalEnvironment MajorActivities20Chinaisdeterminedonunificationbutisnotlikelytotakemilitaryactions.However,ChenShui-bian’sactionsislikelytoputfurthertesttoChina’spatience.TaiwanUSChinaTaiwanParliamentapprovedonNov27theReferendumLaw,whichwillforthefirsttimeprovidealegalbasisforreferendaPresidentChenShui-biansaidonDec4,2003thathewouldkeephispledgenottodeclareindependenceorchangetheisland’sofficialnameTheoverwhelmingmajorityofpeoplestillfavorsmaintainingthe‘statusquo’,butthereisnowastrongsentimentthattheislandshouldbeacceptedasanindependentcountrywithitsownidentityChinaPrimeMinisterWenJiabaometwithUSPresidentGeorgeBushonDec9,2003ChinahaschosentorespondTaiwannotbyadisplayofforce,butbypersuadingtheUStotryandcurbChen’sActionThereisastrongdesireinChinanottoplayChen’schosengame,howeveritdoesn’tmeanthenewleadershipisanylessdeterminedthanitspredecessorsSocial&PoliticalEnvironment

Mainland-TaiwanRelationshipUSpressureandChineseoppositionhaveforcedChentobackdownforplanstoholdreferendumontheissueofindependencyfromChina,however,theintroductionoftheReferendumLawhasaddedanewelementofvolatilitytoTaiwanesepoliticallifeintherunuptocrucialpresidentialelectionsInmanyareas(i.e.directcross-straitflight),Chinapubliclyemphasizestheindependencebetweenpoliticalrelationshipandeconomicrelationship,butChinaislikelytoleveragepoliticsineconomicnegotiationsUStreatedChinaasapartnerinthe“waragainstterrorism”,andthisoverarchingframeworkhasfacilitatedawide-rangingimprovementintherelationship,whichtheWhiteHouseiskeentosecureandadvanceInthiscontext,WashingtonhasviewedChina’snewdiplomaticactivisminapositivelight,notablyitsroleinbringingNorthKoreatothenegotiatingtableintheformofthesix-partytalkButhumanrights,IPrights,weaponproliferationandtradeissuesremainaslingeringproblems21Theincomegapisgrowingasaresultofrapidurbandevelopment,andisalreadycausingmassivemigrationofpeopleGovernmentisNarrowingdownTheGAPTheChinesegovernmentisrelyingonindividual

taxpoliciestoclosetheincomedisparityLabormobilityhelpstoreduceregionalIncomedisparity,thiswillbethetrendinnext10yearsNPCisrequiredtoraisetheincomesofruralandurbanworkersthroughthecompleteimplementationofacomprehensivesocialsecuritysystemToaddmorewealthiereliteintotheCPC,Partystartstoabandonitstraditionalpillarsofsupport--workersandpeasantsAlthoughpersonaleconomyconditionisimproving,thegapbecomeswiderOverthelasttwodecades,some200-300millionChinesehaverisenabovethestandardUNdefinitionofabsolutepoverty(measuredbyanincomeof1dollarperday)Toreduceincomedisparity,Chinesegovernmentpledgedtorestructurethecountry's100,000state-ownedenterprises(SOEs)ThecurrentcalltodevelopChina'swesternregionisthebiggestmoveaimedatshrinkingtheaffluencegapIncomeDistributionisBecomingWiderEastMiddleWestEasternPeopleMakeMuchMoreMoneySource:ChinaStatisticsYearBookNote:1US$=8.26yuan(current)Social&PoliticalEnvironment Incomedisparity22TheruralreformisoneoftheprioritiesoftheChinesegovernmentRuralReformFocusesonUnemploymentandRuralWelfareSystemIncreasingRuralProblemsJeopardizeUrbanStabilityThereisa42%surplusofRuralLaborForceAnother100M+PeopleWillMovetoCitiesThecapacityforcitiestoabsorbsurpluslaborisconstrainedbyrisingurbanunemploymentassociatedwithSOEreformWTOmembershipwoulddisplace6.5%ofthefarmlaborforce,or21millionworkersRapidinfluxintoalreadycrowdedcitieswillworsenproblemssuchascrime,unemployment,trafficcongestionandenvironmentaldegradationAtleast42%ofChinesefarmersareinsurplusandshouldbedivertedtomoreproductivesectorsGovernment’screated100M+ruraljobopportunitiessince1980Hugenumbersofruralmigrantworkershavefloodedintocitiessincethe1980s,inShanghaialonethenumberismorethan2millionSource:StatisticalYearBookRequiredFulltimeLaborForce:191MSurplusLaborForce:137MSource:OxfordAnalysisSocial&PoliticalEnvironment RuralReform23IncreasingunemploymentwillbecometheburdenoflocalgovernmentandmayjeopardizesocialstabilityUnemploymentinChinaIsExpectedtoBeSevererinTheNextSeveralYearsUnemploymentKeepsGrowingTheunemploymentratewillincreasefor3reasonsWTOexacerbatetheshorttermunemployment;IndustryintegrationandFDIexcludethecheaplaborInternalpopulationmigrationreshapethejobmarket,aggravatingunemploymentinurbanareasChallengesandThreatsGovernment’sstatisticsnormallyneglectthe“ruralsurpluslabors”and“earlyretirees”,whichamountsto14millionintotalUnemployedworkforceareratherlimitedintheirskillsandknowledge;theseproblemsdisablethemfromseekingajobagainGovernmentplayslimitedrolesinbuildingupthesocialwelfaresystem,corporationsareexpectedtofilluptheremaininggapSource:TheEconomistIntelligenceUnit(EIU)Hiddenunemploymentrateisestimatedtobeover10%ActualForecastSocial&PoliticalEnvironment Unemployment24ThereareavastdisparitiesbetweenEastandWest,withmostoftheeconomicdevelopmenttakingplaceincoastalregions.However,thegovernmentisincreasingitsattentiontodevelopingthepoorerwesternregions(unit:12millionUS$)10,000andabove4,000-10,0002,000-4,0002,000andbelowShanghaiSICHUANBeijingHUBEILIAONINGGUANGDONGHEBEISHANXISHAANXIJIANGSUANHUIJIANGXIFUJIANYUNNANGANSUHEILONGJIANGJILINXINJIANGSHANDONGNINGXIAQINGHAINEIMENGGUHENANZHEJIANGGUANGXITIBETHAINANHongKongGuangzhouXiamenNingboNanjingDalianQingdaoQinhuangdaoHUNANGUIZHOUHangzhouSource:ChinaStatisticalYearbook2002GrossOutputvaluerangeProvincialgrossoutputSocial&PoliticalEnvironment EastWestDivide25ReturnoninvestmentinChinaisrealbutwilllikelytakealongtimeformostcompanies,particularlythosethatlackdeepculturalunderstandingofthemarketFiction:

SuccessinChinarequirescompaniestoinvestandforegoprofitstodaytopositionforthefutureFact:SuccessinChinarequireslongtermcommitment,andthemostsuccessfulcompaniesdemandacommercialreturnFDIinflowsandprofitrepatriationinChina1991-2001In2001,nearlyUSD30billioninprofitswererepatriated.UsingaccumulatedFDIinflowsovertheprevioustenyearsasabase,thisimpliesareturnoninvestmentofaround8%2/3ofFDIisaimedatdomesticconsumersManyfirmsarerealizingChinarelatedprofitsoutsideofChinaManyfirmsarelearningtoleverageChina’scapabilitiestoenhanceglobalperformanceProfitsarebeingmadeSource:GoldmanSachsCommercialEnvironment ReturnonChinaInvestment26%Source:NationalBureauofStatistics,PRC;CDIanalysis(cross-bordertransactiononly)ChinaM&Adealsareontherise,especiallywithprivatelyheldcompaniesExamplesofrecentM&AdealsBuyerSellerIndustryValue(USDm)HuanengPowerIntShandongHuanengPowerElectricpower1,450EmersonElectricAvansysPower,ownedbyHuaweiTechnologiesPowerSystems750FlextronicIntNatSteelBroadwayManufacturing364AlcatelShanghaiBellTelecom300Li&FungColbyGroupHoldingsTrading282CCTMultimediaHaierGroupTelecom185Source:CDIChinaCommercialEnvironment M&AGrowthrateofM&AvalueinMainlandChinaNowistheidealtimeforM&AinChinaChinahasavastappetiteforcapitalespeciallytheprivatelyownedcompanies,wheremostofM&AdealsareontheriseChina’sbankscontinuetoprimarilyallocatefundstothelargelyinefficientSOEsThestockmarketsasanalternativefundingsourcetobankloansarefundamentallyunsoundCurrentlysome500to1000companiesarewaitingtobelistedonthedomesticmarketTheattractivenessforforeigninvestmentis