Emerging Markets Equity Research

31 May 2011

China 2020: 130 million swing
How demographics change the economy
• The number of graduates in China has increased by 74 million in past decade (2010 Census). The tertiary enrolment ratio is now 35%. This combined with a 2% decline in the working age population leads to a 91 million fall in non-graduates in the workforce; it grew by 28 million in 2000-2010. We believe that this is the most important driver of reduce fixed asset investment. It reverses the commonly held belief that China must have growth above 8% to generate sufficient jobs. Continuing the current investment-driven model will be inflationary. • China’s official GDP growth target and inflation rate for this decade are 7% and 4%, respectively. Considering a 10.5% GDP CAGR in 2000-2010 with just 2% inflation, this lower target appears conservative. To achieve the 7% target China requires circa10% labor productivity. It is investment in human capital that makes this high level of productivity possible, as higher-paying service sector jobs replace lower-paid construction and manufacturing jobs. The challenge is creating jobs for graduates. • If we assume a return to the consumption/investment ratio in 2000 and 7% GDP growth, the consumption CAGR accelerates from 8.5% to 8.9%. Fixed investment CAGR falls from 12.7% to 4.8% (see page 10). Commodity bulls take note. The 12th Five-Year Plan aims to rebalance. But it is China’s 1979 one-child policy that is driving economic change today.

EM 101

Emerging Markets Equity Strategy Adrian Mowat
AC

(852) 2800-8599 adrian.mowat@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited

Ben Laidler
(1-212) 622-5252 ben.m.laidler@jpmorgan.com J.P. Morgan Securities LLC

David Aserkoff, CFA
(44-20) 7325-1775 david.aserkoff@jpmorgan.com J.P. Morgan Securities Ltd.

Rajiv Batra
(91-22) 6157-3568 rajiv.j.batra@jpmorgan.com J.P. Morgan India Private Limited

Faheem S Desai
(91-22) 6157-3329 faheem.s.desai@jpmorgan.com J.P. Morgan India Private Limited

Ravi Saraogi
(91-22) 6157-3305 ravi.saraogi@jpmorgan.com J.P. Morgan India Private Limited

Figure 1: Demographics should reverse this trend
800% 700% 600% 500% 400% 300% 200% 100% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: CEIC. Note: Household income lagging profits and GDP growth

748%
GDP Government Profits Income

Figure 2: China needs jobs for graduates, not in pouring concrete or manufacturing: Change in the non-graduate available workforce 15-39 years old
%oya, Millions
3% 2% 1% 0% -1% -2% -3% -4% -5% -6% 600 500 400 300 200 100 0

512% 343% 258%

%oya

Number

Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation

See page 28 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047

Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Emerging Markets Equity Research 31 May 2011

EM 101 Series
EM 101 key briefing notes for emerging market equity investors.

Table of Contents
Figure 1: Demographics should reverse this trend.......................................................1 Figure 2: China needs jobs for graduates, not in pouring concrete or manufacturing: Change in the non-graduate available workforce 15-39 years old ...............................1 Figure 4: Change in the non-graduate available workforce 15-39 years old................3 Figure 5: And reverse this trend...................................................................................3 Figure 6: Real GDP growth (2000=100)......................................................................4 Figure 7: Contribution to China’s real GDP growth ....................................................4 Figure 8: Growth in per capita GDP & average national wages (%) ...........................4 Figure 9: From consumption to investment .................................................................5 Figure 10: Household income lagging profits and GDP growth..................................5 Figure 11: More 19 years old in Tertiary Education - Less for construction, manufacturing and agriculture .....................................................................................9 Figure 12: Change and absolute number of 19 year old non-graduates .......................9 Figure 13: Change in the non-graduate available workforce 15-39 years old..............9 Figure 14: Tertiary enrollment ratio as a percentage of 19 years old...........................9 Figure 15: China labor productivity growth (%)........................................................10 Figure 16: China export price index (%oya, nsa).......................................................10 Figure 17: China FAI breakdown ..............................................................................11 Figure 18: China ICOR..............................................................................................12 Figure 19: China export prices and US import prices from China.............................13 Figure 20: Export price trends - China, Korea and Taiwan .......................................13 Figure 21: Manufacturing wages relative to industry output .....................................13 Figure 22: Share of US import market.......................................................................14 Figure 23: Industrial enterprise profit margin ............................................................14 Figure 24: China exports by region............................................................................14 Figure 25: Lessons from other countries - Real GDP growth (5-year centered moving average %) vs. adjusted per capita GDP (US$) .........................................................16 Figure 26: Real GDP growth %oya (5-year centered moving average) over time.....17 Figure 27: Relative growth and wealth of provinces in China...................................18 Figure 28: Real GDP growth vs. Average CPI in the previous decades ....................19 Figure 29: Intensity of cement use; per-capita consumption of cement (tonnes) vs. adjusted per-capita nominal GDP ..............................................................................20 Figure 30: Intensity of steel use; per-capita consumption of steel (lbs) vs. adjusted per-capita nominal GDP ............................................................................................21 Figure 31: Per-capita consumption of oil (barrels per day per 1000 population) vs. adjusted per-capita nominal GDP ..............................................................................22 Figure 32: Total energy consumption in China higher than in the US but low at a percapita level; per-capita consumption of primary energy (tonnes of oil equivalent) vs. per adjusted capita nominal GDP...............................................................................23 Figure 33: Mobile subscription per 100 people vs. adjusted per capita nominal GDP ...................................................................................................................................24 Figure 34: China is already the world’s largest car market…but still low per 1000 people; passenger cars per 1000 people vs. adjusted per capita nominal GDP..........25 Figure 35: Share of global nominal GDP (%) – China’s share is 10% in 2010 and forecast to be 17% in 2020.........................................................................................26

For more on this subject from J.P. Morgan’s economics team please see: China’s consumption uptrend and role of labor market, 30 July 2010, Grace Ng et al China’s export sector copes with rising wages, 4 March 2011, Grace Ng et al (See page 13) Riding on the coattails of China’s rising labor cost, 25 March 2011, Sin Beng Ong et al

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Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.com

Emerging Markets Equity Research 31 May 2011

Demographics driving change
China’s official growth target and inflation rate for this decade are 7% and 4% respectively. Considering its historic double-digit growth rate with just 2% inflation, this lower target appears conservative. But China faces demographic and structural challenges that investors need to consider. The catalyst for writing this paper was the following statement in the Nation Bureau of Statistics press release on the November 2010 Census: “Compared with the 2000 population census, following changes took place in the number of people with various educational attainments of every 100,000 people: number of people with university education increased from 3611 to 8930;…….” China’s investment in physical infrastructure is legendary. On page 11 we review the impact of cheap money and an increase in the capital to output ratio. We believe investors are underestimating the investment in human capital. This provides China with the ability to maintain high growth through shifting labor from manufacturing, construction and agriculture to services. But it cannot continue the investment driven growth model of the 2000s. China leaders acknowledge this in the 12th Five Year Plan with its focus on rebalancing the economy from investment to consumption plus rebalancing of income distribution from profits to household income. Our view is optimistic. The investment in both physical and critically human capital permits high productivity that is needed to drive growth with a declining working age population. The winners are: 1. Consumers and consumer companies 2. Automation 3. Service sector growth 4. The environment 5. Countries with better demographics The losers are 1. Intensity of commodity demand 2. Low value added labor intensive industries
Table 1: Calculation of the change in the number of graduates in China 2000 to 2010 based on Census data
Year 2000 2010 Change Ratio 3.61% 8.93% 5.32% Population 1,265,824,852 1,339,724,852 73,900,000 Graduates 45,708,935 119,637,429 73,928,494

Figure 3: More 19-year-olds in Tertiary Education - Less for construction, manufacturing and agriculture
Millions
30.0 25.0 20.0 15.0 10.0 5.0 0.0 Under-graduates Non-graduates

Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation

Figure 4: Change in the non-graduate available workforce 15-39 years old
%oya, Millions
3% 2% 1% 0% -1% -2% -3% -4% -5% -6% %oya Number 600 500 400 300 200 100 0

Source: PRC NBS, Ministry of Education PRC, US Census, J.P. Morgan calculation

Figure 5: And reverse this trend
% of nominal GDP
65 60 55 50 45 40 35 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: IMF, Datastream, J.P. Morgan calculation

Source: PRC National Bureau of Statistics; November 2010 Census

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047
Fixed investment Private consumption Total consumption
3

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047

• Average national wage CAGR of 14. Morgan economics. .3% • CPI CAGR of 2%.mowat@jpmorgan.7% Domestic consumption CAGR of 8.P. minimum wages were increased by a substantial 23% to compensate for the lack of increment during the 2009 slowdown. Figure 7: Contribution to China’s real GDP growth 15 10 5 0 -5 00 01 02 03 04 05 06 07 08 09 10 11 12 Real consumption Real investment Real net external demand Source: J.277 to 6. notably underemployed agricultural workers. Minimum wages are growing faster than the national average wage. Figure 8: Growth in per capita GDP & average national wages (%) 22 19 Per capita GDP Wages There are no other countries that have achieved the same combination of low inflation and high growth that China had in the 2000s.Adrian Mowat (852) 2800-8599 adrian. 16 13 10 7 00 01 02 03 04 05 06 07 08 09 10 Source: CEIC. 4 . • Growth was led by fixed investment while consumption lagged: • • • Fixed investment CAGR of 12. For the past 30 years the country has developed with an assumption of unlimited labor. In 2010. • Rmb/US$ CAGR of 2% from 8.6%.5% • Nominal GDP CAGR of 15% • 2010 nominal GDP = Rmb40trillion or US$5880 billion.com Emerging Markets Equity Research 31 May 2011 2000s: High growth with low inflation The economy: 2000 to 2010 • Real GDP CAGR of 10. significantly lower than the CPI CAGR 1990 to 2000 of 7%.5% Net external demand CAGR of 11.P.4% Figure 6: Real GDP growth (2000=100) 500 400 300 200 100 0 00 01 02 03 04 05 06 07 08 09 10 Real GDP Consumption Inv estment External demand Source: J. This is 10% of global GDP. IMF. But the exchange rate was fixed until 21 July 2005. There was a sharp acceleration in 2007-08 when the average growth was 18%. The minimum wage CAGR 17. the CAGR from this point to end 2010 was 4%. • Per capita GDP CAGR of 14.8% from 2005-09. Morgan economics.6.

Adrian Mowat (852) 2800-8599 adrian. Figure 9: From consumption to investment % of nominal GDP 65 60 55 50 45 40 35 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: J. Commodity consumption grew in the high teens in the last decade (see Table 2). Financing an investment growth model requires a wealth transfer from households to profits. a year after the peak in cement demand. Consumption declined from 62% to 48%. more than double the pace of household income growth of 11%. The 12th Five-Year Plan acknowledged the inequality of growth with an aim to balance revenue distribution among enterprises.com Emerging Markets Equity Research 31 May 2011 Investment-led growth in the 2000s China’s economic development is a souped-up version of the Asian investment led growth model. J. as a percentage of nominal GDP fixed investment increased from 34% to 46%.mowat@jpmorgan. Morgan’s equity strategy team is less optimistic about China commodity demand than the consensus (see page 12). * Nickel demand CAGR is from 2003-10. In 1998 Korea had a current account crisis. The intensity of commodity use increased sharply.6% of China's 9. Taiwan property prices peaked in 1994. helping offset the sharp contraction in external demand.6 19. Morgan commodities research and Brook Hunt historic. private consumption fell from 46% to 35% (see Figure 9).5* 14. But Korean per capita GDP in 1997 (in today's dollars) was four times China’s current per capita GDP. low return on savings and an undervalued currency.P.P. central governments and local authorities. IMF Fixed investment Private consumption Total consumption Figure 10: Household income lagging profits and GDP growth 800% 700% 600% 500% 400% 300% 200% 100% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: CEIC. China accounted for over half of the world’s iron ore demand. Morgan economics. The contribution of fixed investment to GDP growth surpassed the contribution from real consumption in 2003 (see Figure 7).9 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 CAGR (2000-10) Source: J. The subsidy is achieved via low wages.5 20. In the past decade. industrial profits grew at 25% CAGR from 2000-09. China cement consumption is remarkable (see Figure 29). In 2010.1% real GDP growth.P. individuals. China's per capita cement consumption was 1.34tonnes in 2010. Note the trend in Taiwan’s per capita cement demand. 748% GDP Government Profits Income 512% 343% 258% Table 2: China's dominant share of global commodity demand and CAGR 2000-10 China share of global demand (%) Aluminum Nickel Copper Iron ore 13 12 20 15 15 21 16 16 23 18 11 19 26 20 13 21 30 22 15 23 36 26 18 23 40 32 23 26 43 33 23 28 47 39 32 37 60 41 33 37 57 17. In 2009 fixed investment contributed 8. There are numerous reasons discussed below that require a move away from an investment-led growth model. Korea in 1997 did reach the same level of per capita cement consumption that China achieved in 2010. 5 . The impact of this policy is clear in Figure 10.

8 1. In the past decade it exceeded estimates.8%.2% CAGR.2 1. World Urbanization Prospects: The 2009 Revision Population Database. In 2000 the urban population was 36%.Adrian Mowat (852) 2800-8599 adrian. This is the decade when China's working age population will start to decline.5 1.3 2.7 1.4 1.6 1.8 0. The population is ethnically homogeneous.3% over 60 years. a CAGR of 1. an increase of 2.1 -0.3 2.0 -0.4 2.3% CAGR in 2010-20.6 0.1 0.8 1.6 0. The growth in total population is forecast to slow to 0. which had a CAGR 1.4 0.5 1.1 2010-2020 2.8 -8.6 2.2 million. The growth rate halved compared to the 1990s.1 1.3 0. The population is shifting. The shift is to the wealthy Eastern region.2 12. It is assumed that the urbanization rate will slow to 2. This growth rate may be exaggerated by a new methodology for counting unregistered migrant labor in the 2010 census.0 1. 6 .9% compared to 2000.0 2. The growth from 2000 was just 73.9 million. The working age population comprised 69% of the total population in 2010.2 0. It grew 12% from 2000 to 2010.0 2. with an 81% increase in the population living in a different location than their town of registration.4 1.1 1.1 1. and there is a large spread of urbanization rates across developed and emerging economies.5 0.9 1.6 million and rural 674. On 1 November 2010 the total population was 1.44 to 3.3 2. The population is aging rapidly.8 1. The number of households was 401. This was the fastest rate of urbanization across EM and DM (see Table 4). Table 4: Urbanization rate in the last decade and current (CAGR) % EM China Malaysia India Philippines Morocco Turkey Egypt South Africa Colombia Israel Brazil Peru Indonesia Thailand Mexico Chile Argentina Korea Hungary Czech Republic Poland Russia DM Singapore France US Australia Italy UK Hong Kong SAR Japan Germany 2000-2010 3. It is the rate of urbanisation that is debatable.6%.724.0 2. with 13.7 0.com Emerging Markets Equity Research 31 May 2011 Demographic transition China published the results of it 2010 census in April. The decline in the fertility rate partly explains the reduction from 3.1 1.4 -1.0 0.3 0.4 0. In the 2000s the working age population increased by 12% a CAGR of 1.2%.2 0.0 Source: United Nations. Each year China added 21 million to its urban population.0 2.7 0.mowat@jpmorgan.3 0.3 0. China’s urbanization rate was a 3. the working age population is expected to contract by 1. There is no clear relationship between per-capita GDP and the urbanization rate.1 0.6 1. The urban and rural split is now 50:50.8 0.8 3.57% CAGR.4 1. The peak in China’s working age population is well known. with 91% Han Chinese.852. According to the US Census.0 1.2 2. or a -0.9 0.2 -0. or a 0.1 2. this decade (see Table 3). This is low even compared to other emerging markets (see Table 5).2%.3% to 16.9 1. The population under the age of 14 declined by 6.2 1.8 1.1 people per household.8 1.1% during this decade.9 1. The urban population is 665.5million.339.07%.2 Source: US Census.5 1.8 1. Table 3: China’s working age population (millions) 1990 2000 2010 2020 2030 Population Working age 724 819 921 905 830 Total 1148 1264 1340 1385 1391 Working age popn % of total popn 63 65 69 65 60 Growth in working age popn (%) 13.8% CAGR in the last decade.

6 #4 -0.Adrian Mowat (852) 2800-8599 adrian.2 10 1. This is a gross simplification of the dynamics of the world’s second largest economy.7 7 . Labor productivity growth was a 10. The arguments in favor of maintaining high productivity growth are: 1. Table 5: Urban population as a percentage of the total population % EM Argentina Israel Chile Brazil Republic of Korea Mexico Peru Colombia Czech Republic Russian Federation Malaysia Turkey Hungary South Africa Poland Morocco China Philippines Indonesia Egypt Thailand India DM Hong Kong SAR Singapore Australia France United States of America United Kingdom Germany Italy Japan 1990 87 90 83 74 74 71 69 68 75 73 50 59 66 52 61 48 26 49 31 43 29 26 100 100 85 74 75 78 73 67 63 2000 90 91 86 81 80 75 73 72 74 73 62 65 65 57 62 53 36 48 42 43 31 28 100 100 87 77 79 79 73 67 65 2010 92 92 89 87 83 78 77 75 74 73 72 70 68 62 61 58 50 49 44 43 34 30 100 100 89 85 82 80 74 68 67 2020 94 92 91 90 86 81 80 78 75 75 78 74 72 67 62 64 55 53 48 46 39 34 100 100 91 90 85 81 76 71 69 Source: United Nations. World Urbanization Prospects: The 2009 Revision Population Database. The CAGR in the urban working age population is forecast to decelerate from 4. This is a reasonable base case. the highest globally. In this section we review the assumptions that we believe investors should watch.2% in the last decade. the migration from manufacturing to service will boost productivity.8%. Urbanization.2 8 1. growth and productivity The high rate of urbanization in the last decade contributed to higher labor productivity as the population migrated from lower return agricultural jobs to higher income manufacturing jobs. The US Census forecast minus 0. Table sorted by urban population % of total in 2010.2 10 4.2 4. 3.com Emerging Markets Equity Research 31 May 2011 Demographics drive rebalancing China’s official growth target and inflation rate for this decade is 7% and 4% respectively.5% to 1.5 2.5 6.5% CAGR in 2000-08 (as per the International Labor Organization). more than the population of Thailand.2 12 1.7 #3 1.2% CAGR in the working age population this decade. In the 2000s the urbanization CAGR was 3. Morgan calculation #1 1.9%. We solve for the adjustment factor using both the 2000s growth in working age population and urban working age population. The key demographic assumptions are: 1. In 2008.mowat@jpmorgan.2 8 4.2 6.1% this decade. The CAGR of the working age population was 1.2%.7 #2 1.5 8.P. 2. Table 6: Sensitivity of potential GDP calculation to productivity using the growth in working age population Parameters Working age pop growth Productivity growth Adjustment factor Potential GDP Source: J. That is an increase of 74 million graduates.6 #2 -0. China had the highest labor productivity globally (measured by GDP per person engaged). In Table 6 and Table 7 we calculate the 2010 to 2020 potential GDP using the growth in working age and urban working age population. The challenge for China is maintaining a high level of productivity growth. Morgan calculation #1 -0. The range is wide with the maximum at 14% and the minimum at 8%.5 4.2 12 4.2 8.P. If China can generate service sector jobs.2 10. The UN forecast urbanization CAGR 2. A third of 19-year-olds (circa 21 million) are undergraduates.6 Table 7: Sensitivity of potential GDP calculation to productivity using the growth in urban working age population Parameters Urban working age pop growth Productivity growth Adjustment factor Potential GDP Source: J.6 #3 -0.6% to 8. Simple model Theoretical potential GDP growth = the change in the hours worked + productivity – adjustment factor.2 6 1. Investment in human capital: In the past decade the ratio of the population with a university degree increased from 3.7 #4 1.2 6 4.

mowat@jpmorgan.000 people: number of people with university education increased from 3611 to 8930.9 million graduates in adult higher education institutes and the 1 million web-based graduates (see Table 11.4% -0.494 swing of 130 million will add to wage inflation in manufacturing and construction.1 275 2030 1.159 21.134 2. This 8 .852 1.708. Economies of scale and clustering: The large scale of manufacturing facilities in China permits the investment in R&D for customized automation. 180.3% -0.944 865 1.724.P.31%.405 246 1.5% 1.8% 0.799 9.035 Total Enrolment 1.moe.637.2% 4.cn/publicfiles/business/htmlfiles/mo e/s4969/201012/113484.9% 3.199 1. Infrastructure: Huge investment in infrastructure increases logistic efficiency.265.074 10. We believe that this is the most important driver of the need for China to reduce its fixed asset investment.264 819 86 7% 36% 455 3.7% 5.1% 0.2% 2. A real rate of 2. The low cost of capital relative to growth lowers the hurdle rate for productive capex. Table 8: Calculation of the change in the number of graduates in China 2000 to 2010 based on Census data Year 2000 2010 Change Ratio 3. Morgan calculations Table 10: Annual growth key population statistics CAGR (%) Population Working age population Over 60 population Urban population Household size Urban households 2000 1.3% assuming the new CPI target of 4%.157 4.2% -0.078 984 406 578 8.852 73.61% 8. the number of people with junior secondary education increased from 33961 to 38788.824.0% 2020 0.1 215 2020 1.238 New Entrants 511 62 449 6.0% 1.8% 3.1 306 Source: NBS China.395 3. The discount to nominal GDP growth target is 3.7 81 2000 1.2% 4.600 31.626 551 1.1% 2010 0.015 816 1.339.385 905 172 12% 62% 851 3.000 Graduates 45.9% of the population with a university degree means that the number of graduates in China increased by 73. US Census. number of people with senior secondary education increased from 11146 to 14032. following changes took place in the number of people with various educational attainments of every 100. November 2010 Census We forecast a 90 million decline in the non-graduate working-age population. J.173 1. Low cost of capital: The 12-month best lending rate is 6.P.148 724 63 5% 26% 299 3.93% 5. Based on the Ministry of Education website the discrepancy may be partly explained by the 1. It reverses the commonly held belief that China must have growth above 8% to generate sufficient jobs. 3.257 3.0% 2.455 2.648 5. US Census.0% 5.6% to 8.8% Source: NBS China.573 2.261 3. Note that new entrants in 2010 were 8.1% 2.3% 1.330 921 115 9% 50% 665 3.414 2.856 1.0% 1.5% 2030 0. Morgan calculations Table 11: Number of graduates in China 0000s Graduates Higher Education Postgraduates Doctor's Degrees Master's Degrees Undergraduates in Regular HEIs Normal Courses Short-cycle Courses Undergraduates in Adult HEIs Normal Courses Short-cycle Courses Web-based Undergraduates Normal Courses Short-cycle Courses Total Undergraduate 371 49 323 5.4 132 2010 1.429 73.000 students went abroad to study.html). This figure is 116% higher than the Ministry of Education Data in CEIC. J.311 2.4 million.0% 0. http://www. The non-graduate labor shortage A key data point from the November 2010 census was: “Compared with the 2000 population census.5% 0.9% -1. (Source: National Bureau of Statistics press release on Major Figures of the 2010 National Population Census).447 11. Shorter delivery times and superior inventory management allow for premium pricing. 4.9 million in the past decade.Adrian Mowat (852) 2800-8599 adrian.edu. Based on Ministry of Education press release.9% 3.900.1% -0. An increase from 3.391 830 239 17% 68% 950 3.32% Population 1. In the 2000s the non-graduate working age population expanded by 30 million.2% 0.1% 2040 -0.2% 3.033 Source: Ministry of Education of the PRC (29 December 2010) Source: PRC National Bureau of Statistics.7%.com Emerging Markets Equity Research 31 May 2011 2. Table 9: Key population statistics Size (million) Population Working age population Over 60 population Over 60 population (%) Urban population (%) Urban population Household size Urban households 1990 1. and the number of people with a primary education decreased from 35701 to 26779”.928.935 119.

Morgan calculation Figure 13: Change in the non-graduate available workforce 15-39 years old %oya.P. Combining both regular and adult data 8.0% %oya Non-graduates 30 25 20 15 10 5 0 Source: PRC NBS.0 5.mowat@jpmorgan. The challenge for China is generating jobs for the eight million graduates entering the work force each year.P. Morgan calculation Source: PRC NBS. US Census. As noted above the November 2010 Census highlighted a 74 million increase in graduates in China.0% -2.0% 2. Ministry of Education PRC. The enrolment-tograduate ratio is 3. Millions 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% %oya Number 600 500 400 300 200 100 0 Source: PRC NBS. Graduate unemployment is already a source of concern.0 15.4 million through to 2049.0% 4.0 25. US Census.0 10.P. this is conservative. The combination of a shrinking pool of 15-39 years old and the upgrading of their skill set argues for a sharp decline in the workforce willing to work in manufacturing and construction. Morgan calculation Figure 11: More 19 years old in Tertiary Education .0% -8.0% -4.0 20. Figure 12: Change and absolute number of 19-year-old nongraduates %oya. We assume that the number of new entrants remains at 8. US Census.Adrian Mowat (852) 2800-8599 adrian.0 Under-graduates Non-graduates Figure 14: Tertiary enrolment ratio as a percentage of 19-yearolds 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 Source: PRC NBS. This is higher than the CEIC data from the Ministry of Education. Ministry of Education PRC. J.5 (calculated from Ministry of Education website). J. J.4 million new graduates entered university in 2010. Millions 6. US Census. Morgan calculation 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 9 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 .0% -10.com Emerging Markets Equity Research 31 May 2011 130 million decline in manual workforce We use a number of data sources and assumptions to calculate the change in the non-graduate workforce. The Chinese manufacturing sector has historically used young migrant labor.P.0% -6.0% -12.0% 0. J. It is arguably harder for government policy to drive service sector employment than manual and semiskilled through stimulus programs. The available non-graduate workforce aged 15-39 is calculated excluding cumulative graduate (of that age group) and those enrolled in university. Ministry of Education PRC. manufacturing and agriculture Millions 30.Less for construction. Ministry of Education PRC.0 0.

India and Vietnam.0 7.5% to 10%.3 4.P.3 14.2 29.2 8.0 12.1 10.0 14.8 6.7% to real GDP growth in the last decade.0 10.3 0.0 6.8 8.9 22.0 12. Note that China already has a significant share in high value added exports including electronics and machinery. selected commodities % share Textiles Clothing Iron and steel Chemicals Machinery & transport equip.9 26. Telecom equip.4 2008 25. 1990 4.0 9. Office & telecom equip.4 12.9 2. Table 12: China's export share of world trade.7% to 4.9 6. Textile and footwear orders are shifting to Bangladesh.3 26.0 11.6 2005 25.2 1.P.9 1.0 8.com Emerging Markets Equity Research 31 May 2011 Net external demand a drag on growth? FT Confidential (7 April 2011) forecast 20-30% wage inflation for the 166 million migrant workers.3 34.4 6. Morgan economics.0 13.9 Fixed Inv 38 47 38 12.3 14. Table 13: Potential consumption and investment CAGR (2010-20) % Share of GDP in 2000 Share of GDP in 2010 Assumed share in 2020 CAGR (00-10) CAGR forecast (10-20) Real GDP Consn 56 47 56 8.2 17.7 12. Private consumption CAGR increases from 7. Net exports CAGR decelerates from 11% to 6% (2000-10) • Source: International Labor Organization Figure 16: China export price index (%oya.0 4.2 3.2 9. nsa) 15 10 5 0 -5 -10 -15 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: J. strategy.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Results: • Fixed investment CAGR decelerates from 12.8 2003 20.5% to 8.1 na 2001 14.4 18. fixed investment and net external demand as a share of GDP return to 2000 levels (see Table 13).Adrian Mowat (852) 2800-8599 adrian. Figure 15: China labor productivity growth (%) 15.6 2. Minimum wages in India and Vietnam are US$96 and US$62 per month compares to China's lowest minimum wage in the Western provinces of US$130 (RMB850).9 1. Assumptions: • Real GDP CAGR (2010-20): 7% • Consumption. Guangdong is US$200 (Rmb1320). In this decade if Chinese wage growth exceeds other EMs then net external demand may be negative.5 8.1 3. In the same report Hong Kong Footwear Makers Association in Dongguan reported a 5% drop in orders post a margin protecting 15% increase in prices. The minimum wage in Shenzhen. • Consumption CAGR increases from 8.6 24.4 Source: World Trade Organization Changing composition of growth Below we explore the potential magnitude of deceleration in fixed investment growth if real GDP growth slows to a base case of 7% and the drivers of growth shift from fixed investment to consumption.7 20.4 2.8 33.mowat@jpmorgan. while less developed countries with rapidly growing working age populations win market share.9 2009 28.4 6. This is potentially a win-win situation with China replacing low-value jobs with high-value service jobs.0 7.9% (2000-10).4 2.5 7 Source: J. 10 .7 Ext Dd 5 5 5 11. Net external demand contributed an average 0. It is reasonable to assume that China’s trade surplus narrows as it loses market share in low-value-added industry. Morgan economics.7 4.7% (2000-10).0 26.

The largest liability is their pension. Today bank deposit rates are more than 10% lower than nominal wage growth. The result is that individuals are forced to save larger and larger portion of their income in order to have sufficient capital to retire.P. The low return on savings is a drag on consumption. The risk is that the ministries and industries which thrive with investments are unwilling to reduce their share of GDP. Bloomberg Figure 17: China FAI breakdown 70% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 Priv ate and JV 2007 2008 2009 Collectiv e 2010 2011 State Ow ned Source: J. Individuals save to meet future liabilities.36 11.0 in the high growth period since 1979.9 8. As household income to GDP rises there will be a corresponding decline in profits to GDP. Twice EM fixed investment to GDP ratio China fixed investment to GDP ratio is twice the EM average (see Table 15).9 Average ICOR 4. It may be counterintuitive. It has averaged 4. 11 . Morgan economics Table 15: Contribution to real GDP: China the outlier Countries Argentina Brazil Chile China Colombia Czech Republic Hungary India Indonesia Malaysia Mexico Peru Philippines Poland Russia South Africa South Korea Taiwan Thailand Turkey Consumption 78% 82% 84% 48% 81% 71% 72% 73% 66% 66% 81% 75% 86% 79% 77% 84% 67% 66% 60% 81% Fixed Investment 23% 21% 28% 47% 24% 27% 13% 33% 24% 23% 22% 25% 21% 23% 22% 22% 27% 19% 22% 20% Net trade -1% -3% -11% 5% -5% 2% 15% -6% 9% 11% -3% 0% -6% -2% 1% -6% 6% 15% 19% -1% Source: J. Potential risks of this are poor allocation of capital and inflation.Adrian Mowat (852) 2800-8599 adrian.0 Average Annual CPI % 6. China’s ICOR has been rising in the last three years.62 9.35 China* Taiwan Korea Japan** India Source: J.02 6. but China needs higher interest rates to boost consumption. Excess savings help fund this investment via the banking.P.com Emerging Markets Equity Research 31 May 2011 Cheap money and high ICOR The Incremental Capital Output Ratio is domestic investments divided by the change in real GDP.12 6. Its investment in human capital permits China to break away from its investment-led growth model.3 2. This is higher than the ICOR in Korea.mowat@jpmorgan.0 2. Table 14: Real GDP growth.9 6.9 9. Morgan economics. ICOR and average CPI during high growth periods High growth period 1979-2010 1965-1990 1965-1990 1956-1970 1991-2010 Avg Real GDP growth % 9.6 4. The rapid rise in profits relative to GDP (Figure 10) provided the cash for reinvestment.8 8. Morgan economics: Note: In Figure 9: From consumption to investment nominal rather real GDP is used to calculate the ratio. Taiwan and Japan during their respective high growth periods (See Table 14).0 3.P.

P.com Emerging Markets Equity Research 31 May 2011 Impact on commodity demand If fixed asset investment real growth slows from 12.8 7.6 6.0 23359 22735 -3% Iron ore 20 57 57 19.9 5. J. Morgan EM equity strategy team calculations Source: J.8 2636 2567 -3% Source: J.7% growth in China’s commodity demand.2 4. The difference in global demand.0 58209 51360 -12% Nickel 33 41 20.5 10.mowat@jpmorgan. Morgan estimates. Morgan’s base case and the rebalance scenario in 2015. In Table 16 we assume 4.7% in 2010s then China’s demand for commodities will slow.P.4 5.P. between the J.Adrian Mowat (852) 2800-8599 adrian.6 1979 1791 -9% Copper 12 37 42 14.5 10. 12 .8 5.7% to 4.P.8% growth 2000 2010 2015e CAGR (2000-10) China CAGR (201015) base case Total CAGR (201015) base case Base case 2015 total volume Rebalance scenario volume Reduction Aluminium 13 41 49 17. ranges from -12% (aluminium) to -3% (iron ore). Morgan economics. Figure 18: China ICOR 8 6 4 2 0 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Table 16: How slower investment could reduce commodity demand – base case and 4.

when it fell somewhat). but rising wages have begun to affect production costs. USD (LHS) US import prices from China.P. the index started to pick up 13 . have been rising. Within the nonfood CPI. March 4.com Emerging Markets Equity Research 31 May 2011 China’s export sector copes with rising wages Grace Ng (852) 2800-7002.0 -2. 2011 • Tradable goods inflation has been modest so far. While the price increase in the tradable goods sector has been modest compared to overall domestic service prices.China.8%oya in January. with the housing CPI up 6. however. Alternatively.Adrian Mowat (852) 2800-8599 adrian. Along with that. in addition to near-term pressure from rising food prices. As part of the growing global attention being paid to China’s inflation.P. total manufacturing sector wage payments by secondary industry GDP output (in nominal terms). Morgan economics This ratio should reflect the trend in labor cost per unit of secondary industry output (dominated by manufacturing). • Rising export prices in 2007-08 largely reflected stronger CNY. USD terms 20 China 10 0 -10 -20 -30 06 07 08 09 11 Taiwan Korea Source: J. that has been rising the fastest. which reflects the pricing trend in the tradables sector and is more relevant to China’s export prices. China’s export price index in yuan terms (that is. trade sector For China’s inflation.0 4. Yuan (LHS) China export prices. The latest US data showed that consumer goods import prices have begun to turn up on the back of rising prices in China. this time domestic inflation plays a major role. our estimate for the major consumer goods CPI component.0 2.5%oya in January. while this measure was relatively stable during 2005-08 (except during the financial crisis period. we have highlighted that. China’s inflation: domestic vs. for China’s trade sector.0 Apr 11 • Export sector manages to move up value-added chain amid rising costs. Interestingly. USD terms (RHS) 6.0 -4. in particular the housing component. reflecting persistent. gradually emerging from the prevalent deflationary trend seen in recent years. Morgan economics Figure 21: Manufacturing wages relative to industry output 108 106 104 102 100 98 96 05Q1 06Q1 06Q1 07Q1 08Q1 09Q1 10Q1 Source: J. rose a modest 0.mowat@jpmorgan. Meanwhile.0 0. including wages. before reflecting the currency effect) rose 4.P. Chinese exporters may begin to lose export market share in the global economy. which has become a more dominant concern than the gradual appreciation of the CNY/USD exchange rate. both scales 16 12 8 4 0 -4 -8 -12 Jan 05 Jul 06 Feb 08 Sep 09 China export prices. We constructed a measure of wage cost pressure by dividing Source: J. The broader worry is that overheating risks in the EM world will place significant upward pressure on DM consumer goods prices. faced with upward pressure on domestic production costs.6%oya in January. Morgan economics Figure 20: Export price trends . there is increasing concern that domestic inflation is being transmitted abroad through rising export prices. the fastest rise in 13 years. the general costs of production in China’s manufacturing sector. it is the domestic service sector. entrenched excess capacity in a number of manufacturing industries over the years. Figure 19: China export prices and US import prices from China %oya. Korea and Taiwan %oya.7%oya 3mma by January. the worry is that. with profit margins on the rise. the recent upward trend in nonfood inflation has been notable as well: the nonfood CPI rose 2.

this time the rise in China’s export prices has been largely driven by the gradual rise in domestic prices. as improving global demand allows Asian exporters to lift prices at a gradual pace. which had expanded significantly over the past decade. profit margins for the export-related industrial enterprises in particular have advanced notably. such as machinery and high-tech sectors. the pace of gain in US$ export prices in over-year-ago terms is approaching the recent peak seen during 2H07-1H08.Adrian Mowat (852) 2800-8599 adrian. Regarding the implications for China’s export prices. 3mma Overall industrial enterprises 2 03 04 05 06 07 08 09 10 11 Source: J. while in 2007-08 the notable appreciation in the CNY/USD exchange rate played an important role in the rise in China’s US$ export prices (CNY/USD appreciated by about 10% between mid-2007 and mid-2008).P. Morgan economics Figure 24: China exports by region % share of total exports. Indeed. Another way Chinese exporters have attempted to manage production costs has been to move inland. despite growing cost concerns.0 91. Figure 22: Share of US import market % share. China’s share of the US (and global) market.5 8. as the pace of CNY appreciation picks up further (we expect CNY/USD to rise about 5% this year). which suffered notably during the global financial crisis. have rebounded swiftly during the past two years. in addition to the gradual.0 9. Exporters adapting to rising wages The encouraging news is that despite growing concerns over rising production costs (hence the pressure to raise export prices). remained at an elevated level through 2010. Meanwhile. Indeed. profit margins for China’s industrial enterprises.0 8. a growing number of large-scale US.5 00 02 Western and central region (RHS) 04 06 08 11 10. where costs of labor and land are generally lower than in the coastal area. broadly speaking. along with expected solid global demand.com Emerging Markets Equity Research 31 May 2011 rather notably since early 2009. both scales 92. 12-month moving average 20 18 16 14 12 10 8 6 98 00 02 04 06 08 10 12 Japan EM Asia (ex-China) China Mexico Source: J. the recent pace of gain in China’s export prices has been generally in line with that in other major exporters in EM Asia such as Taiwan and Korea. has come on the back of steady industrial upgrading and moving up the value-added chain.5 Source: J. and Asian manufacturers have moved part of their coastal production lines to the central and western parts of the country.P. European. China’s share of the global market in many higher valueadded industries. with migration speeding up considerably over the past two years.0 89. Indeed.5 91. Morgan economics Figure 23: Industrial enterprise profit margin 7 6 5 4 3 Export-related industrial enterprises % of sales rev enue.0 90.P. while the share of China’s exports of lower end consumer goods (such as textiles and clothing) in the global market seems to be gradually peaking.0 7. there could be more upward pressure on China’s export prices (in US$ terms). Morgan economics 14 .5 9. As the Chinese government is set to speed up the urbanization process and infrastructure spending in inland regions under the 12th five-year plan.As such. The fact that China’s export sector is holding up well. 12mma. This trend to some extent reflects the gradual rise in overall labor cost in the manufacturing sector during the past two years.5 10. has continued to expand in recent years.5 90. significantly exceeding the average pre-crisis level. the improvement in the transportation network should further encourage manufacturers to move inland. moderate rise in China’s tradable goods prices. This suggests that.5 Coastal region (LHS) 92. In addition.mowat@jpmorgan.

4% 2030 1.3 -6.264 819 86 7% 36% 455 3.330 921 115 9% 50% 665 3.0% 34.1 306 2030 7 -74 67 7% 98 0.26 52 2010 1.4 -1.5 9.9% 3.4 132 2000 115 96 23 156 -0.0% 2010 6.3% -0.00 32 2030 0.148 724 3.8 422 75 -139 27.7 10.1% 2.8 711 75 -91 63.359 766 25.8% 0.7 9.148 724 63 5% 26% 299 3.9% -24.2% 2.1% -0.4 8.P.0% 5.0 8.0% 2.3 15.7% 5.8 8.5 689 15 .0 2020 1.3% 268.1 332 2040 -33 -64 88 8% 80 0.1% 0.4% -0. J.391 830 19.1% 2000 11.3% 343.8 802 73 28 160.2% 3.6 6.2% 1990 1990 1.2 2000 1.0% 2040 1.00 60 2020 0.9% 118.8% 2040 -3. Morgan Calculations 1990 1.6 5.1 215 2010 67 102 29 14% 210 -0.0% 193.2 2.0% 1.3% 3.359 766 327 24% 76% 1.9% 3.385 905 172 12% 62% 851 3.8% 1990 2000 1.8 3.7 18.1% -11.2 2030 1.6 2040 1.2% -0.34 82 2010 0.029 3.8 562 75 -149 38.0% 1.6 774 11 84 32.4 6.330 921 8.Adrian Mowat (852) 2800-8599 adrian.8% 3.7 -7.mowat@jpmorgan.2% 4.com Emerging Markets Equity Research 31 May 2011 Table 17: Summary of key population data Size (million) Population Working age population Over 60 population Over 60 population (%) Urban population Urban population Household size Urban households Change (millions) Population Working age population Over 60 population Urbanisation rate Urban population Household size Urban households CAGR (%) Population Working age population Over 60 population Urban population Household size Urban households Annual change (millions) Population Working age population Over 60 population Urban population Urban households Education Total population Total working age population Graduate ratio Graduates Non-graduates working age Change graduates Change non-grad' working age Change graduates (%) Change non-grad' working age (%) Source: China NBS.5% 2020 5.6% 45.0% 0.9 21.1% 2030 0.2 2010 1.5% 0.1 275 2020 54 -16 57 12% 186 0.6 5.5% 1.385 905 14.7 81 1990 2000 1.9% -1.0 2.264 819 3.6 2.00 26 2040 -0.7% 2020 1.2% 4.7% -21. US Census.3% 1.391 830 239 17% 68% 950 3.4% 12.2% 0.

Morgan economics.Real GDP growth (5-year centered moving average %) vs. We do this by inflating the historical per capita GDP by current deflator and converting to US$ using current exchange rate 2. Note The fitted curve excludes Singapore data points.P.com Emerging Markets Equity Research 31 May 2011 Methodology – 1. 40000 50000 16 .Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan. The centered moving average is calculated as the average of current year. adjusted per capita GDP (US$) Real GDP grow th 5-y ear centered moving average % 16 China (1978-2010) Taiw an (1960-2010) US (1948-2010) South Korea (1960-2010) Poly . (Curve fit) Japan (1956-2010) Hong Kong (1963-2010) 14 Singapore (1960-2010) 12 10 8 6 4 2 0 -2 0 10000 20000 30000 Adjusted GDP per capita US$ Source: J. We adjust per capita GDP to today’s US$. previous two years and next two years real GDP growth Figure 25: Lessons from other countries .

P. Morgan economics 17 .Adrian Mowat (852) 2800-8599 adrian.com Emerging Markets Equity Research 31 May 2011 Figure 26: Real GDP growth %oya (five-year centered moving average) over time Real GDP grow th 5-y ear centered moving average % 16 US China Japan South Korea Hong Kong Taiw an Singapore 14 12 10 8 6 4 2 0 -2 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: J.mowat@jpmorgan.

6% 10.000 20.1% 15.2% 9.Adrian Mowat (852) 2800-8599 adrian.4% 17.9% 14.000 – 60.8% 14.3% 15.8% 15.000 Source: CEIC.8% 11.5% 14.000 40.9% Province Tianjin Chongqing Heilongjiang Hainan Qinghai Sichuan Inner Mongolia Hubei Hunan Anhui Shaanxi Zhejiang Gansu Xinjiang Beijing Shanghai Jilin Inner Mongolia Liaoning Xinjiang Beijing Tianjin Hebei Ningxia Shanxi Shandong Qinghai Gansu Henan Shaanxi Hubei Chongqing Hunan Guizhou Yunnan Jiangxi Fujian Jiangsu Anhui Shanghai Zhejiang Tibet Sichuan GDP per capital (RMB) 60. Morgan’s Hands of China Team Guangxi Guangdong Hainan 18 .com Emerging Markets Equity Research 31 May 2011 Figure 27: Relative growth and wealth of provinces in China 2010 GDP Growth 17.P.mowat@jpmorgan.1% 14. J.5% 14.000 – 80.7% 10.000 – 40.000 0 – 20.5% 11.

mowat@jpmorgan. Bloomberg 19 . Morgan economics.1990) 6 4 China 2 Taiw an Singapore US South Korea Japan Hong Kong 0 -1 1 3 5 7 9 Av erage CPI % 11 13 15 17 19 Source: J.P.Adrian Mowat (852) 2800-8599 adrian.2001) 10 8 China (1981 .com Emerging Markets Equity Research 31 May 2011 Figure 28: Real GDP growth vs.2010) China (1991 . Average CPI in the previous decades Real GDP grow th % 12 China (2001 .

4 Mexico 2009E Taiwan 2009 Germany 2009E 0.P.Adrian Mowat (852) 2800-8599 adrian. adjusted per-capita nominal GDP Cement consumption per capita (tonnes) 1. 20 .mowat@jpmorgan.2 China 2009 Russia (1991-2009E) 1997: per capita cement consumption peaked in Korea Brazil (1985-2009E) India (1985-2009E) China (1985-2010E) US (1930-2008) UK (1985-2009E) Germany (1985-2009E) Japan (1985-2009E) Taiwan (1985-2009) 1. Morgan estimates.6 Russia 2009E 0.0 S. Note: The GDP per capita is restated for today’s dollars by adjusting the deflator series.8 South Korea (1985-2009E) Mexico (1985-2009E) Japan 2009E 0. per-capita consumption of cement (tonnes) vs. Korea 2009E 0.0 0 6000 12000 18000 24000 30000 GDP per capita (USD) 36000 42000 48000 UK 2009E US 2008 Source: US Geological Survey and J.com Emerging Markets Equity Research 31 May 2011 Figure 29: Intensity of cement use.4 China 2010 E 1993: per capita cement consumption peaked in Taiwan 1.2 Brazil 2009E India 2009E 0.

Adrian Mowat (852) 2800-8599 adrian.P.000 50.000 15.2009E) China (1983 .2009E) 2008: per capita steel consumption peaked in Korea 2.500 Taiwan (1977 .000 35. Morgan estimates. per-capita consumption of steel (lbs) vs.2009E) Germany (1968 .000 30.000 20.2009E) 2.000 10. 21 .000 China 2009E Germany 2009E 500 U.mowat@jpmorgan.2009E) 1.com Emerging Markets Equity Research 31 May 2011 Figure 30: Intensity of steel use.000 40.000 45.000 1993: per capita steel consumption peaked in Taiwan South Korea (1970 . adjusted per-capita nominal GDP Per capita consumption of steel (lbs) 3.500 Taiwan 2009E Japan 2009E 1.2009E) Japan (1956 . Korea 2009E India (1978 .000 S. Note: The GDP per capita is restated for today’s dollars by adjusting the deflator series.000 25.S.2009E) United States (1950 .000 GDP per capita (US$) Source: CRU and J. 2009E India 2009E 0 0 5.

com Emerging Markets Equity Research 31 May 2011 Figure 31: Per-capita consumption of oil (barrels per day per 1000 population) vs. adjusted per-capita nominal GDP Barrels per day per 1000 population 80 Russia (1991-2009) Brazil (1982-2009) India (1965-2009) China (1978-2009) US (1965-2009) UK (1965-2009) Germany (1968-2009) Japan (1965-2009) Taiwan (1965-2009) South Korea (1965-2009) South Africa (1965-2009) 60 S.mowat@jpmorgan.Adrian Mowat (852) 2800-8599 adrian. Korea 2009 Japan 2009 Taiwan 2009 US 2009 40 Russia 2009 20 UK 2009 Germany 2009 Brazil 2009 China 2009 South Africa 2009 12000 18000 24000 30000 GDP per capita (USD) 36000 42000 48000 0 0 6000 Source: BP Statistical Review of World Energy June 2010 22 .

Note: Primary energy comprises commercially traded fuels only. peat and animal waste. geothermal and solar power generation. Korea 2009 6 Russia 2009 Taiwan 2009 5 Japan 2009 4 South Africa 2009 3 Germany 2009 2 UK 2009 1 India 2009 0 6000 China 2009 Brazil 2009 0 12000 18000 24000 30000 36000 42000 48000 GDP per capita (USD) Source: BP Statistical Review of World Energy June 2010. Also excluded are wind.Adrian Mowat (852) 2800-8599 adrian. therefore.com Emerging Markets Equity Research 31 May 2011 Figure 32: Total energy consumption in China higher than in the US but low at a per-capita level. per adjusted capita nominal GDP energy consumed per capita (tonnes of oil equivalent) 9 Brazil (1982-2009) India (1965-2009) China (1978-2009) South Africa (1965-2009) US (1965-2009) UK (1965-2009) Germany (1968-2009) Japan (1965-2009) Taiwan (1965-2009) South Korea (1965-2009) Russia (1991-2009) 8 7 US 2009 S.mowat@jpmorgan. per-capita consumption of primary energy (tonnes of oil equivalent) vs. Excluded. 23 . are fuels such as wood.

2009) Taiwan (1989 .000 25. Note: Subscriber data is not adjusted for individuals using multiple SIM cards 24 .000 30.000 50.2009) South Korea (1989 .2009) Brazil (1992 .2009) 40 China 2009 20 0 0 5.000 20.000 15.000 10.2009) Russia (1993 .com Emerging Markets Equity Research 31 May 2011 Figure 33: Mobile subscription per 100 people vs.000 45.000 GDP per capita (USD) Source: Bloomberg.2009) UK (1989 .2009) India (1995 .mowat@jpmorgan.000 35.2009) China (1992 . adjusted per capita nominal GDP Mobile subscription per 100 people 180 Russia 2009 160 Taiwan 2009 140 UK 2009 120 South Korea 2009 100 US 2009 80 India 2009 Brazil 2009 60 US (1989 .Adrian Mowat (852) 2800-8599 adrian.000 40.

Morgan estimates.P. passenger cars per 1000 people vs.com Emerging Markets Equity Research 31 May 2011 Figure 34: China is already the world’s largest car market…but still low per 1000 people. US Department of Energy. Eurostat.P. adjusted per capita nominal GDP Passenger cars per 1000 population 900 US (1930-2007) Germany (1995-2006) Italy (1995-2006) US 2007 800 UK (1995-2006) Japan (1970-2008) South Korea (1970-2008) India (2001-2008) China (1991-2008) 700 600 Italy 2006 Germany 2006 500 400 UK 2006 Korea 2008 300 200 India 2008 (8) China 2014 E Japan 2008 100 China 2008 0 0 10000 20000 30000 GDP per capita (USD) Source: J.Adrian Mowat (852) 2800-8599 adrian. Note: China 2014 forecast from J. GDP per capita data is adjusted for inflation.mowat@jpmorgan. 40000 50000 25 . Morgan China Autos team.

Adrian Mowat (852) 2800-8599 adrian. The projections assume nominal GDP growth at potential real GDP growth and central banks inflation target. IMF. To compute FX for periods beyond 2011. 2020: 19%) Brazil India Russia China (2000:4%. 2020F: 17%) 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: J. 2010: 10%. Morgan economics. 2010: 24%.mowat@jpmorgan. 26 .com Emerging Markets Equity Research 31 May 2011 Figure 35: Share of global nominal GDP (%) – China’s share is 10% in 2010 and forecast to be 17% in 2020 100% ROW 90% 80% Other EM Japan 70% 60% 50% 40% 30% 20% 10% Developed Europe US (2000: 31%. Note: Regions follow MSCI country definitions. we assume the normalization of REER over the forecasted period.P.

com Emerging Markets Equity Research 31 May 2011 27 .Adrian Mowat (852) 2800-8599 adrian.mowat@jpmorgan.

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