China Opportunities:

As a market and as an investor

June 2010

PwC
PricewaterhouseCoopers
 Section 1
China‟s Economy at a Glance

PricewaterhouseCoopers
China opportunities: as a market and as an investor

China myth: continuous high growth (CAGR of 10%) and less

affected by the global economic recession

GDP (2001 – 2009) Global financial

• China‟s Premier Wen Jiabao called 2009 a
Opening A- crisis “scary year” as its economic growth in Q1
share markets
14% to foreign 35,000 plunged to 6.1%, the lowest quarterly
investors growth for more than a decade
12% Accession 30,000
to WTO
• The impact of credit crunch in overseas
market quickly reverberated in China‟s

GDP (RMB in billions)

10% 25,000
export sectors, causing widespread factory
8% 20,000 close downs and industrial layoffs

6% 15,000 • Thanks to Rmb 4 trillion (US$586 billion)

stimulus plan together with massive bank
4% 10,000 loans (Rmb 9 trillion), the economy
bottomed out in Q2 and reported around
2% 5,000 8.7% growth for the whole year

0% - • China‟s 2010 first quarter GDP growth was

2001 2002 2003 2004 2005 2006 2007 2008 2009 11.9% Y-o-Y

Source: IMF, National Statistics Bureau of China

PricewaterhouseCoopers
China opportunities: as a market and as an investor

Investments led the GDP growth in 2009, making up the down-

slope in export

Contribution to GDP Growth • China‟s growth pattern in 2009 has not

14
changed much, except for the slump in
external demand (net exports). Thus,
GDP Growth Contribution Margin (%)

12 2.6
0.1 2.2
growth in 2009 was primarily fuelled by the
10 0.6 expansion of investment and domestic
2.5
0.7 0.8 8.0 consumption
8 5.1
6.4 5.6 4.9
6 4.2 4.4 3.9 4.1 • Given the current economic situation,
China‟s overall strategy is to restore
4
economic growth first and then tackle the
5.3 4.6
2 4.1 4.0 3.5 3.9 4.0 4.5 4.1 long-term structural problem
-

(2) (3.9)

(4)
2001 2002 2003 2004 2005 2006 2007 2008 2009

Consumption Investment Net exports

2001 2002 2003 2004 2005 2006 2007 2008 2009

GDP Growth 8.3% 9.1% 10.0% 10.1% 10.4% 11.6% 13.0% 9.6% 8.7%

Source: National Statistics Bureau of China

PricewaterhouseCoopers
 China opportunities: as a market and as an investor

…and China‟s growth is still concentrated in the Eastern region

2008 Per Capita GDP

2008 Disposable Income
RMB USD*
RMB USD*
East 40,509 5,940
East 15,526 2,276
Central 20,462 3,000
Central 7,916 1,161
West 18,421 2,701
West 6,720 985
National 26,464 3,880
National 10,054 1,474

Beijing

2008 Urbanization Rate

%
East 56%
Shanghai
Central 43%
West 38% 2008 Foreign Direct Investment
USD in % of
National 46%
billions Total
East 78 85%
Western region: Central 7 8%
Inner Mongolia, Guangxi, Sichuan, Chongqing, Guizhou, Yunnan, Shenzhen
Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, Tibet Hong Kong West 7 7%
Central region: Guangzhou
Total 92 100%
Shanxi, Jilin, Heilongjiang, Anhui, Jiangxi, Henan, Hubei, Hunan
Eastern region:
Beijing, Tianjin, Hebei, Liaoning, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong,
Guangdong, Hainan *Exchange rate of 6.82RMB/USD are used

Source: Ministry of Commerce of China, China Economics Weekly

PricewaterhouseCoopers
China opportunities: as a market and as an investor

Meanwhile, CPI movement triggers some inflation concerns

Major Price Indices YoY Growth, Sep 00 – Mar 10

CPI: 2.4%• The global economic slump has so far

CPI PPI
15
(Mar 2010) kept commodity and energy prices
10
% relatively low. In addition, bumper
5
harvests in 2008 has kept grain
0
Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09
prices down. 2009 is on track to be
-5
Both CPI & PPI turned
another harvest year
-10
to be positive since the
end of 2009 • As a result, CPI and PPI both fell in
2009. However, as the execution of
powerful stimulus economic policy,
Food Price YoY Growth, Jan 06 – Mar 10
price index bounced upward in the
30
beginning of 2010
20
% • Any rapid and unexpected uptick in
10
CPI or PPI in 2010 may cause the
0
government to reverse its expansion
Jul-06

Oct-06

Jul-07

Oct-07

Jul-08

Oct-08

Jul-09

Oct-09
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Apr-06

Apr-07

Apr-08

Apr-09

-10 policies (watch for CPI when it rises

above 3%)

Source: National Statistics Bureau, Bloomberg

PricewaterhouseCoopers
 China opportunities: as a market and as an investor

Huge amount of foreign exchange reserves caused China to

seek outbound direct investment
China’s foreign reserve (1990 – 2010)
Drivers of foreign reserve
increases:
2,500
USD in billions

China’s current account

2,000
surplus was reduced by one- • Historical trade surplus
third in 2009. Total foreign
1,500
reserve asset was USD2.4 • High net FDI inflows
1,000
trillion, a increase of USD453 • Speculative capital inflows
billion from 2008.
500

-
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

China’s outbound investment (1990 – 2008) • Chinese policymakers

60 realise that parking the
bulk of their foreign
USD in billions

40 reserves in the bonds of

over-indebted Western
20
governments will not
0 generate the highest
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 returns
Greenfield M&A

Source: National Statistics Bureau of China，Thomson Reuthers

PricewaterhouseCoopers
China opportunities: as a market and as an investor

The current leadership is seeking to take China to the next level

of economic development

• Harmonious Society “和谐社会”

- Gap between rich and poor getting too wide, social unrest
- Limits of low-cost export model reached
• New Labour Contract Law in 2006
• Focus on Indigenous Innovation to develop or acquire technology to
move China up value curve
- Combined with economic downturn which highlighted over-reliance on
export model and exposed private companies
- Impact has been to strengthen SOEs as government trusts them more
than private companies to fulfil policy

PricewaterhouseCoopers
 Section 2
China as a Market

PricewaterhouseCoopers
China opportunities: as a market and as an investor

State-owned enterprises (SOEs) play a significant role in China‟s

economy, while private sectors (POEs) have been growing in
recent years
Number of SOEs and POEs in China Output of SOEs and POEs (RMB in billions)

500
40,000 36,350
405
400
28,549
316 30,000
(in thousands)

300 277
244 21,768
20,000 16,787
200 14,379
11,969
9,891
8,375
10,000
100
27 25 21 21
- -
2005 2006 2007 2008 2005 2006 2007 2008

Number of SOEs Number of POEs Output of SOEs Output of POEs

Source: National Statistics Bureau of China Source: National Statistics Bureau of China

• 5% of Chinese companies are SOEs, which contribute nearly 30% of China’s total
output
• POEs, which have been growing in terms of number and size, are playing an
increasingly important role in China’s economy

PricewaterhouseCoopers
China opportunities: as a market and as an investor

China‟s economy is dominated by SOEs

• National industries (e.g. petroleum, infrastructure, mining, heavy industry,

telecommunications, financing, airline, and etc.) are dominated by SOEs

• As a result of historical planned economy and resource allocation

• These markets got even more concentrated to SOEs as:

- Regulatory barrier for new entrants via licenses and restrictions;
- Active promotion of consolidation to eliminate capacities with less economy of scale;
- Easy in getting resources (e.g. regulatory approval, bank financing)
- Closer relationship with central and local administration

• SOEs are believed to be economic stabilizer for the administrator to manage and control
the economy. A good example is that during the financial crisis, authorities seek to
stabilize China‟s economic growth, through the “国进民退” initiative where SOEs are
advancing their stake in the economy while private businesses are retreating

Source: PwC Analyses,

PricewaterhouseCoopers
China opportunities: as a market and as an investor

Through consolidation and controls over new entrants, national

champions have been built from these large SOEs

Actively promoting consolidation in 10 industries including Mining, Steel,

Logistics, Automotive, Cement, Banking, Textiles, Pharmaceuticals, Power &
Energy
Fortune 500 Industy Revenue
Company Industry
Rank # Ranking (US$billion)
9 Sinopec Petroleum Refining 7 207.8

15 State Grid Utilites 1 164.1

92 ICBC Banking 15 51.5

99 China Mobile Telecommunications 8 70.6

133 China Life Insurance Insurance 5 54.5

170 Sinochem Trading 3 44.5

220 Baosteel Group Metals 5 35.5

242 China Railway Group Engineering, Construction 4 33.8

318 China National Offshore Oil Mining, Crude Oil Production 6 28.0

327 China Ocean Shipping Shipping 2 27.4

359 Shanghai Automotive Motor Vehicles & Parts 21 24.9

426 Aviation Industry Corp. of China Aerospace & Defense 11 21.7

From the 2009 Fortune Global 500 ranking, 2008 results

PricewaterhouseCoopers
China opportunities: as a market and as an investor
However, the administrator has been encouraging private capital
to previously restricted industries
• The state council published “Opinions on
Encouraging and Guiding Healthy
Development of Private Investment” on
13 May 2010 to encourage private sector
capital entering into six previously
restricted industries
• Nevertheless, the window is opened
gradually in a managed pace. It could be
many years before we see all market
players compete at the same ground
• Private companies with ready resources
or technical knowhow related to the six
industries may benefit from the emerging
market opportunities and could be
attractive investment targets
• Participating through M&A in the
reorganisation and reform of SOEs in
these restricted industries can be a
shortcut to enter
Source: PwC Analyses,
PricewaterhouseCoopers
Six industries released to private sector:
• Infrastructure: Transportation, water resource,
electrical power construction, oil & gas
construction, telecommunication construction,
mining and etc.
• Municipal utilities and housing: Economic
housing, public leasing house, upgrade of
shanty town and etc.
• Community service: Hospital, community
medical care centres, clinic, rest home for the
aged, educational and training institution, and
etc.
• Financial service: Commercial banks, urban &
rural credit union
• Wholesale and logistics: Commodity
wholesale and retailing, modern logistics, chain
store, e-business, and etc.
• Civil defence industry: participation in the
reform of military equipment companies,
outsourcing of R&D and manufacturing of
military weapons
China opportunities: as a market and as an investor

…and adjusting economic structure by depressing over-

capacitated industries and promoting consumption
• Over-capacitated sectors (e.g. steel, • Efforts have been made to adjust the
cement, coke) have large volume of economic structure:
market demand for infrastructure and - Deregulating the national industries
housing construction and are usually
- Upgrading industry to high value
unrestricted to private capital
added with more high technology
• Private businesses have limited - Encouraging service sector
selections of investments when national
- Develop the western provinces
industries are restricted. These sectors
have been the destination of excessive - Promoting low-carbon strategy and
private capital even they have been over- encouraging green energy solution
capacitated - Stimulating domestic consumption
Over- % of Over-
Production Demand capacity capacity • Private capital has great opportunity and
Coke (million tons) 3,116 2,716 400 15% potential during the economic structure
Cement (million tons) 1,870 1,600 270 17%
Steel (million tons) 660 500 160 32% upgrade process
Polysilicon (tons) 20,000 4,000 16,000 400%
Plate Glass (million cases) 650.0 574 76 13%

• The administration launched initiative to

reduce excessive low efficiency capacity
through promoting industry consolidation
and rejecting inefficient new projects
Source: PwC Analyses,
PricewaterhouseCoopers
China opportunities: as a market and as an investor

Chinese consumers are arriving with retail sales jumped in

Sep‟09 and consumer confidence continue to grow

Retail Sales Jan 2009 – Sep 2009 Consumer Confidence Index

1,150 20%
Seasonal high 89 Uptick corresponds
due to Chinese to jump in Retail Sales
18%
New Year 88
1,100
16% 87

86
14%
1,050 85

12% 84

yoy growth %
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09
Rmb bn

1,000 10% Source: National Statistics Bureau, Bloomberg

Urban and Rural Household per capita

8%
disposable income
950
6% Yuan

4% 10,000 8,856
8,065
900 8,000
2% 6,000
4,000 2,528 2,733
850 0%
2,000
Mar-09

May-09
Jan-09

Feb-09

Jun-09

Jul-09

Sep-09
Apr-09

Aug-09

-
Urban Rural
Retail sales value (Rmb bn) yoy grow th 1H'08 1H'09
Source: National Statistics Bureau, Bloomberg Source: National Statistics Bureau, Bloomberg

PricewaterhouseCoopers
China opportunities: as a market and as an investor

Consumption structure is in a continuously rapid upgrade stage

 Major drivers increasing consumption

- Rapid growth of GDP per capita and personal dispensable income
- Changes of spending concept for the society as a whole
- Government‟s subsidy to rural population
- Fast growing urban population and overall population bonus

 Major curbs on consumption growth

- High residential house price
- Underdeveloped social security system
- High education cost

Housing, auto and telecommunications are some of the largest spending

markets in China

PricewaterhouseCoopers
 Section 3
China‟s M&A Market

PricewaterhouseCoopers
China opportunities: as a market and as an investor

Deal volume in China dipped in 1Q'09 but rebounded strongly

during the remainder of the year
Disclosed Mainland China Deal Values and Volume China’s M&A market has had a V-
1,000 50,000
shaped recovery
900 45,000 Driven by :
800 40,000
 Liquidity through the government‟s
700 35,000 stimulus package; Rmb9.6 trillion /
US$1.4 trillion of loans were issued in
600 30,000

USD in millions
2009
No. of Deals

500 25,000

 As most industries are fragmented,

400 20,000
consolidation continues and
300 15,000 'National Champions' are being
encouraged by the government
200 10,000

100 5,000  “Go Global”, utilizing their significant

foreign currency reserves, the
- 0
Chinese government has encouraged
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
the State Owned Enterprises
Source: Thomson Reuters
Deal Values Deal Volume
(„SOEs‟) and private enterprises
(through bank loans) to expand
PricewaterhouseCoopers
globally
China opportunities: as a market and as an investor

…as monetary policies of lower interest rates and RRR have

increased lending activities and money supply

Lending interest rate & RRR Monthly Loan Growth Jan 07- Mar 10
Rmb bn Monthly Avg Monthly Avg Montly Avg
2,000 341 522 731
% Lending Rate Bank RR
20 1,500

1,000
16
16.0%
500
12
-
8

Mar-07
May-07
Jul-07

Mar-08

Mar-09

Mar-10
Nov-07

May-08
Jul-08

Nov-08

May-09
Jul-09

Nov-09
Jan-07

Jan-08

Jan-09

Jan-10
Sep-07

Sep-08

Sep-09
4 5.4%

0
Mar-07
May-07
Jul-07

Mar-08
Nov-07

May-08
Jul-08

Mar-09
Nov-08

May-09
Jul-09

Mar-10
Nov-09
Jan-07

Jan-08

Jan-09

Jan-10 Source: People’s Bank of China

Sep-07

Sep-08

Sep-09

M1 & M2 YoY growth, Sep 06- Mar 10

Source: People’s Bank of China 50%
40%
• Short-term (1-3 year) base lending rate has been kept 30%
at 5.4% 20%

•Total lending surged in first half of 2009 and the 10%

0%
beginning of 2010 with a slow down in the middle
Mar-07

Mar-08

Mar-09

Mar-10
Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09
Sep-06

Sep-07

Sep-08

Sep-09
• Majority of borrowers are SOEs and large private
businesses M1 Grow th yoy M2 Grow th yoy
• M2 growth reached 39.0% in Jan of 2010, and then
fell down to 30.0% in March Source: Bloomberg

PricewaterhouseCoopers
China opportunities: as a market and as an investor

…and continuous industry consolidation occurs in line with

enormous M&A opportunities in the highly fragmented industries

Market share of top 5 companies: Drivers for consolidation include:

• Overcapacity
Auto 40%
• Economies of scale
Steel 23%

Logistics 19%
• Geographical development

Beverage 15%

Electronic 14%

Pharma 11%

Paper Making 10%

Raw Chemicals 8%

Food 7%

Printing 5%

Plastic Products 5%

Textile 4%

0% 10% 20% 30% 40% 50%

Source: Thomson Reuters

PricewaterhouseCoopers
China opportunities: as a market and as an investor

Chinese buyers are increasingly active for expansion

Mainland China Deal Volume

100% 3% 4% 4%
4% 5% 4% 5% 4% 4% 6% 5% 7% Outbound activities are encouraged
90%
21% 22% 19% 18% 17%
14% by Chinese government with its “Go
23%
80% 31% 29% 29% 27% 21%
Global” strategy, but it is still a small
70%
portion of M&A
60% Foreign buyers were focused on
50%
dealing with the impact of crisis and
thus have decreased their M&A
40% 82%
73% 75% 74% 77% 73% 77% 76% activities in China
65% 66% 67% 69%
30%

20%
Domestic buyers are becoming
increasingly active as they are
10%
continually focusing on expansion
0%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Domestic Inbound Outbound

Source: Thomson Reuters

PricewaterhouseCoopers
China opportunities: as a market and as an investor

China‟s inbound M&A market - Investment through M&A is one

of the key channels for foreign businesses to enter China
Disclosed Inbound Deal Value and Volume
250 8,000

• In 2009, foreign buyers focused on

7,000
dealing with the impact of crisis vs.
200 expanding in China
6,000

• China is still an attractive market for

150
5,000
inbound M&A activities, especially

USD in millions
with the global economic recovery
4,000

• Inbound M&A are diversified across

100
3,000 industries

2,000 • Chinese materials and industrial

50
products sectors have always been
1,000 key focus area of investment

- -
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

Inbound Deal Value Inbound Deal Volume

Source: ThomsonReuters
PricewaterhouseCoopers
China opportunities: as a market and as an investor

Challenges exist in China‟s Inbound M&A Market

• Regulation and enforcement

• Industry structure and geographic scale

• People versus systems

• Partners and alliances

• Compliance costs

• Potential traps on financial information

• Proper structuring

• Intellectual property

PricewaterhouseCoopers
China opportunities: as a market and as an investor

China‟s outbound M&A market – Strong growth to the record

level in 2009 but modest in terms of GDP penetration compared
with other mature economies
China outbound M&A
Disclosed deal value and announced deal volume of (2005-2009) • The financial crisis has created
opportunities
180 35 ‐ Distressed assets
‐ China is staying cash-rich in a post-

Disclosed deal value (USD in billions)

30 financial crisis world
Number of announced deal volume

150
• China‟s foreign exchange reserve is
25
120
used to make direct investment
• Seeking to solve economic bottleneck
20
by relocating some industries abroad
90
15
• Chinese government is promoting
China‟s outbound M&A in aspects of
60
10 regulatory

30
5

- -
2005 2006 2007 2008 2009
China‟s outbound M&A is
Disclosed deal value Announced deal volume
evolving in a favourable
Note: Deal value in 2007 was pushed up by three mega investments to western
banks, namely ICBC / Standard Bank (US$5.6 billion), CIC / Morgan Stanley
environment !
(US$5 billion) and CIC/ Blackstone (US$3 billion)

Source: Thomson Reuters

PricewaterhouseCoopers
China opportunities: as a market and as an investor

China‟s outbound M&A will continue to grow with more

diversified industry focus
• China’s outbound M&A continued to grow in 1Q2010, with disclosed deal
value amounted to USD11.6 billion, a 863% increase compared with 1Q2009
• Growing momentums remain

• Resources sector will continue to be one of the focus areas, while

investment to auto, healthcare, agribusiness, media, bio-technology, clean
energy will increase
• Not only SOEs, but also more POEs will participate in the outbound M&A
activities (Geely/Volvo, Tencent/Digital sky, Shanda/Mochi Media, Jiangsu
Shagang/one Australian iron ore, etc.)
• Chinese buyers will become more mature and practical concerning
outbound investment

PricewaterhouseCoopers
China opportunities: as a market and as an investor

Access new markets and acquiring resources & technology are

the primary incentives for Chinese companies to “go out”

“Go global” is a natural extension of the

What will be the main motivation of
development path of Chinese companies
your outbound investment?

1. Access new markets 48% • To develop new markets outside China and
intensify international presence
2. Acquire resources 26%
• A secure supply of mining and natural-
3. Acquire technology and brands21%
resource assets is a most important purpose
4. Keep pace with domestic 5% for Chinese companies to go out
competitors
• Technologies and brands are many Chinese
5. Acquire talent n.a. buyers seek to improve their competitive
position in China (BAIC/SAAB, Sergio
6. Comply with government n.a.
policy Tacchini, Fila, Kappa )

Source: survey of 110 CEO of Chinese companies concerning potential
outbound M&A plan conducted by “Economist Intelligence Unit” (“The
Survey”), “A brave new world: The climate for Chinese M&A abroad”
Economist Intelligence Unit 2010
• Making minority interest investment to a
strategic partner to consolidate partnership
and future corporation opportunity

PricewaterhouseCoopers
China opportunities: as a market and as an investor

China outbound M&A were traditionally active in resource-rich

areas like Australia, Canada, while Investments in mature
markets such as Europe is emerging recently
• European countries are
North America favourite hunting grounds for
39 manufacturing-related
Europe
technologies, especially
34 Germany and Sweden

• Chinese companies are keen

Asia to buy German machinery
46
and equipment
manufacturers, as well as
car-component makers
(BAIC/Saab, Geely/Volvo)
South America Africa
20 7 • Chinese financial service
companies are also investing
Oceania
38
into European counterparts
strategic corporation as well
as managerial / operation
Note: Number of completed China outbound deals (2007-2009) expertise (PingAn/Fortis)

Source: Thomson Reuters

PricewaterhouseCoopers
 pwc

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information
contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of
the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume
any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or
for any decision based on it.

© 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network

of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent
legal entity.

PricewaterhouseCoopers