Why Invest In China August 2018 00
Table Of Contents 1. Macro Overview 2. Opening-Up The Financial Market 3. Consumption 4. Made In China 2025 5. Supply-Side Structural Reform 6. SOE Reform 7. One Belt One Road 8. The Greater Bay Area 9. Free Trade Zones 10.The Beijing-Tianjin-Hebei Coordinated Development Plan 11. Four Brands Of Shanghai 12.Summary 13.Appendix 1 1
1. Macro Overview 1. 2017 Economic Development 1. Population: 1.4b 2. GDP in 2017 (RMB): 82.7t 3. Real GDP growth rate 2016-2017: 6.9% 4. Real GDP 5yr CAGR: 7.1% 5. Unemployment rate: 3.9% 6. CPI in 2017: +1.6% YoY 7. PMI in 2017: 51.6% 8. Exchange rate: US$ / RMB = 6.33 Exhibit 1: GDP Of China 2. 2018 Outlook 1. International Monetary Fund (IMF) commented that growth in economy was supported by a rebound in exports in 2017. They raised their GDP forecast for China to 6.6% in 2018 and 6.4% in 2019, reflecting an improved external demand outlook. 2. China is the world s largest trading nation in terms of total value of export and import of goods. In 2017, the trade volume increased 14.2% YoY to RMB27.8t, and trade surplus decreased 14.2% YoY. Exhibit 2: Trade Volume Of China Source: National Bureau of Statistics, IMF 2 2
2. Opening-Up The Financial Market 1. China Will Open The Financial Market To Foreign Investors 1. As part of China s broader opening-up push, China will roll out a set of measures for foreign investors to enter China s financial market. This was announced at the Boao Forum this April. The push will incentivize foreign entities to take over JVs and create wholly-owned entities. 2. CSRC has lifted foreign ownership limits on banks and financial asset management firms, and promises to gradually expand the business scope of foreign-funded banks. 3. Foreign-funded insurance brokers will have the same business scope as their Chinese counterparts. 4. China has been gradually liberalizing access to its bond market. In 2017, the Bond Connect program was launched, which allows foreign investors to access China s onshore bond market via the Hong Kong Exchange. 5. The PBOC has recently accelerated China s market-oriented interest rate reform, highlighting further financial liberalization. Exhibit 3: Financial Institutions Operating In China 2. Mainland-HK Stock Connect 1. The daily northbound quota for each of the Shanghai and Shenzhen stock connect programs will be expanded fourfold to RMB52b from RMB13b starting from 01 May 2018. 2. The daily southbound quota, which allows investors in the Chinese mainland to buy Hong Kong stocks, will be boosted to RMB42b from RMB10.5b. 3. The Shanghai-London Stock Connect is expected to be launch by the end of this year. 4. The MSCI A-share inclusion will also boost the cross-border investment in the long-term as foreign money flows in to track the index. 231 large-cap A-shares will become a part of MSCI EM Index at a gradually increasing inclusion factor. Source: NDRC, Xinhuanet 3 3
3. Consumption 1. Consumption Has Become The Major Driver Of China s Economy 1. In 2017, national total retail sales rose 9.02% YoY to RMB36.6t in 2017. Consumption contributed 58.8% of GDP growth. 2. In 2017, China s disposable income per capita was RMB25,974, an increase of 9.0% YoY in nominal terms, and 7.3% YoY in real terms. 3. E-commerce is a fast growing segment of China s economy. In 2017, online retail sales reached RMB7.1t, an increase of 32.2% YoY. 2. Consumption Upgrade 1. With increasing disposable income, consumers are more likely to purchase more premium products that are higher quality instead of essential products. This trend has been termed as consumption upgrade. 2. Chinese residents now spend more money in culture and entertainment activities, e.g. tourism and film. Growth in tourism will be a long-term trend in China. 3. During the Labour Day holiday in 2018, total domestic tourists reached 147m, an increase of 9.3% YoY. The total domestic tourism revenue reached RMB87.2b, an increase of 10.2% YoY. In 1Q18, the total box office revenue of the Chinese film market reached RMB20.2b, exceeding the US$2.98b (about RMB18.3b) in North America during the same period. It is the first time the Chinese film market took the global no.1 position. Exhibit 4: Retail Sales In China Exhibit 5: Consumption Contributes To GDP Growth Exhibit 6: Disposable Income Per Capita Source: National Bureau of Statistics, People s Bank of China, Xinhuanet 4 4
4. Made In China 2025 1. The Made In China 2025 Strategy 1. Made in China 2025 is a decade long action plan for the Chinese government to build an advanced manufacturing industry targets are modelled on advanced manufacturing economies such as Germany and Japan. 2. Five major projects: Manufacturing Innovation Centre Construction Project, Intelligent Manufacturing Engineering, Industrial Foundation Project, Green Manufacturing Engineering and High-end Equipment Innovation Project. 3. It covers ten major industries: the next generation of information technology industry, high-end CNC machine tools and robots, aerospace equipment, marine engineering equipment and high-tech ships, advanced rail transportation equipment, energy saving and new energy vehicles, power equipment, agricultural machinery and equipment, new material, biotech and high-performance medical devices 2. Achievements In 2017 1. The national manufacturing innovation system has further improved with the addition of information and optoelectronics, printing and flexible displays, and three national robot manufacturing innovation centres. 2. High-speed equipment innovation such as the 350km/h Fuxing train and other innovations have continued to emerge. 3. China continues to increase national public fiscal expenditures (NPFE) of science and technology. In 2017, NPFE of science and technology reached RMB726.7b, an increase of 10.7% YoY. Positive growth for nearly two decades. Exhibit 7: China s GDP From Manufacturing Exhibit 8: C919 Successful Test Flight Exhibit 9: NPFE Of Science & Technology Source: Ministry of Industry and Information Technology, National Bureau of Statistics, Xinhuanet 5 5
5. Supply-Side Structural Reform 1. Background 1. Tackle overproduction of traditional industries. 2. Target: optimize resources, reinforce China s New Economy. 2. Major Tasks 1. Cutting excess capacity: cutting the low-added-value, high-pollution low efficiency production, such as steel, coal and cement; 2. Destocking: reduce inventory in the property sector; 3. Deleveraging: to reduce systemic risk, especially for certain traditional SOEs; 4. Reducing costs: to help reduce the costs for enterprises, to support the development of enterprises; 5. Core Focus: to strengthen city infrastructure and people s livelihood, including education, health care, culture, employment and social security services. 3. Recent Achievements 1. The industry capacity utilization rate in 2Q18 was 76.8%, the same as 2Q17; 2. The residential housing area for sale in July 2018 was 268.7m square metres, a decrease of 21% YoY. Exhibit 10: Coal Capacity Has Been Cut Exhibit 11: Industry Capacity Utilization Rate Exhibit 12: Residential Housing Area For Sale Source: GOV.cn, Xinhuanet, NBS, China Business Network 6 6
6. SOE Reform 1. Chinese Government Now Pushes State-Owned Enterprises (SOE) Reform 1. Aim: cultivate world-class companies with global competitiveness. 2. Private capital is allowed to participate in SOE reform. 3. China has introduced three batches of reform pilots, involving a total of 50 companies. These companies are mostly involved in key areas such as oil, natural gas, power generation, telecommunications, transportation, civil aviation, and defence. 2. Example: China Unicom 1. The reform plan of China Unicom was approved in 2017. 2. According to the plan, China Unicom adopted mixed methods such as nonpublic offerings and transfer of existing shares, and introduced large-scale strategic investors including "BATJ" (Baidu, Alibaba, Tencent, and JD.com). 3. China Unicom s headquarters divisions decreased from 27 to 20, a decrease of 26%; the headquarters staff decreased from 1787 to 891, a decrease of 50.14%. The goal was to increase efficiency and productivity. Exhibit 13: Major SOEs Under Reform Exhibit 14: Leading Private Capitals Source: CPC 19 th National Congress Report, Company Data 7 7
7. One Belt One Road 1. One Belt One Road (OBOR) Initiative 1. OBOR was a cooperation initiative proposed by Chinese President Xi Jinping in September and October 2013. 2. It aims to build political mutual trust and economic integration with countries along the belt. 3. The Silk Road Economic Belt included 13 provinces (municipalities): Xinjiang, Chongqing, Shaanxi, Gansu, Ningxia, Qinghai, Inner Mongolia, Heilongjiang, Jilin, Liaoning, Guangxi, Yunnan, and Tibet. 4. The 21 st Century Maritime Silk Road included: Shanghai, Fujian, Guangdong, Zhejiang, and Hainan provinces (or municipalities). 5. Main Regions: Southeast Asia, South Asia, Central Asia, West Asia, Europe Exhibit 15: Belt And Road Trade Value Index 2. Achievements In 2017 1. Currently, there are three operating rail corridors that connect China and Europe. These corridors link up 35 Chinese cities and 34 major cities in 12 European countries. 2. China has a signed bilateral maritime transport agreements with 36 nations along the route. The national public transport logistics platform has realized the interconnection and sharing of logistics information with 31 major ports around the world. 3. China Civil Aviation has opened direct flights with 13 countries along the route. 4. China has established 34 cross-border fibre optic cable with 12 countries along the route. 5. The Belt and Road Trade Value Index (BRTI) hit the historical record of 131.01 in December 2017. (BRTI is an index calculated by Shanghai Shipping Exchange to monitor the OBOR trading situations.) Source: YIDAIYILU.GOV.CN, China Investment Research, Shanghai Shipping Exchange, Wind 8 8
Exhibit 16: One Belt One Road Routes Source: Platinum Research 9 9
8. Guangzhou-Hong Kong-Macau Greater Bay Area 1. Guangzhou-Hong Kong-Macau Greater Bay Area 1. The Guangzhou-Hong Kong-Macau Greater Bay Area (GBA) refers to the urban agglomerations of the two special administrative regions of Hong Kong and Macau, and nine cities in Guangdong Province (Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Zhaoqing, Jiangmen and Huizhou). 2. The GBA covers an area of 56,000 sq km and has a population of 66 million. It is among the world s largest four bay areas, the other three are the Tokyo Delta, New York Delta and San Francisco Delta. 3. The GBA is also an key component of the OBOR strategy. Exhibit 17: HZMB Bridge 2. Major Investment Projects 1. Hong Kong-Zhuhai-Macau Bridge is an important link connecting Hong Kong, Macau and the western bank of the Pearl River Delta. The Shenzhen-Zhongshan Bridge and Humen No.2 Bridge enhance the connection of the GBA. 2. Intercity Railway Network aims to build a One-Hour Rail Traffic Circle in GBA. 3. Mainline Airport Network. It mainly serves the GBA and surrounding areas and actively develops domestic and international air passenger and cargo transportation. Source: GBA Framework Agreement, HZMB Official Website 10 10
Exhibit 18: Greater Bay Area Map Source: NBS, Platinum Research, HK C&SD 11 11
9. Free Trade Zones 1. Goals: 1. Test bed for economic and social reforms. Lower corporate tax rate (16.5%). 2. To accumulate experience for deepening reform and openness for the country; 3. Simulate an international business environment with lower requirements for business establishment. Simplified procedures with the one-stop application processing platform which is unique to the zone. 4. In the long-run, these trade zones will help improve competitiveness as successful reforms and policy could be implemented nationwide. Exhibit 19: China s Pilot Free Trade Zones 2. China s Free Trade Zones 1. 2013: the first free trade zone was approved in Shanghai. 2. 2015: Guangdong, Tianjin and Fujian. 3. 2017: Liaoning, Zhejiang, Henan, Hubei, Chongqing, Sichuan and Shaanxi; 4. 2018: Hainan Source: GOV.cn, China Business Network, Platinum Research, NBS 12 12
10. The Beijing-Tianjin-Hebei Coordinated Development Plan 1. Specific Function & Positioning Of The Cities And Province 1. Beijing (Jing) : national political centre, cultural centre, international exchange centre and science and technology innovation centre; 2. Tianjin (Jin) : national advanced manufacturing R&D base, Northern international shipping core area, a financial innovation operation demonstration zone and a reform demonstration zone; 3. Hebei Province (Ji) : the important base for modern commercial and trade logistics, an industrial transformation and upgrading pilot zone, a new urbanization and urban-rural demonstration zone, and a Beijing-Tianjin-Hebei ecological environment support zone. 2. Major Topics 1. Traffic System Integration: One-Hour Commute Circle, Beijing Daxing International Airport, etc.; 2. Public Service System Integration: Education, Medical Care and Retirement System cooperation, etc.; 3. Environment Protection: National Parks Circle around Beijing, Coal-to-Gas Conversion, etc.; 4. Industries Upgrading And Transferring: developing industries based on their own advantages; 5. Population Size Regulation: The resident population of Beijing is controlled within 23m by 2020; 6. Technology Innovation And Development: developing high-end technology and promoting the utilization of research. Source: China Briefing, jingjinjicn.com, Platinum Research, NBS Exhibit 20: Jing-Jin-Ji Megalopolis 13 13
10. The Beijing-Tianjin-Hebei Coordinated Development Plan 3. Xiongan New Area: 1. Target: Remove the non-core functions of Beijing, explore new models for optimizing development in population-intensive areas, adjust and optimize the urban layout and spatial structure of Jing- Jin-Ji Area, and foster a new engine for innovation-driven development 2. Positioning: The Millennium Plan of China 3. Location: It covers the contemporary counties of Xiong, Rongcheng and Anxin 4. Transport: 6 railways, 4 high-speed railway stations, 1 airport 5. Area: Starting: 100 sq km Mid-term: 200 sq km Long-term: 2,000 sq km 6. Major Tasks: 1. Building a green and smart new city; 2. Create a beautiful ecological environment; 3. Develop high-end & high-tech industries; 4. Provide high-quality public services, build high-quality public facilities, and create new models for urban management; 5. Build a fast and efficient green transportation network; 6. Promote the reform of the government system, play a better role as the government to stimulate market vitality and market resources allocation; 7. Expand all-round opening up and create a new platform for foreign cooperation. Exhibit 21: Xiongan New Area Source: Xiongan.gov.cn, Platinum Research 14 14
11. Four Brands Of Shanghai 1. Four Brands Of Shanghai 1. In 2018, Shanghai Government decided to build and promote the Four Brands of Shanghai; 2. The Four Brands are Shanghai Service, Shanghai Manufacture, Shanghai Shopping and Shanghai Culture. Exhibit 22: Shanghai GDP (Expenditure Approach) 2. Why These Four Brands 1. Shanghai has accumulated an advantage and a practical foundation in service, manufacturing, shopping, and culture in the past. 2. With increasing disposable income and consumption upgrade trends, the support behind quality, the optimization of services and the guidance of culture are the embodiment of a city s overall strength. 3. Supporting Measures 1. Strengthen government service innovation 2. Strengthen functional platforms and services 3. Focus on talent cultivation 4. Improve brand building mechanisms Source: GOV.cn, China Business Network, NBS 15 15
11. Four Brands Of Shanghai 4. Targets: 1. Shanghai Service : to become the city with global influence in finance, trade, shipping, economics and science. By 2020, the service economy will account for about 70% of the city's GDP, and about ten service economy innovation and development demonstration zones will be established; Exhibit 23: Port Of Shanghai 2. Shanghai Manufacture : to obtain core technology, develop advanced manufacturing industries and promote internet industry development. By 2020, the added value of strategic emerging industries will account for more than 20% of the city's GDP. The output value of strategic emerging manufacturing industry will account for about 1/3 of the total manufacturing output value of the city, creating and nurturing six world-class industrial clusters; 3. Shanghai Shopping : to introduce more global high-quality goods and services, promote the launch of more international and domestic brands in Shanghai and improve the retail experience. By 2020, the average annual contribution of consumption to economic growth will remain above 60%, creating two worldclass business streets, ten domestic first-class business districts, 20 distinctive commercial districts, and 50 new and 50 old brands with distinctive Shanghai characteristics; Exhibit 24: Made In Shanghai 4. Shanghai Culture : to inspire the innovation of Shanghai culture, create an international cultural metropolis that is more open and more contemporary. By 2020, the added value of the cultural and creative industries will account for more than 13% of the city's GDP. Source: GOV.cn, China Business Network, SCMP 16 16
12. Summary 1. Steady Economic Growth Although the growth rate of China s GDP has decelerated in recent years, China s GDP growth has broadly sustained and beaten expectations from economists in recent years. The transition to higher quality growth is underway. 2. China Is Gradually Opening Up The Chinese government has unveiled a series of policies to make the Chinese market more open. Since 2013, China has established 12 free trade zones. In 2018, China also adopted new policies in the automobile industry and financial industry to open the market wider for foreign investors. This will improve competitiveness and encourage entrepreneurship. 3. Consumption With increasing disposable income and demand for a better quality life, Chinese consumers now have stronger consumption ability and preference. China pledges to introduce high-quality global goods and services, as well as promote domestic brands. Consistent with the overall goal of becoming a services and consumption based economy. A key theme in China s economic transition. 4. The Next Industrial Revolution Promote high-tech industry development and adopt preferential policies for innovative enterprises, especially for SMEs. High-end manufacturing is also a core development target of China in the following decade. Made in China 2025. 5. Global Cooperation The Chinese Government also promotes international development. Certain industries which exceed domestic demand can find new opportunities in other countries and regions. The One Belt One Road strategy, opens more free trade zones and opening-up policies can help Chinese enterprises develop in other countries. International enterprises also have opportunity to develop in Chinese domestic markets. 17 17
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