Moderator: Gilbert Hammer
Mark Barnes: Hello and thank you for joining today's high growth markets webcast. The topic today, China's 12th five-year plan. My name is Mark Barnes and I'm the partner in charge of KPMG's US high growth markets practice and I'll be your moderator for today's program.
Joining us today are Edwin Fung, Chairman, KPMG's global China practice in Beijing, Tom Stanley, Chief Operating Officer of KPMG's global China practice based in Shanghai, Rodney Lawrence, partner in charge of KPMG's US international tax practice based in Chicago and three of our industry partners from KPMG in China, Andrew Thomson for automotive based in Hong Kong, Steve Yiu for infrastructure based in Hong Kong and Terry Chu for energy based in Beijing.
This webcast is the latest in a series of events focusing on business issues and opportunities regarding high growth markets around the world. I think for many of those who join regularly you will be familiar with the format. On March 14, China's national people's congress approved a new national development program for the next five years so from 2011-2015, providing important economic and policy direction.
And it's really key for businesses invested in China to be aware of and to understand particularly as it develops the message of the plan largely promotes continuity with a further strengthening of focus on boosting rural incomes and improving social provision. Certainly rebalancing the Chinese economy towards domestic consumption is a key policy theme that runs around much of the plan.
Also prominent are the need for inclusive economic growth and also protection of the environment. I think a continuing message from leadership has really been to highlight the virtues of a harmonious society. You know, we have certainly seen tremendous growth from China over the last few years. In 2010 growth was certainly very much ahead of plan at around about ten percentage points plus of GDP.
And the plan seeks to look at that over the next five years and really looks to achieve an annual rate of GDP of around 8.5% over the next few years. Our discussion today focuses on the impact the plan will have on China's economy and also the interrelationships with other countries around the world. The national plan together with industry specific five year plans is under development and really offers insight into how the business landscape is likely to evolve over the next five years in China.
Also the impact on other countries around the world, the US, Europe, etcetera - we'll touch on a few of those industries today - automotive, infrastructure, energy and we'll also attempt to take a look at the plan as it moves ahead. Towards the end we'll take some questions from the audience again time permitting and please do submit questions as we go through the presentation.
Before we begin I'd like just to cover a few admin items. USCP rules require that online participants respond to at least four questions during the webcast as well as view the entire event the entire duration. So during the event we'll be asking polling questions. Please be aware that when you respond to these they will remain confidential.
We're not going to tie any back to an individual or organization. The survey questions will be pushed out through the presentation and they'll appear on your media player on the top of the slide so don't view your webcast in full screen or slideshow mode. Otherwise you're not going to see the questions. All participants will be in listen only mode.
But you may submit questions as I said by using the ask a question icon on your media player. And I do encourage you to do that. So we have over 3000 registrants today from 52 countries so we're all in very good company. Welcome to everybody. Thank you for joining us today. If we are unable to answer any of your questions at the end certainly we will get back to you either via email or via phone.
Finally, if you encounter any problems during the webcast you can call our help desk. There are two numbers on the slides, the US +1 877 398 1471 and for other international locations +1 954 969 3342. Finally I just wanted to mention an exit survey, your feedback is really important particularly on not only today's session but also future topics.
So if you have the time to complete that we'd be very grateful. Now that we have covered the admin items let's get underway with today's program. With that I'd like to hand over to Edwin Fung in Beijing. Edwin, good evening.
Edwin Fung: Thank you Mark for your kind introduction. This year is a very important year for China not just because China (released) its 12th five year plan but also this is the 90th year anniversary of the Communist Party of China.
Coming from the last 50 years, every five years China's leaders release a five year plan for the nation's given focus. The current five year plan, which covers from 2011-2015 period, is a hugely important document (containing) the goals, aspirations of the country and where the leadership intends to go for the next five years.
Mr. Hu Jintao, the President of China, (appeared) at the opening ceremony of (file forum) in April 2011. China will become all around balanced and sustainable development and improve people's well being in the next five years. It maintains a roadmap of China as to how to transform its economic growth model in the next five years.
Mr. Wen Jiabao, the Premier of China, emphasized at the China Development Forum in March 2011 that the Chinese 12th five-year plan has brought hope and confidence not only to China but also to the entire world. The current plan includes very specific macroeconomic and industry specific targets and also indicators for China, which definitely impact business outlooks for both companies in and outside China.
Could have strong and long-term implications for the way how companies manage business, the decisions they make in terms of investments and more importantly, how to manage and develop the people and talents to meet the business challenges. When you look at the tenth five year plan as summarized in Slide 8, the mode of focus was a booming, rapid economic development and (getting success with lax taxes and areas) at that time.
We (moved to the) 11th five year plan, which has covered the period from 2006-2010, which continued to put focus on economic development with aim to improve social common capacity. Now how about the 12th five year plan? There are certain key words you will hear on and on, more and more, which are balance, sustainability economic development, no carbon, (new technology), move up the value chain.
The list goes on. If you asked me what's the best word to describe the plan I would say quality. China is now focused on achieving quality growth, not quantitative growth in the next five years. In fact, when you look at NRGDP target growth for the next five years under the plan it's only 7%, which is even lower than NRGDP growth for the 11th five year plan of 7.5%.
The plan is not just about setting an economic target for China but also staking out certain key non-economic and social targets, which were not included in previous five year plans. As to the next step, the release of the national plan is not an end of the planning process. It is required that ministry (unintelligible) - are undertaking to implement their own five year plan in the coming years.
More details to come. So what are the major themes of the 12th five year plan? As I mentioned before, sustainable growth is one of the keys, which is improving energy efficiency, environmental consideration, innovation and investing in seven strategic industries. All of this will help China to move up the value chain from manufacturing to services, from made in China to innovation in China.
According to the plan, China aims to increase the service sector contribution of GDP by 4% from 43-47%. Balanced growth is another major theme of the plan. China has seen huge imbalance between urban and urban areas, coastal and underdeveloped areas. Mr. Wen Jiabao, the Premier of China, expressed clearly in February of this year China should not only make the (cake of the social barrel express as possible) but also distribute the cake in a fair way and let everyone enjoy success of this form and open up in China.
So over the next five years China aims to achieve 4% of the population to be urban residents which cross over the 50% benchmark, which represents more than 50 million new urban residents, (which inevitably induces) high domestic demand for consumption in China. Implementing a more open inbound and outbound investment environment is also another big focus under the five year plan.
It is expected that more policy will be rolled out to simplify the approval requirements and procedures, which will generate new big investments in and outside China. As I mentioned earlier, there are seven sectors that are strategic industry sectors under the plan to (uphold) the economic development of China in the next five years.
As you can see on Slide 10, these sectors include energy, high end equipment, clean energy vehicles, IT, etcetera. This provides a snapshot of where China's leaders see the economy moving and what investments they are really looking to invest ahead of the curve. China has set a very challenging goal for these seven sectors.
The contribution of these seven sectors as a percentage of GDP is expected to increase from 2% last year to 8% by 2015. It is also expected that more policy including tax incentives and other supported measures will be rolled out later this year. Before I finish my section I would like to give you certain takeaway points.
First, the 12th five-year plan is now official. It is final. It is not a plan for the safeguardment but also for the Communist Party, ministry level and the provisional and city governments as we all take very seriously this plan. Second, this is a plan focused on high quality and sustainable growth instead of quantitative growth.
There are lots of non-economic goals and indicators including low carbon intensity, which has a significant impact on the transformation of certain sectors including energy, auto and infrastructure in China for the next five years. Third, other important sectors will be energy, low carbon, industries like high end manufacturing, biotechnology, new technology and materials are also the sectors where the Chinese government would like to grow and develop.
The opportunities and challenges as a result of the emergence of these strategic sectors will not just fall on companies in China but also companies outside China. Investment related to this policy sector in China is likely to be favored or even fast tracked. So government support and encouragement on inbound and outbound investment are also a big focus as I mentioned before.
It is expected that new rules and guidance will come out later this year to induce new M&A and green field projects in and out of China. Last but not least, as industry and local plans are released over the next couple of months we will see more and more detail how the plan is being implemented, which may have impact on companies' operations or future business opportunities or challenges in and outside of China.
KPMG is committed to helping you to navigating the competitive and understanding the implications of China's 12th five year plan to your business. We will keep close eyes on this development and provide our insights to you. We have come to the end of my section but before I finish I would like to ask the first polling question.
Which specific sector in China most interests your company from an investment standpoint? I'm sure you have the answer on your question. Without further ado, let me hand over to Terry Chu who is going to talk more on the energy sectors, which is one of the key focuses under the 12th five year plan. Thank you.
Terry Chu: Thanks Edwin. In the next ten minutes I will cover China's 12th five-year plan in connection with the energy sector and give you an overview of the implications for the sector and what business opportunities it presents.
China's 12th five-year plan marks a turning point from the country's previous emphasis on growth. While the country's GDP growth has benefitted millions of people it has also impacted the environment. Though growth is still an important aspect for China the current plan responds with emphasis on clean energy sources and energy efficiency, which is an important step to ensure sustainable growth for the nation.
Among the seven strategic sectors as mentioned in Edwin's presentation identified in China's five year plan, clean energy, energy conservation and clean energy cars are the key investment areas in relation to the energy sector. Clean energy cars will be discussed in a minute in the automotive session. For clean energy outlook, hydropower is likely to see strong growth though we don't expect to see the (unintelligible) - due to the (implementation) issue.
While the picture for nuclear energy is less clear after the nuclear crisis in Japan, China will be more conservative due to safety issues. Expansion of other clean energy sources like green, solar and biomass will also part of China's environmental efforts. To achieve energy conservation it will lead to further (exploration) of smaller scale and use inefficient power plants and to introduce technology to improve the efficiency of existing power plants.
Specific goals have been set to reduce energy use and emissions. China aims to cap the amount of energy used and carbon dioxide emissions (related to) every unit of economic output by 16% and 17% respectively over the five years to 2015. This is consistent with China's long-term plan to cut carbon intensity by 40% to 45% by 2020 relative to 2005 levels.
It is worth noting that the reduction of energy use is the first time it has been done in China's five year plan. The nation also intends to push the use of non-fossil fuels to 11.4% of the country's total energy use by 2015 by developing clean energy. As we know, China is rich in coal resources and its dominance as an energy source suggests that meeting this target will be a challenge though not unachievable.
Targets have also been set to reduce emissions of major pollutants including sulfur dioxide, nitrogen oxide by 8% to 10%. On the next slide you can see from the far tracks on the right hand side that use of coal represents more or less 70% of China's energy consumption while clean energy is only 9%. To increase the use of non-fossil fuels to 11.4% by 2015 will surely open up more opportunities for renewable energy companies.
Huge investments have also been planned for the power sector. China plans to invest RMB 5.3 trillion from 2011-2015, roughly half of which in power plant construction and half in power grid construction mainly in the smart grid construction and the upgrading of the distribution network. In the next slide I'm going to summarize the business opportunities arising from the five year plan.
On the investment perspective financial investors have investment opportunities given the significant (capacity leading in the sector), especially investment in clean energy. Renewable energy companies are seeking sources of funding to support their (capacity) and we now see a lump of companies planning for initial public offerings.
As mentioned by Edwin earlier, our government encourages both outbound and inbound investments. On the outbound side (positive acquisition) targets for China's energy companies include (coal mines), renewables, (unintelligible). Some of the companies are also looking for strategic partnerships with foreign companies, which in turn will give the foreign partner the opportunity to invest in China.
On procurement the opportunities are especially in areas where home grown technologies are still being developed in China, for example, nuclear and smart grid. Nuclear technology is still under development so for operation with foreign companies beyond simple (experience applied) could be important for the development of this sector.
To support the development of clean power China's grid companies are engaged in smart grid development. They are now developing lots of new standards and studying the standards in other countries. Foreign players have an opportunity in terms of equipment and smart meter supplies. In light of the government's target to reduce carbon emissions from 2005 levels there is also opportunity to offer advice and assistance in green energy consulting.
The big power generating companies will also benefit from services such as fundraising assistance. This is an important issue for them because they have high P/E ratios. Providing fundraising services for IPOs, private placements and P/E investments would help. Though the window of opportunity for foreign players has been closing in certain areas, for example direct investment in grid network, in certain areas they may still be able to participate in the equipment supplies or make passive investments as mentioned earlier.
As a final remark, one should also watch out any new rules and regulations that may come out in connection with the development of clean energy and energy conservation, which will have a direct impact on the cost of doing business as well as may give rise to other opportunities. This is the end of my session. I'll now ask the second polling question.
When determining your investment strategy how much importance is placed on China's five year plan? I'll now turn it to Andrew to discuss about the automotive sector.
Andrew Thomson: Thank you very much Terry. I'd like to start today by just putting the automotive sector into some sort of context because I think that helps very much in understanding the objectives of the five year plan from a new energy vehicle perspective.
And basically what I'd like you to take away from the comments on this first slide is that the automotive sector in China is very large and very important. But actually relatively speaking it's almost in its infancy in terms of future potential and impact. And for these two reasons it really is right at the heart of government policy.
In terms of the size of the sector, 11-1/2 million passenger vehicles were sold last year and that was a 42% increase on 2009 and that was accompanied by a further 7 million commercial vehicles that were sold in 2010. And in fact, China became the world's largest automotive market ahead of the US in 2009 and maintained that position in 2010.
And I don't think we're going to see a day now where China goes back from being the world's largest automotive market. And if that isn't striking enough, that's based on the fact that at the end of 2010 roughly speaking only 41 people in every 1000 actually owned a car in China. And you can see from the slide that compares with more than 500 per 1000 in Japan, over 600 in Western Europe and a good deal over 900 in the US.
And amazingly, 70% of people buying a car in China right now, more than 70% are actually doing it for the first time. So I'll go back to my infancy comment and just say that basically by comparison China and...
Mark Barnes: Okay. We appear to have a technical glitch here so we're going to sort of hold for a few minutes while the presenter dials back in. So bear with us one minute.
Andrew Thomson: I'm sorry. This is Andrew Thomson dialing back in. I'll try and pick up. I think my line went dead so I'll try and pick up where you lost me.
Mark Barnes: Yes. Thanks Andrew. You just dropped off briefly so if you could just pick up that would be great, thank you.
Andrew Thomson: Right. I understand that where I dropped off was around the car penetration comment.
Mark Barnes: That's right.
Andrew Thomson: I was really just making the point there that China is really at a green field stage, essentially 41 cars per 1000 people is where the US was in 1916 and basically what that means in terms of automotive development is that there's a huge opportunity for the government either to get things right in terms of the automotive sector or also potentially to get things wrong from an energy, security or pollution perspective.
And that's why this five year plan and new energy vehicles is so important. This is not entirely new. The automotive industry has been a pillar industry for some time and it's received that level of importance because basically it employs a lot of people and for every person directly employed in automotive manufacturing there are usually three to four employed in related industries.
And also on top of that from a consumer and societal perspective as everyone knows, owning a car is an aspirational thing. And for a population that is urbanizing and becoming increasingly wealthy, basically everybody wants to own a car when they are able to. So having given that little bit of background on the importance of the automotive sector and where things are likely to go, I'd like to turn now to the specifics of the five year plan.
And in my view what we see here is a coming together of really energy priorities, environmental priorities and also technology developments. From an energy perspective cars do use up a lot of crude oil. China's oil production actually went up by the biggest margin ever last year but still net imports of oil to China went up by 15%.
And that's significant when China has to import 2/3 of its oil needs and much of the consumption of crude oil, about 55% actually, is driven by transportation and vehicle needs. From an environmental perspective as Terry pointed out, China has committed to some very challenging energy use and emission reduction targets and cars as we all know, contribute a great deal to CO2 emissions.
So new energy vehicles really are a key factor in achieving these environmental targets and you only have to have been to China recently to see what's been happening in terms of pollution and traffic congestion. In Beijing, Shanghai, Xianyang, Xi' an and Guangzhou we have five of the top ten most air polluted cities in the world according to some reports.
And I have seen one statistic for Beijing which says that 73% of all the air pollution there comes from cars and commercial vehicles. And then we look at technology - there are a lot of interesting things going on in China and really some opportunities actually. I'm sure some of you have heard of a company called BYD.
This is actually - BYD by the way stands for build your dreams - it's a company that's actually 9-10% owned by a unit of Warren Buffet's Berkshire Hathaway and it actually has been producing - well, this year it's producing China's third most popular sedan, the BYD F3. Amazingly, only just a few years ago this wasn't a car company at all.
It was actually one of the largest mobile phone battery makers in the world. So actually they have an interesting angle on things, some technology behind them that provides opportunity and some ambitions that demonstrate just what can be done in China in terms of what might happen going forward. And I think to some extent new energy vehicles is an area in which China can leapfrog because actually it doesn't have the legacy and history in traditional, internal combustion engine technology and therefore can move ahead quickly.
In terms of specific content of the plan I won't repeat my slides. But the key points in summary are firstly that this is about new energy vehicles and that’s defined as being hybrids, plug in hybrid electric vehicles, pure electric vehicles and fuel cell vehicles.
Electric vehicles in particular and smaller cars are the chosen technology platforms and we’re going to see some big investment effort being put into standards setting, key technologies such as the 50% target for reduction in battery production costs and some major, major investment in infrastructure. And in particular there have already been 25 pilot cities named for new energy vehicle investment.
And there is a target to increase this to 70 cities and just as a matter of interest for those of you listening; the 25 cities already cover 20% of China’s car buying population. There are significant targets set for new energy vehicles being on the road and that number is 1 million by 2015. And just to give you an idea of scale in terms of the financial numbers, the government is expecting to invest something like $15 to $17 billion U.S. over the next five years in new energy vehicle development.
And one Deutsche Bank economist has estimated that this will leverage another 50 to 16 - $50 to $60 billion in private money and private investment into new energy vehicles over the same period. So we're talking about something like $75 billion of money going into the new energy vehicle sector.
In terms of who is driving all of this there are really two central ministries, government organs, are the most important. There's the Ministry of Science and Technology and the Ministry of Industry and Information Technology. And it's very important for anyone with serious plans in terms of new energy vehicles to understand these organizations and potentially develop relationships with them.
And just a small story indicating the level of seriousness if you like and thought and depth and all the planning, Wan Gang, who actually leads the Ministry of Science and Technology, is actually a Ph.D. mechanical engineer, a former very senior academic. And he actually worked for Audi in Germany for nearly ten years. And he's had a particular interest in new energy vehicles for a long, long period.
And he and other leaders driving the new energy vehicle plans, fundamentally they really understand their subject matter. And they're very, very serious people.
I'll move on to my last slide now where I'll just run quickly through where I see the key business opportunities and challenges arising and how sector players and investors might respond.
I think everything really starts with the development and selling of new energy vehicles domestically in China particularly with some of the vehicle targets that are being put forward. Virtually every major OEM in China is developing something, has a vehicle in the pipeline - or has a vehicle in the pipeline.
And when I walked around the Shanghai auto show earlier this year I counted 57 new energy vehicles covering hybrids, plugins, pure electrics. And actually 36 of these vehicles were on the pure electric platform. So there's going to be a lot going on.
There’s actually also some production in China going on of electric vehicles to go overseas. And for any of you sitting in California right now you may well see a vehicle called the CODA on the streets in your neighborhood by the end of this year. That’s an electric vehicle produced in China in Tianjin by a U.S./China JV. And quite interestingly the CEO of that company is actually a chap called Phil Murtaugh, who was responsible for establishing GM's operations in China many years ago.
In terms of infrastructure, in the pilot cities alone it's planned that there will be something like 2000 charging stations which will have 400,000 charging poles. And in areas like infrastructure development, property development it's going to be a requirement that new housing developments have a minimum amount of space for charging stations for a certain percentage of cars.
And then in all of this we’ll probably see some new business models, some new players emerging. The four example, the power utilities could be in the battery leasing business. Or they may be new suppliers who might appear and get - providing raw materials, control systems, power management, all of the components that go into new energy vehicles.
The opportunities in the ecosystem that will build up around new energy vehicles could be considerable. And it’s very worthwhile being prepared for all of that and perhaps thinking about greenfield investment, acquisitions, alliances, inbound and outbound investment to China and being ready for what might happen.
In terms of risks and things to be ready for I do see that there's some risk of over-ambition, over-capacity. And if you add up some of the production plans for - capacity plans being put forward by vehicle manufacturers out to 2015 you can see that this capacity planning to around 28 million passenger vehicles per year. And some estimates, some sort of realistic estimates of what vehicle sales might be are around 17 to 18 million. So we could run the risk of companies not achieving their targets.
There's going to be issues around the cost of vehicles. Batteries are currently very expensive. Government subsidies and government buying are going to be required to support the sector.
And I'm a bit worried about actual achievement of the environmental targets. China generates a lot of its energy from coal. And as a result to achieve the new energy vehicle targets from what's called a wheel-to-well perspective for carbon emissions we are going to have to look at alternative energy sources such as biofuels and renewables.
I'll finish by saying that despite these risks and issues I do expect China to do extremely well in the new energy vehicle space. And why is that? Well firstly I think it's about the technologies in place. China has ample resources to pursue technology development. There's big investment going in. And in areas like battery technologies as I mentioned there is already some experience here in China.
From a consumer expectance - consumer acceptance, expectations point of view people generally have a very short driving history here and perhaps will be generally less stringent in terms of their performance requirements of cars.
And then from an infrastructure perspective this really is all about government will. And I think you've got the message by now about how serious the government's five-year plan is and the fact that this isn't just a plan. Things are going to get done and achieved with the sort of government backing that's behind this.
So I will close there. And I will take this opportunity to ask the next polling question.
So at this point I'd like to pose the question: to what extent have you been involved with Chinese companies? And there are four choices to make.
With that I'll close. And I'll pass over to my colleague, (Stephen), that is going to develop the themes in the five-year plan in relation to infrastructure. (Stephen)?
Steve Yiu: Thank you very much, Andrew. Infrastructure in China is being developed at a massive scale. And there are ample opportunities for foreign investment in this area. The key challenge of course is to find the right opportunities amongst the huge number of infrastructure projects being developed.
The new five-year plan outlines various areas driving China's transport infrastructure spending as we've shown on this slide. But the main thing to remember is this is all about improving connectivity across the country.
If you think about the scale of China's land area and population and the continuing need to connect its inland regions with the traditionally more-developed coastal provinces it isn't at all surprising to see the kind of investment numbers that are being talked about. We're talking trillions as well as billions along the right-hand side of this page.
Railway is the sector that tends to grab the headlines with its high profile and the news, the continuing news, about the build-out of its high-speed rail network over the past few years. However, growth in the roads network will also continue to be a major factor in the new five-year plan as improving rural road links as well as extending the national highway system are absolutely necessary to deal with the usage demands from increasing urbanization that Edwin mentioned and the rapidly growing domestic economic activity which the government is pursuing.
Before we move on I also want to highlight that ports and airports will also continue to see more investment. And these areas will continue to offer opportunities for foreign participation as they have been open for investment for many years. Given the plan's objective to further develop inland waterways on the port side this may offer additional opportunities beyond the traditional container port terminal investments that practically all the foreign operators have made in the past.
I'll also talk about in my presentation a little bit later about The Catalogue for the Guidance of Foreign Investment which deals with the guidance that the state council has approved relating to how foreign investments participate in various industries in China.
Onto the next slide, if we look at the railway investments since 2003 you can clearly see that this has been driving up very quickly particularly in the last few years. The Chinese government had highlighted in the last five-year plan its long-term objective of expanding the railway network to 120,000 kilometers from less than 80,000 kilometers in 2007. To put that into context the total length of the railway in the U.S.A. is over 200,000 kilometers and that was developed over a much longer time period.
The new five-year plan also emphasizes the continued need to expand coal transport capacity which relies heavily on rail. And the movement of coal by railway is needed to deal with the resource imbalances geographically within China and a continuing reliance on coal-fired power plants for energy for the foreseeable future notwithstanding the renewable energy focus within the new plan that Terry mentioned earlier.
Just tracking back to high-speed rail for a second at the beginning of 2011 around 8400 kilometers of high-speed rail was operational in China which is by far the largest network of any country. In fact I think the nearest country to China has only around just over 3000 kilometers of high-speed rail.
The addition of the Beijing, Shanghai line from the 1 of July this year will take the operational length close to 10,000 kilometers, Beijing to Shanghai line being over 1300 kilometers, a trip that will be able to be completed in five hours or less.
The network length of high-speed rail could reach 25,000 kilometers by 2015, a very ambitious target but possible as around 17,000 kilometers is currently to be - reported to be under construction. I think the longer-term aspiration for 45,000 kilometers will take many more years than will be achievable under the current five-year plan.
In terms of foreign investment as rolling stock is now predominantly manufactured by Chinese domestic companies and a number of smaller foreign JV companies the opportunities for foreign companies in the future are likely more related to the provision of equipment and systems related to the railway network. The ownership and operation of passenger rail is still off-limits to foreigners although investment in freight railway lines has been permitted for awhile. So if you are focusing more on the cargo or freight side that may be a more interesting area to look at.
In addition the increasing visibility of China being involved in potential high-speed rail development in other countries like the U.S., like the U.K., like the Middle East, we - and also in Asia may offer people on this call opportunity to partner with the Chinese companies as they look overseas - as they increasingly look overseas.
Building high-speed rail in China has played a major part in supporting economic activity and growth since 2008. And the Ministry of Railway may need to start tackling its high levels of debt taken on to fund this construction in the future. And this may provide more opportunities for investors to participate in future refinancing situations.
The sort of financing that we're talking about may be in the form of capital markets. It may be in the form of bonds.
As we move on to roads I'd like to come - remind everyone that this area actually is seeing as much investment as rail. We're talking over 3-1/2 trillion renminbi which is a good deal over $500 billion U.S.
Investment in the roads network has been running at very high levels in the past few years, well over 1 trillion renminbi in the last two years for instance. But this is not expected to continue. And it will moderate a little in the new five-year plan to be more like 700 to 800 billion a year.
Last five-year plan targeted 65,000 kilometers of overall expressway length to be achieved. And this is actually a target that was achieved. So as Andrew's mentioned the plan is not just a plan. It can get results.
The new plan seeks to extend this to 83,000 kilometers which for the U.S. listeners on the call is slightly larger or longer than the U.S. interstate highway system developed under Eisenhower.
Private ownership of roads has been allowed since the late 1990s. And in theory foreign ownership of up to 100% is possible for toll roads for example.
Increasingly there's been some issues around toll roads in China about the tolls they charge. But this is something that's - it's early - too early to tell what impact that will have on foreign investment.
The government's desire to make new five-year plan one that helps reduce wealth disparity between regions particularly the Western (Inan) provinces and between rural communities and city dwellers is underscored of a renewed emphasis on enhancing rural road connections. If you look at the slide you can see there's a huge number of townships and villages that are not connected. And currently that is a massive task that the government is facing, to tackle that but also being mindful of its low-carbon agenda because if they improve the basic communication links that will ultimately drive further car usage.
I'd like to wrap up with a slide outlining some additional foreign investment opportunities in infrastructure resulting from the new five-year plan. And as I mentioned The Catalogue for the Guidance of Foreign Investment which is currently being revised, this is a document which is published every few years. It's not under a five-year cycle so the last plan was - sorry, last guidance was updated in 2007, the one before that in 2004.
A new draft of this one was issued in April this year. And there - a finalized draft will be available hopefully later this year as well.
Some of the areas likely to see more liberal foreign investment policies consistent with the new five-year plan themes are electric vehicle and battery-charging stations -- this allows the government to encourage technology and innovation which it currently does not have in the country to be injected into commercial businesses here if their foreign participants wish to provide that technology -- the construction and operation of water treatment facilities with government officials openly talking about the need for 2 trillion renminbi of investment in the next five years and a further 2 trillion investment in the following five years. And this is not only to do with water supply but also to improving water management in rural areas.
The operation of medical institutions will become a permitted activity for foreigners for the first time which allows the ability for hospitals to be owned and run by foreign companies and also vocational training as part of the government's educational agenda to help people attain more skills to actually get - seek better employments.
I recommend that you keep a watch out for the final version of the catalog later this year as this should provide more clarity on which sectors to consider if you're planning to expand existing activities in China or enter China market for the first time.
And I'd like to leave it there and ask the fourth polling question. Over the next five years do you see your company's investment or presence in China? And there are four options for you to choose.
Now moving along I will hand over to Tom Stanley, who will talk - take us through the road ahead.
Tom Stanley: Thanks, (Stephen). So the road ahead, how will the five-year plan play out in practice?
One of the most closely watched targets will of course be GDP growth. And there have been some concerns about slowing growth in China. And it's helpful to look at the track record and some forecasts.
And as Edwin mentioned the target in the last five-year plan was 7.5%. China actually handily exceeded that target with growth coming in over the last five years of over 11%. And I think that's going to be the picture for the next five years.
The target has been set at 7%. But actually the story is likely to be one of growth above that target. For the current year growth is looking to come in north of 9% and most forecasts for the 2012 year are still over 8%. So we’ll just have to get use of high-single-digit growth in China rather than double-digit growth but still very robust growth for China.
But it's not all plain sailing. And even with the economy growing at over 7% there will be businesses and companies that won't thrive. And there are some headwinds facing China that I outline on Page 31.
Top of the list is really costs. Rising costs and inflation are a major concern here in China. Real estate prices and food and vegetable prices have contributed to a spike in the consumer price index which is now running at over 5%.
And labor costs which have been rising for some time in China are continuing to put pressure on companies. And that's forcing some companies to relocate to the interior of the country or even to other locations outside China.
The environment as we've heard is a pressing issue. I think companies will need to face increased compliance costs and costs to adapt their processes to meet the more stringent environmental standards as a result of the five-year plan.
Another concern is financing for all of the investment that's going on. Much of China's government investment is through local government. And in fact local government loans outstanding currently top 10 trillion renminbi. So this is a concern to policymakers.
In the short-term we may actually see some limits on local government investments. But over the longer-term there may be more flexibility in raising local taxes or issuing bonds.
A quick mention on demographic pressures, the elderly population over the next five years is going to increase by about 50 million people. At the same time the working age population is stabilizing or falling. So this is going to put huge pressures on the government for social and safety net spending and also on wages as people fight for a diminishing pool of labor.
And finally China emerging onto the world stage and China businesses emerging onto the world stage is also a potential for issues to crop up as China becomes more and more a part of the interconnected global economy.
On Page 32 I just want to recap some of the targets that the five-year plan have set. There are no easy targets. Some of them are going to be challenging to achieve and some of them are going to be extremely challenging to achieve.
The challenging-to-achieve ones are on the left-hand side. One to highlight, the energy use per unit of GDP, I think is achievable. In fact over the last five-year plan China reduced its energy use by over 19% per unit of GDP, just short of the target of 20%. So it can be done. And a lot of these left-hand side issues are under the government' control.
On the right-hand side those are more challenging. They may rely more heavily on the private sector or they're areas such as inflation or R&D where the government has missed its targets in the past.
Having said that it's still early days. We're only a few months into the current five-year plan. And if history’s any guide we'll see China make tremendous progress against these targets over the next five years.
With that I'd like to turn to Polling Question Number 5. Within your company how would you characterize management's understanding of China?
And I'll turn back over to Mark Barnes.
Mark Barnes: Thank you very much, Tom. Thank you, everybody on the call who is presenting.
This concludes the formal presentation, very informative. There are lots of questions. Andrew, very good recovery on the way through. I thought we had a lot of questions around automotive. In fact looking at the list here's some 200 questions.
So we are actually approaching top of the hour. But I want to - I'd like to ask a few questions.
And please, if you do have a question still, do send it to us. If they, you know, given that we won't be able to answer all of these obviously on the call we will respond to all the questions obviously. So if you have a burning question please do ask.
So that - let me just turn to - and, you know, don't - there's a lot of - actually there's quite a number of questions around this particular issue. And actually Tom and Edwin, this sort of touches on one of, you know, a number of items throughout the slides. But you had talked about the Chinese government accounting for the rises in wages in China which potentially could push many factory into other local - locales in the rest of the world.
Do you think that's a big issue? Do you expect it to happen faster than say for example in U.S. and Europe as the world becomes more globalized? What do you think the impact to the rise of wages will be?
And I know, Tom, you touched on it. But perhaps you could just elaborate. And Edwin, if you can put in some comments as well.
Tom Stanley: Well Mark, I think it's something that we're already seeing happening in China, companies moving inland to reduce their costs or actually industries seeking cheaper labor offshore. And in areas such as textiles or shoe manufacturing that's something that's been in process for some time.
I think we're going to see more of that going forward. And it is actually in line with the five-year plan goal of quality growth and focusing on higher value-added manufacturing. So the challenge will be to manage that in a orderly way.
Edwin Fung: Tom, this is Edwin. Just one thing I would like to add is that it's true when you look at China in particular for past couple years there has been I would say like a sizable increase in wages in terms of labor cost. It is the government job to make sure that that's a really reasonable increase but to get the allowance that the (unintelligible) as well.
There's no doubt about it. It's a challenges for companies is how to look at the cost. It's happening in China, challenges, opportunity.
And when you look at the five-year plan in fact there's a lot of way that be the companies we look at, how we look at the cost structure and better restructure the operation so that you can review the situation.
Mark Barnes: Thanks Edwin, Tom. Another question, again this has come up a couple of times. Obviously we've not covered all the sectors. And, you know, clearly it covers a number of other sectors that we could look at in future calls. But technology, software was raised and historically has always been part of the five-year plan.
Okay. Is that very true of this one? How important is technology and software as part of this new plan?
Edwin Fung: Mark, this is Edwin. Let me take that one.
The way I would see that when we look at the five-year plan although that, you know, that's not specifically mentioned about technology, software in the five-year plan. But when you look at the main stream, the five-year plan, you can see that, in particular when you look at the China commitment as to the spending on R&D and as to how they increase the commitment on the service contractors as percent of GDP and also they tried to move up their value chain. And there's no doubt about it. That's all related technology and software. There's so much that can help. And I do believe that, you know, this sector we still play an important role in the current five-year plan.
Mark Barnes: Thanks, Edwin. Andrew, we've had a lot of questions around auto. And I'm going to field just this one because it was raised a couple of times.
The Chinese government appears to be taking some action around the rate of - managing the rate of growth in the auto industry. Do you think that could have an impact on automotive companies in the region or even companies trying to invest more there?
Andrew Thomson: Oh I think the first thing to say, Mark, is that when you look at growth rates, you know, we are coming off a massive year in 2010 where a lot of the volume last year was driven from, you know, a government stimulus package. And a lot of those incentives that were put in place for 2010 came off on the 31 of December. And of course, you know, the focus now is new energy vehicles and the incentives are being directed towards those vehicles and the pilot cities.
So Number 1 it was always going to be challenging to achieve, you know, off a big base the same sort of growth numbers as happened last year. And then secondly you really can see the shift towards new energy vehicles.
And, you know, if anything's going on, Mark, it's not so much that, you know, I think that the government's really limiting purchasing. They're just trying to push it in a different direction now.
Mark Barnes: Right. Thank you. That's helpful.
Edwin, some - another sort of broader question. Are there any sectors that are restricted to foreign entrants?
Edwin Fung: I would say that, you know, when you look at, you know, China in particular, when they entered the WTO and there's certain industry or sector that they still have certain what we call restriction. And there hasn't been a big, you know, breakthrough on that.
And of course, you know, as I said, you know, when you look at the current five-year plan and there's certain sector that, you know, actually relating to those that are prohibited in the WTO at that time they would like to do or we say like a gradual changes or open up. And somehow you use gradual changes as compared to what they come under the WTO.
Mark Barnes: Okay. Okay. That's helpful.
Well look, gentlemen and everybody on the call. Again a lot of questions here covering intellectual property, covering incentives. And again we'll come back to all of you over the course of the next few days. I'd just like to thank everybody for joining.
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