BMI China Business Forecast Report Q4 2014

IMPORTANT NOTICE:
The information in this PDF file is subject to Business Monitor Internationals full copyright
and entitlements as defined and protected by international law. The contents of the file are for the
sole use of the addressee. All content in this file is owned and operated by Business Monitor
International, and the copying or distribution of this file, internally or externally, is strictly prohibited
without the prior written permission and consent of Business Monitor International Ltd.
If you wish to distribute the file, please email the Subscriptions Department at
subs@businessmonitor.com, providing details of your subscription and the number of recipients
you wish to forward or distribute this information to.
DISCLAIMER
All information contained in this publication has been researched and compiled from sources believed to
be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or
mechanical error, either at source or during production, Business Monitor International accepts no liability
whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of
the publication. All information is provided without warranty, and Business Monitor International makes no
representation of warranty of any kind as to the accuracy or completeness of any information hereto
contained.
Q4 2014
www.businessmonitor.com
CHINA
Business Forecast Report

includes 10-year forecast to 2023
Published by Business Monitor International Ltd
Beijing Treading The Middle Path
ISSN 1744-8778
Published by Business Monitor International Ltd.
Copy Deadline: 12 September 2014
2
6,640
5,030
GDP per capita, USD
GDP per capita, EUR
National Sources/BMI
Import cover, months
Foreign reserves ex gold, USDbn
Current account balance, % of GDP
Current account balance, USDbn
Balance of trade in goods and services, % of GDP
20.5
3,820.0
2.4
224.8
2.3
211.6
2,240.8
Goods and services imports, USDbn
Balance of trade in goods and services, USDbn
2,452.4
-1.3
Goods and services exports, USDbn
Budget balance, % of GDP
-118.8
8.12
Exchange rate CNY/EUR, ave
Budget balance, USDbn
6.15
Exchange rate CNY/USD, ave
3.0
Lending rate, %, ave

6.00
2.6
Consumer price inflation, % y-o-y, ave
Central bank policy rate, % eop
5.0
1,385.6
4.5
43.5
9.0
13.8
8.0
35.1
Unemployment, % of labour force, eop
Population, mn
Fixed capital formation, real growth % y-o-y
Fixed capital formation, % of GDP
Government final consumption, real growth % y-o-y
Government final consumption, % of GDP
Private final consumption, real growth % y-o-y
Private final consumption, % of GDP
7.7
6,970.2
Nominal GDP, EURbn
Real GDP growth, % y-o-y
9,200.7
Nominal GDP, USDbn
2013e
China - Macroeconomic data AND Forecasts
18.2
3,800.0
1.7
167.8
1.6
159.1
2,498.8
2,657.9
-0.9
-91.8
8.21
6.13
6.00
3.0
2.6
5.0
1,393.8
5.4
42.7
9.0
14.0
8.4
35.4
7.3
5,441
7,291
7,583.8
10,162.3
2014f
15.9
3,700.0
1.0
111.1
1.0
108.1
2,799.4
2,907.5
-0.5
-56.4
7.78
6.23
5.75
3.2
2.8
5.0
1,401.6
4.7
41.9
8.5
14.2
8.2
35.9
6.7
6,260
7,826
8,775.2
10,969.0
2015f
14.7
3,800.0
0.8
97.1
0.8
100.8
3,094.7
3,195.5
-0.2
-26.2
7.50
6.25
5.75
3.5
2.7
5.0
1,408.9
4.0
41.2
8.0
14.5
8.0
36.7
5.8
7,022
8,427
9,894.6
11,873.6
2016f
13.0
3,700.0
0.6
81.3
0.7
90.8
3,421.6
3,512.4
0.0
-2.7
7.50
6.25
5.75
3.7
2.7
5.0
1,415.8
4.0
40.5
8.0
14.8
8.0
37.4
5.8
7,597
9,116
10,755.9
12,907.1
2017f
11.4
3,600.0
0.4
59.9
0.6
77.5
3,783.7
3,861.2
0.0
-5.7
7.50
6.25
5.75
4.0
2.7
5.0
1,422.1
4.0
39.8
8.0
15.1
8.0
38.2
5.8
8,220
9,864
11,690.3
14,028.3
2018f
10.0
3,500.0
0.2
32.2
0.4
60.5
4,184.8
4,245.2
-0.1
-9.4
7.50
6.25
5.75
4.0
2.7
5.0
1,427.8
4.0
39.1
8.0
15.4
8.0
39.0
5.8
8,897
10,677
12,704.0
15,244.8
2019f
8.8
3,400.0
0.0
-7.3
0.2
34.7
4,629.1
4,663.8
-0.1
-13.6
7.50
6.25
5.75
4.0
2.7
5.0
1,432.9
4.0
38.4
8.0
15.7
8.0
39.8
5.8
9,631
11,557
13,800.2
16,560.2
2020f
7.7
3,300.0
-0.3
-57.6
0.0
2.8
5,121.5
5,124.3
-0.1
-18.5
7.50
6.25
5.75
4.0
2.7
5.0
1,437.3
4.0
37.8
8.0
16.1
8.0
40.6
5.8
10,431
12,517
14,993.3
17,991.9
2021f
6.8
3,200.0
-0.6
-125.8
-0.2
-36.2
5,667.3
5,631.1
-0.1
-24.2
7.50
6.25
5.75
4.0
2.7
5.0
1,441.1
4.0
37.1
8.0
16.4
8.0
41.5
5.8
11,307
13,568
16,294.0
19,552.8
2022f
6.1
3,200.0
-1.0
-217.1
-0.4
-89.1
6,272.3
6,183.3
-0.1
-30.8
7.50
6.25
5.75
4.0
2.7
1,444.2
4.0
36.5
8.0
16.7
8.0
42.3
5.8
12,260
14,712
17,706.7
21,248.1
2023f
china Q4 2014
Business Monitor International Ltd
Contents
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks To Outlook.....................................................................................................................................................................5
Chapter 1: Political Outlook..................................................................................................................... 7

SWOT Analysis........................................................................................................................................................... 7
BMI Political Risk Ratings......................................................................................................................................... 7
Domestic Politics....................................................................................................................................................... 8
Zhou Investigation Raises Stakes For CPC Leadership..............................................................................................................8
The Communist Party of China (CPC) has launched an official investigation against former politburo standing committee member Zhou
Yongkang, the party's most high profile target since at least the 1970s. Zhou's downfall has considerable implications for the party's top
leadership moving forward, and suggests that President Xi Jinping's ongoing political purge has further to go.
Table: Political Overview............................................................................................................................................................................... 8
Long-Term Political Outlook..................................................................................................................................... 9

Major Challenges Over The Coming Decades..............................................................................................................................9
China faces myriad economic, social and environmental challenges over the coming decades that could seriously test the Communist
Party of China's ability to govern. The best-case scenario for any eventual political transition would entail an elite-led liberalisation of the
authoritarian system, while the worst-case scenario would involve a violent change of regime.
Chapter 2: Economic Outlook................................................................................................................ 13

SWOT Analysis......................................................................................................................................................... 13
BMI Economic Risk Ratings.................................................................................................................................... 13
Economic Activity.................................................................................................................................................... 14
Rebalancing Efforts A Long-Haul Campaign..............................................................................................................................14
Following a forecasted 7.3% performance in 2014, we expect real GDP growth in China to slow further in 2015. That said, further
targeted monetary and fiscal stimulus measures are likely over the coming quarters as the government looks to avert a more acute
slowdown, and we believe that harder-hitting reform efforts could be shelved in lieu of supporting economic growth. As such, we are
upgrading our 2015 real GDP growth forecast to 6.7%.
Table: Economic Activity............................................................................................................................................................................... 14
Fiscal Policy.............................................................................................................................................................. 16
Reforms To Stabilise Local Government Borrowing Position .................................................................................................16
The Chinese government's recent decision to allow some local governments to begin directly issuing bonds will increase transparency
and most likely lower borrowing costs for participating local governments over the near-term.
Table: Fiscal Policy......................................................................................................................................................................................... 16
Monetary Policy........................................................................................................................................................ 17
Credit Creation Plummets In Sign Of Renewed Economic Weakness.....................................................................................17
A renewed slowdown in the Chinese economy, as evidenced by surprisingly low credit creation in July as well as poor fixed asset
investment growth, will keep the People's Bank of China (PBoC)'s monetary policy relatively loose over the near-to-medium term. That
said, we do not expect the central bank to opt for a benchmark interest rate cut over the coming quarters, and instead see officials
opting for lighter touch measures that will support liquidity as well as ailing property markets.
Table: Monetary Policy ................................................................................................................................................................................ 18
Exchange Rate Policy ............................................................................................................................................. 18

CNY Facing Downside Pressures Despite Recent Gains..........................................................................................................18
Despite the Chinese yuan's recent strength, we believe that the currency is still vulnerable to downside forces over the near-to-medium
term as the Chinese economy continues to slow. Nevertheless, owing to recent strength, we have upgraded our end-2014 forecast on
the unit to CNY6.2000/USD from CNY6.3500/USD previously, and our end-2015 forecast to CNY6.2500/USD from CNY6.4000/USD
previously.
Table: Exchange Rate..................................................................................................................................................................................... 19
Table: BMI CURRENCY FORECAST.................................................................................................................................................................... 19
china Q4 2014
Chapter 3: 10-Year Forecast................................................................................................................... 21

The Chinese Economy To 2023.............................................................................................................................. 21
6.0% Is The New 10.0%.................................................................................................................................................................21
China's economic growth in the coming decade will be much slower than in the last, as the savings rate declines, the economic
liberalisation process slows, and population growth falls. These dynamics will result in real GDP growth averaging 6.0% over the next
decade as opposed to the 10.1% average seen over the past decade. Private consumption will be a major outperformer, averaging
growth of 8.1% and rising in importance as a share of GDP.
Table: Long-Term Macroeconomic Forecast........................................................................................................................................ 21
Chapter 4: Business Environment......................................................................................................... 25

SWOT Analysis......................................................................................................................................................... 25
BMI Business Environment Risk Ratings.............................................................................................................. 25
Business Environment Outlook.............................................................................................................................. 26
Institutions................................................................................................................................................................ 26
Table: BMI Business & Operation Risk Ratings...................................................................................................................................... 26
Table: BMI Legal Framework Rating.......................................................................................................................................................... 27
Infrastructure............................................................................................................................................................ 28
Table: Labour Force Quality....................................................................................................................................................................... 28
TABLE: ASIA ANNUAL FDI INFLOWS................................................................................................................................................................. 29
Table: Trade & Investment Ratings........................................................................................................................................................... 30
Market Orientation.................................................................................................................................................... 31
Table: Top Export Destinations................................................................................................................................................................. 31
Operational Risk....................................................................................................................................................... 33
Chapter 5: Key Sectors........................................................................................................................... 35

Pharmaceuticals & Healthcare................................................................................................................................ 35
Table: Pharmaceutical Sales, Historical Data And Forecasts.................................................................................................... 36
TABLE: Healthcare Expenditure Trends, Historical Data And Forecasts................................................................................ 37
TABLE: Government Healthcare Expenditure Trends, Historical Data And Forecasts..................................................... 37
TABLE: Private Healthcare Expenditure Trends, Historical Data And Forecasts............................................................... 37
Telecommunications................................................................................................................................................ 38
TABLE: Telecoms Sector Mobile Historical Data & Forecasts................................................................................................ 39
table: Telecoms Sector Wireline Historical Data & Forecasts............................................................................................ 40
Other Key Sectors.................................................................................................................................................... 43

table: Oil & Gas Sector Key Indicators................................................................................................................................................... 43
table: Defence & Security Sector Key Indicators............................................................................................................................. 43
table: Infrastructure Sector Key Indicators.................................................................................................................................... 43
table: Food & Drink Sector Key Indicators........................................................................................................................................... 44
table: Autos Sector Key Indicators........................................................................................................................................................ 44
table: Freight Key Indicators..................................................................................................................................................................... 44
Chapter 6: BMI Global Assumptions..................................................................................................... 45

Global Outlook.......................................................................................................................................................... 45
Eurozone Downgrade On Poor Q214...........................................................................................................................................45
Table: Global Assumptions.......................................................................................................................................................................... 45
Table: Developed States, Real GDP GrowtH, %.................................................................................................................................... 46
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %............................................................................. 46
Table: Emerging Markets, Real GDP Growth, %................................................................................................................................... 47
Executive Summary
Core Views
Key Risks To Outlook
As evidenced by strong rhetoric regarding its economic growth target
A key downside risk to our economic outlook remains another collapse
in 2014, Beijing is likely to continue to implement targeted stimulus
in external demand, such as the one that occurred at the height of
measures in order to avert a more acute economic slowdown. As
the global financial crisis. This would seriously undermine growth in
a result of what we expect to be a balance between short-term
trade-dependent industries and hasten a fall in the property market,
stimulatory measures and longer-term economic reforms, we have
potentially leading to an outright recession. There is also a risk that
upgraded our 2015 real GDP forecast to 6.7% from 6.0% previously.
greater-than-expected fiscal and monetary stimulus by government
At the same time, we see the economy achieving a 7.3% rate of
and the People's Bank of China could usher in stagflation.
growth in 2014, versus our previous forecast of 7.1%.

A hard-landing scenario is also a key risk in China, as falling property
The Chinese government's official investigation in Zhou Yongkang
prices amid rising domestic debt levels could set the stage for a
is a major split from past precedent, and will likely be the zenith of Xi
financial crisis. While we believe that this eventuality will be averted
Jinping's anti-corruption campaign. The campaign has also served
over the next few years owing to the government's considerable
as a purge to eliminate hostile political forces, and we believe that it
resources, such an outcome cannot be entirely ruled out. In this
will pave the way for Xi to enact more aggressive economic reforms
case, real GDP growth would slow dramatically.
over the coming years.
Major Forecast Changes

Following the Chinese yuan's recent appreciatory run, we have
upgraded our end-2014 and end-2015 forecasts on the unit to
CNY6.2000/USD and 6.2500/USD, respectively, from CNY6.3500/
USD and CNY6.4000/USD previously. That said, we continue to see
downside forces acting against the currency, as the PBoC may look
to utilise the currency as a stimulatory tool in the face of a slowing
economy.
Chapter 1:
Brief Methodology
Political Outlook
SWOT Analysis
BMI Political Risk Ratings
China's short-term political risk rating of 80.2 reflects the high degree of
Strengths
The CPC, which has governed for over 60 years, remains secure in
its position as the sole political party in China.
China's expanding economy is giving it greater clout in international
policy continuity and cohesion with regard to the policymaking process

associated with one-party rule. However, while this is a boon in the near
term as reflected by the high score it acts as a drag on the country's
long-term political risk rating of 62.9. Indeed, the absence of a strong
affairs, which will allow it to build politically important ties, especially
constitutional framework and the tight control over political freedoms hurt
with the developing world.
China's long-term rating particularly sharply.

S-T
Trend
Political
Weaknesses
As with any other one-party state, China's political system is inherently unstable and unable to respond to the wider changes taking
place in society.
Provincial governments often fail to enforce central government
directives.
Although bilateral ties have warmed in recent years, China's relationship with Taiwan remains problematic, with Beijing refusing to rule
out the threat of force in the event of a declaration of independence
by Taiwan.
Opportunities
China is actively expanding its political and economic ties with major
emerging markets in Latin America, Africa and the Middle East.
A new generation of leaders (the so-called 'fifth generation') took
power in 2012. This should ensure the continuation of reform and
modernisation.
Threats
Growing corruption, widening inequalities, increasing rural poverty
and environmental degradation have led to an increase in social
unrest in recent years.
The Communist Party is facing increasing factional rifts based on
ideology and regionalism. While greater political debate would be
welcomed by many, internal regime schisms could prove politically
destabilising.
Regional
Rank
Global
Rank
Regional
Rank
Global
Rank
Singapore
94.8
=
1
Brunei Darussalam
90.6
=
2
Hong Kong
84.0
=
3
New Zealand
84.0
=
3
Japan
83.5
=
5
Taiwan
81.7
=
6
Laos
80.4
=
7
China
80.2
=
8
Kiribati
80.2
=
8
Macau
79.6
=
10
Australia
79.4
11
South Korea
79.0
=
12
Sri Lanka
77.1
=
13
Vietnam
76.9
=
14
India
76.5
=
15
Malaysia
76.3
=
16
Philippines
71.3
=
17
North Korea
69.8
=
18
Indonesia
68.8
=
19
Cambodia
64.0
+
20
Thailand
62.3
=
21
Bangladesh
62.1
=
22
Bhutan
61.0
=
23
Mongolia
60.0
=
24
Myanmar
56.9
=
25
Fiji
51.5
=
26
Timor-Leste
50.8
=
27
Pakistan
50.4
28
Nepal
48.3
=
29
Papua New Guinea
44.0
=
30
Afghanistan
39.6
=
31
Regional ave 69.8 / Global ave 64.1 / Emerging Markets ave 60.4
L-T
Political
Trend
Japan
88.1
=
1
South Korea
84.2
=
2
New Zealand
84.1
=
3
Australia
83.0
4
Singapore
80.6
=
5
Kiribati
77.9
=
6
Taiwan
75.4
=
7
Hong Kong
72.9
=
8
India
71.9
=
9
Mongolia
67.7
=
10
Malaysia
66.7
=
11
Brunei Darussalam
63.8
=
12
China
62.9
=
13
Philippines
62.8
=
14
Bangladesh
62.6
=
15
Macau
60.7
=
16
Sri Lanka
60.2
=
17
Indonesia
60.0
=
18
Thailand
59.8
=
19
Cambodia
59.3
+
20
Vietnam
57.7
=
21
North Korea
55.3
=
22
Papua New Guinea
53.8
=
23
Pakistan
53.7
24
Bhutan
51.0
=
25
Laos
50.9
=
26
Timor-Leste
49.8
=
27
Nepal
49.5
=
28
Myanmar
40.9
=
29
Fiji
38.6
=
30
Afghanistan
20.2
=
31
3
8
15
15
17
23
26
28
28
32
34
36
39
40
41
43
64
71
79
99
106
108
113
116
125
143
148
150
155
162
171
8
20
22
25
28
35
39
47
49
63
67
75
82
84
87
95
97
98
99
102
107
116
120
121
133
134
142
143
162
169
184
china Q4 2014
Domestic Politics
Zhou Investigation Raises Stakes For
CPC Leadership
standard for culpability among China's top leadership, which

has historically been immune from such campaigns.
Crackdown Not A Threat To Broader Stability
Short-Term Political Risk Rating & Subcomponents, Out Of 100
BMI View
The Communist Party of China (CPC) has launched an official inves-
Total
100
tigation against former politburo standing committee member Zhou
80
Yongkang, the party's most high profile target since at least the 1970s.
60
Zhou's downfall has considerable implications for the party's top lead-
Policy Continuity
ership moving forward, and suggests that President Xi Jinping's ongo-
Policy-making
Process
20
0
ing political purge has further to go.
The Communist Party of China (CPC) has initiated an official

inquiry into former head of state security and Politburo Standing Committee (PSC) member Zhou Yongkang, capping a
remarkable fall from grace for a man that was as recently as
2012 among the five most powerful politicians in China. Zhou
has been under fire from the top echelons of the party since at
least mid-2013, and has not been seen in public since October
of last year. The move to officially investigate Zhou, who served
as the head of the tremendously powerful Central Politics and
Law Commission from 2007-2012, is an unprecedented step for
the party, marking its most high profile target since at least the
1970s. Zhou will be the first current or former member of the
PSC to be subjected to such an investigation, which sets a new
40
Security/External
Threats
Social Stability
Source: BMI
Proving the allegations of widespread corruption ('serious disciplinary violations', in CPC parlance) against Zhou will be for
the party somewhat of a foregone conclusion, as reports indicate
that the government has already seized nearly USD15.0bn in
assets from Zhou's family and close associates. More broadly,
however, the case against Zhou represents a new zenith for
President Xi Jinping's ongoing political purge (see 'Political
Table: Political Overview

System of Government
Single-party socialist republic
Head of State
President Xi Jinping (serving first of a maximum two five-year terms)
Head of Government
Prime Minister Li Keqiang (serving first of a maximum two five-year terms)
Last Election
Presidential and parliamentary March 2013

CPC congress November 2012
Composition of Current Government
Communist Party of China
Key Figures
The Politburo Standing Committee acts as the de facto highest decision-making body in China and
comprises the top leadership of the ruling party. Its members, in order of protocol, are: Xi Jinping
(concurrently general secretary of the Communist Party), Li Keqiang, Zhang Dejiang, Yu Zhengsheng,
Liu Yunshan, Wang Qishan, Zhang Gaoli
Other Key Posts
Finance Minister Lou Jiwei; Foreign Minister Wang Yi; Defence Minister Chang Wanquan;
Minister of Public Security Guo Shengkun; Central Bank Governor Zhou Xiaochuan
Main Political Parties (number of seats in parliament)
Communist Party of China (CPC): The founding and ruling political party of the People's Republic of
China, whose paramount position as the supreme political authority is guaranteed by China's constitution and realised through control of all state apparatus. The CPC was founded in 1921 and came to
rule all of mainland China after defeating its rival, the Kuomintang (KMT), in the Chinese Civil War.
Next Election
Presidential and parliamentary March 2018

CPC congress Autumn 2017
Ongoing Disputes
Ongoing dispute over Taiwanese sovereignty and Tibetan autonomy; some minor territory disputes
with Asian neighbours, including with Japan over the Senkaku Islands in the East China Sea and
with Taiwan, Malaysia, the Philippines and Vietnam over the Spratly Islands in the South China Sea.
Key Relations/ Treaties
Close Link With ASEAN, WTO member, permanent seat on the UN Security Council, founding
member of the Shanghai Cooperation Organisation (SCO).
BMI Short-Term Political Risk Rating
80.2
BMI Structural Political Risk Rating
62.9
Source: BMI
political outlook
Purge Bolsters Xi's Reform Credentials', April 10 2014). The

rift between Xi and Zhou, a classic power-broker with deep
connections within China's state security apparatus as well as its
top State Owned Enterprises (SOEs), has been well documented,
and Zhou's fallen protege Bo Xilai was widely viewed as a top
challenger to Xi's presidency.
Long-Term Political Outlook

Major Challenges Over The Coming
Decades
BMI View
China faces myriad economic, social and environmental challenges
Xi's Power Play

As such, Xi's ability to coalesce the forces of the party in a
purge against Zhou is an impressive feat, and corroborates
our view that Xi is on his way to becoming a significantly
more powerful leader than predecessor Hu Jintao. Earlier this
year, reports emerged that former presidents Hu and Jiang
Zemin had both discouraged Xi from pushing further with the
investigation against Zhou out of fear that the prosecution of
such a high profile figure could be destabilising for the party.
Now that Xi has succeeded in launching an official investigation against Zhou, it is likely that he will continue his purge in
order to both further consolidate his power as well as burnish
his anti-corruption credentials, which are integral to his goal of
restoring the credibility of the CPC among the public.
The scale and depth of Xi's campaign strengthens our conviction
that the leader remains set on implementing the broad economic
reform agenda outlined at last year's third plenary session. However, the controversy surrounding the Zhou Yongkang case, as
well as the considerable amount of time that it has taken to bring
an official investigation against him, suggest that Xi is still in
the process of consolidating his power and clearing the party of
the vested interests that might stand in the way of hard-hitting
and controversial economic reforms, such as a restructuring of
China's bloated and inefficient SOEs, as well as its financial
sector. For this reason, as well as the potentially negative
growth implications tied to such initiatives, the government is
likely to take its time with the implementation of substantive
economic reforms.
over the coming decades that could seriously test the Communist Party
of China's ability to govern. The best-case scenario for any eventual
political transition would entail an elite-led liberalisation of the authoritarian system, while the worst-case scenario would involve a violent
change of regime.
Policy Continuity Scores Highly

Long-Term Political Risk Ratings
Source: BMI
Perhaps the biggest question concerning China's future is whether

the country will eventually move towards a democratic system
of government. This question has received greater attention
following the political upheaval in the Middle East and North
Africa in 2011. China is increasingly an anomaly in that it is
the only major emerging economy that has not yet experienced
a transition to democracy. Other countries as diverse as Russia,
Poland, Mexico, Brazil, South Africa, South Korea and Indonesia
all moved away from one-party rule to democracy once they attained a certain level of economic development, suggesting that
China will too. For now, the Communist Party of China (CPC)
derives its legitimacy from delivering rapid rates of economic
growth, which has lifted hundreds of millions of people out of
poverty over the past 30 years. While Chinese state planners
previously regarded an annual real GDP growth rate of 8.0%
to be the minimum necessary to create enough jobs to maintain
social stability, this notion has since been abandoned.Still, the
weak global economy presents the most immediate test of the
CPC's governance, and the government will keep a watchful eye
china Q4 2014
on employment levels. Even without the anticipated slowdown,

however, China will continue to face many challenges.
Threats And Challenges To Stability

Rising Inequality: As China's economy surged during the 2000s,
inequality widened sharply. Although comparisons between
different organisation's calculated gini coefficients are inexact, due to differing methodologies, most observers agree that
inequality is rising. The gini coefficient was estimated at 0.61
in 2010, based on a survey of 8,438 households by the Survey
and Research Center for China Household Finance, a body set
up by the Finance Research Institute of the People's Bank of
China and Southwestern University of Finance and Economics.
This is an exceptionally high figure, far above a government
estimate of 0.41 in 2000, a World Bank estimate of 0.42 in
2005, and a China Academy of Social Sciences figure of 0.54
in 2008. Moreover, ongoing revelations that China's politically
connected elites have accumulated vast wealth through corrupt
practices are bound to raise public anger.
Regional Economic Imbalances: The eastern seaboard has
benefited disproportionately from China's rapid expansion. In
particular, there is a relatively wealthy coastal belt consisting of Tianjin, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian
and Guangdong provinces where urban household per capita
GDP was higher than CNY21,000 (the average for urban China)
in 2010. Unsurprisingly, these provinces are also where most
of China's industry and foreign direct investment (FDI) are
concentrated. By comparison, rural household per capita GDP
was roughly CNY8,100. Much of the western and interior parts
of China remain poor and underdeveloped. Consequently, the
eastern seaboard provinces are receiving migration inflows from
other parts of China, although these were temporarily reversed in
the 2008-2009 slowdown. Although the government has undertaken massive development plans to address these imbalances,
and new factories are gradually being built further inland, this
will be a long drawn-out process in a country of China's size.
Employment And Working Conditions: The past decade or so
has seen an increase in labour unrest. Job losses from economic
restructuring have generated some resentment towards the CPC,
which is officially a party of the workers. There is also rising
discontent over harsh working conditions, particularly in China's
coal mines, where deaths typically number thousands every year.
Environmental Issues: China's rapid economic growth has
come at the cost of environmental degradation. In 2005, officials acknowledged that more than 70% of rivers and lakes
10
were polluted. In July 2010, the Ministry of Environmental

Protection stated that 24% of China's surface water was unfit
for any purpose, including industrial use. Furthermore, many
parts of China experience water shortages, and these are likely
to increase as urbanisation rates rise. China's cities are also
notoriously polluted as a result of coal power plants. In addition, villagers have taken to violent protests against pollution or
forced land clearing for new projects. The issue of land seizure
has led to major unrest in the countryside. Chinese leaders are
well aware of the risks to economic growth and social stability
posed by pollution. However, the implementation of tougher
environmental laws is being subverted by vested interest groups
and corruption.
Religions And Ethnicity: Chinese leaders are fearful of the
possibility of religious- or ethnic-based rebellions, which convulsed the country in the 19th and 20th centuries. For example, the emergence of the Falun Gong sect in 1999 caught the
Chinese leadership by surprise; the popularity of the group was
seen as a threat to the CPC, prompting a harsh (and ultimately
successful) crackdown. Meanwhile, Christianity is reportedly
growing rapidly in China. The government recognises an official
state-sanctioned church, but underground churches and sects
are on the rise. While neither Falun Gong nor Christian groups
pose a direct threat to the government, any crackdown against
them risks creating a broader backlash against the authorities.
China has 18 nationalities with populations of more than 1.0mn,
out of 56 recognised in total. The most well-known minorities
are the Tibetans and the Muslim Uighurs of Xinjiang province.
The Tibetans staged a major uprising in 2008 and may rebel
again in the event of the Dalai Lama's death, as the younger
generation is considered more militant. The Uighurs clashed
with the Han Chinese in July 2009, leaving around 150 dead.
Aside from these two groups, violence has erupted between
minorities and the majority Han population from time to time.
The government plays down the ethnicity issue, yet it nonetheless has the ability to create instability.
Gender Imbalance: As a result of the one-child policy (adopted
in 1980) and a general bias in favour of sons, China has a pronounced gender imbalance, particularly in the under-30 age
bracket. The Chinese Academy of Social Sciences stated in
2009 that more than 24mn Chinese men of marrying age could
find themselves without spouses in 2020. A noteworthy book
('Bare Branches: The Security Implications of Asia's Surplus
Male Population') points out that such imbalances are potentially
destabilising for societies, since most crimes are committed by
political outlook
single males under 30.
of increased public unrest.
Financial Stresses: Although the banking sector has avoided a

long-predicted crisis, there are concerns that it remains opaque
and that lending is still largely policy-driven. In addition, the
surge in bank lending since early 2009 could yet create more
non-performing loans for banks.
Scenarios For Political Change
Internal Regime Fault Lines: Within the CPC, there are reportedly factional schisms. These reflect differences over ideology
(namely between those who favour more neoliberal reforms and
those who favour a more statist model), geographical regions
within China, the 'generations' within the party and the debate
over whether China should behave more assertively abroad.
All CPC factions favour a continuation of its rule, meaning that
they are unlikely to challenge the system outright. Nonetheless,
factional rivalry could complicate decision-making, thereby
leading to slower reforms.
Foreign Conflict: Although Chinese officials have emphasised
the country's 'peaceful rise', the People's Liberation Army (PLA)
has been sounding a more nationalistic tone. Beijing's increasing
assertiveness over its claims to the South China Sea and East
China Sea could lead to naval skirmishes or conflict with Vietnam, the Philippines, Japan or even the US. In addition, China
continues to claim Taiwan as a province, and has considerable
interests in neighbouring North Korea and Myanmar, which
may eventually necessitate intervention. Chinese military assertiveness could play well with nationalistic elements in society,
but could harm its international image and lead to intra-regime
tensions between 'hawks' and 'doves'.
BMI's long-term political risk rating for China stands at 62.9.
The weakest score, of 33/100, is in the 'characteristics of polity' subcomponent, which carries a 30% weighting. This score
reflects China's authoritarian one-party system of government,
which tolerates virtually no dissent. The 60/100 score in the
'characteristics of society' subcomponent (30% weighting) is
constrained by China's very high gini (inequality) coefficient.
China scores a respective 85/100 and 90/100 in the 'scope of
state' and 'policy continuity' subcomponents (each with a 20%
weighting). Overall, the country's problems are by no means
unique to China. Rather, they are symptomatic of emerging
countries in general. However, they are on a scale never seen
before, which arguably gives them a qualitative dimension.
Furthermore, unlike citizens of other emerging nations, the
Chinese public do not have the opportunity to change their
government via the ballot box. This leaves open the possibility
Although China's former paramount leader, Deng Xiaoping,

stated in 1987 that elections would be possible in 50 years,
Chinese leaders continue to reject moves to adopt Western-style
democracy, fearing that this would lead to chaos. Indeed, in
2005, the CPC released its first white paper, 'The Building of
Political Democracy', which stated that 'democratic government
is the Chinese Communist Party governing on behalf of the
people while upholding and perfecting the people's dictatorship'.
Rather than developing a Western-style liberal democracy, the
CPC believes that 'China's socialist political democracy has
vivid Chinese characteristics'. The Chinese leadership became
particularly worried about the possibility of revolution in China
following the upheaval that shook the Middle East in 2011, and
moved to suppress internet coverage of events there. China's
impressive economic achievements over the past 30 years have
given Chinese citizens less reason to resent their leadership
compared with Egyptians, Syrians, Yemenis, etc. Nevertheless,
we would expect to see greater calls for democratisation over
the next 10-20 years.
Best-Case Scenario: Elite-Led

Transition
Against this backdrop, the best-case scenario for political change
in China would be a stable, elite-led transition, under which a
reformist-minded CPC phases in free, multi-party elections at
city, provincial and national level over a period of several years.
Possible role models include South Korea and Taiwan, both of
which enacted democratic reforms in the late 1980s and early
1990s after decades of one-party rule. In both countries, the
governing party was able to hold on to the elective presidencies
for 10 and 12 years respectively and control the democratically
elected legislatures until the early 2000s. Should China follow
this pattern, the CPC could retain substantial political influence
even after a putative transition to democracy. An alternative
to the multi-party model would be a system whereby the CPC
remains the sole political party, but allows multiple candidates
from its ranks to run for election to key administrative posts.
Under the best-case scenario, rapid economic growth would
remain on track and the liberalisation process should reassure
foreign investors that China is on the road to becoming a 'normal' country. However, South Korea (population 45mn) and
Taiwan (23mn) are far smaller and much more homogeneous
than China, and were considerably richer in the late 1980s than
China is today. As such, their experiences may not be easy to
11
china Q4 2014
emulate at the present time.
Worst-Case Scenario: Indonesia-Style

Chaos
The worst-case scenario for Chinese politics would be an extended period during which the growing contradictions within
the economy foster more and more 'incidents of mass unrest'
especially organised unrest to the point that foreign investors
withdraw their capital and the government is forced to carry
out a harsh crackdown. The trigger for accelerated unrest could
come from a full-scale meltdown of the economy or a multiyear period of growth substantially below what China has been
accustomed to (for example, 5% or less annually). We feel that
both of these developments are unlikely at this stage, but they
cannot be ruled out entirely at the present time.
Were the economy to experience such stresses, the CPC could
find itself in a similar position to Indonesia's Suharto regime in
1997-1998, when civil unrest caused foreign investors to flee
and eventually toppled the government. Indonesia subsequently
democratised over a six-year period, but real GDP growth has yet
to return to pre-1997 levels and the economy is still considered a
somewhat risky investment destination (although it has received
renewed interest in recent years). An 'Indonesia scenario' in
China would set the latter's growth story back years and could
entail regional separatism or even a military coup. China has
experienced several periods in its history during which central
government authority has been reduced to only nominal control
over the provinces and warlords have held sway.
Democracy No Quick Fix

The above scenarios are not the only paths available to China,
and any transition could incorporate elements of both outcomes.
Overall, though, while a democratic government in China should
be more responsive to popular demands and allow greater political transparency, it would by no means provide a rapid panacea
for China's myriad problems. Beyond democratisation, there
would also be the issue of centre-periphery relations would
China remain a centralised state or would it adopt a federal
model that would allow greater autonomy for its provinces?
Furthermore, the political and economic culture resulting from
decades of one-party rule will linger in China, and issues such
as corruption and close links between business and government
will not go away quickly. Finally, in a democratic China, popular
pressures could force the government to go slow on economic
liberalisation, as has happened in many emerging economies.
12
Chapter 2:
Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Strengths
86.0. The country also performs well in our long-term economic risk
China has a massive trade surplus and its huge foreign exchange
reserves serve as a major cushion against external shocks.
China's economic policymakers are committed to continuing their
gradual reform of the economy.
Weaknesses
China's economic growth boom has led to major imbalances and
environmental degradation.
The country's dependency on investment to boost growth has made
it vulnerable to a slowdown in credit growth. Private consumption
remains weak at less than 40% of GDP.
The close relations between provincial leaders and local businesses
are fostering corruption, making it harder for the central government
to enforce its policies.
Opportunities
China's economic growth is slowly becoming more broad-based, with
domestic consumption likely to rise in importance vis--vis exports
and investment.
As China moves up the value chain, it will develop its own global
brand name companies, fostering innovation and growth.
Threats
We believe that we have witnessed a permanent end to China's
double-digit annual growth rate.
The economy will face difficulty in continuing to increase its share
of the global export market and efforts to move up the value chain
will be fraught with problems.
China scores strongly in our short-term economic risk ratings, scoring
ratings, securing a top 20 spot with a score of 78.1, buoyed by China's

strong growth prospects, low and stable inflationary environment and a
very secure external position. However, an over-reliance on commodity
imports and the manufacturing sector drag on China's long-term rating, as
does the paltry amount of government spending on health and education.
S-T
Trend Regional
Global
Economic
Rank
Rank
Singapore
89.6
=
1
South Korea
89.6
=
1
Taiwan
86.9
=
3
China
86.0
=
4
Philippines
79.4
=
5
Malaysia
79.2
=
6
Macau
77.1
=
7
New Zealand
75.4
=
8
Hong Kong
74.8
=
9
Thailand
72.5
=
10
Vietnam
69.8
=
11
Australia
68.8
12
Indonesia
64.6
=
13
Japan
62.5
=
14
India
62.1
=
15
Timor-Leste
58.1
=
16
Brunei Darussalam
57.7
=
17
Bangladesh
57.5
=
18
Sri Lanka
56.9
=
19
Myanmar
52.7
=
20
Pakistan
48.8
21
Papua New Guinea
48.8
=
21
Mongolia
48.1
=
23
Cambodia
46.0
+
24
Nepal
45.2
=
25
Fiji
43.5
=
26
Laos
39.2
=
27
Kiribati
31.0
=
28
Bhutan
26.9
=
29
Afghanistan
n/a
n/a
n/a
North Korea
n/a
n/a
n/a
1
1
3
4
6
7
9
15
18
24
31
36
46
52
53
63
67
68
72
87
94
94
98
106
108
117
136
164
177
n/a
n/a
South Korea
82.1
=
1
Singapore
81.2
=
2
China
78.1
=
3
Malaysia
77.5
=
4
Australia
74.5
5
Hong Kong
74.3
=
6
Macau
74.1
=
7
Taiwan
74.1
=
7
New Zealand
73.9
=
9
Thailand
71.5
=
10
Japan
69.5
=
11
Philippines
66.9
=
12
Indonesia
63.8
=
13
Vietnam
62.2
=
14
Bangladesh
57.5
=
15
India
56.1
=
16
Brunei Darussalam
55.2
=
17
Sri Lanka
54.2
=
18
Fiji
53.0
=
19
Pakistan
49.7
20
Nepal
48.2
=
21
Myanmar
47.5
=
22
Timor-Leste
44.5
=
23
Laos
42.5
=
24
Mongolia
40.8
=
25
Papua New Guinea
40.7
=
26
Kiribati
40.1
=
27
Cambodia
39.8
+
28
Bhutan
33.8
=
29
Afghanistan
n/a
n/a
n/a
North Korea
n/a
n/a
n/a
2
3
6
8
15
16
17
17
20
25
31
40
47
56
69
76
78
80
84
96
102
105
116
119
130
131
137
138
162
n/a
n/a
L-T
Economic
Trend
Regional
Rank
Global
Rank
13
china Q4 2014
Economic Activity
Rebalancing Efforts A Long-Haul
Campaign
BMI View
Following a forecasted 7.3% performance in 2014, we expect real
GDP growth in China to slow further in 2015. That said, further targeted monetary and fiscal stimulus measures are likely over the coming
quarters as the government looks to avert a more acute slowdown, and
However, the chosen measures have thus far constituted a light

touch in comparison to past efforts by the Chinese government.
More specifically, cuts to reserve ratio requirements (RRRs) at
targeted banks which lend primarily to agricultural and rural
interests, as well as the expediting of some railway projects
represent a considerable degree of restraint relative to Beijing's
massive CNY4trn (USD645.2bn) enacted in 2009, which was
the last time that broad macro indicators such as fixed asset
investment growth and industrial production had fallen to the
levels that we have seen over recent months.
we believe that harder-hitting reform efforts could be shelved in lieu of
No End In Sight
supporting economic growth. As such, we are upgrading our 2015 real
Total Outstanding Debt To GDP, %
GDP growth forecast to 6.7%.
Transitory Pick-Up Coming To An End

HSBC/Markit Purchasing Managers' Index (PMI)
Source: BMI, NBS
Stimulus Effects Increasingly ShortLived

Source: BMI, HSBC/Markit, Bloomberg
The Q214 stabilisation of the Chinese economy (see 'Positive

GDP Print Masks Lurking Weaknesses', July 16 2014) is more
a reflection of the government's efforts to support short-term
economic growth than it is a reversal in the country's fundamental economic state. The government has since March enacted a
series of stimulatory measures in order to maintain economic
growth near its stated target of 7.5%, and Q214's growth print
(7.5% year-on-year [y-o-y]) suggests that these measures have
manifested in a pick-up in broad economic activity.
The transient boost from these stimulus measures appears to be

fading, with high frequency data such as HSBC/Markit's Flash
Purchasing Managers' Index (PMI) in August as well as total new
social financing in July pointing towards a renewed downturn
(see 'Credit Creation Plummets In Sign Of Renewed Economic
Weakness', August 14). With economic growth for H114 hovering just below 7.5%, we believe that further stimulus measures
will be needed in order to achieve the government's target. As
such, the question in the near-term is just how aggressive the
government will be in its attempts to re-ignite economic activity
through the end of 2014.
Table: Economic Activity

Nominal GDP, USDbn
GDP per capita, USD
Population, mn
Industrial production, % y-o-y, ave
Unemployment, % of labour force, eop
2009
2010
2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
5,069.4
5,952.5
7,200.4
8,116.1
9,200.7
10,162.3
10,969.0
11,873.6
12,907.1
14,028.3
9.2
10.6
7.6
7.7
7.7
7.3
6.7
5.8
5.8
5.8
3,751
4,377
5,261
5,893
6,640
7,291
7,826
8,427
9,116
9,864
1,351.2
1,359.8
1,368.4
1,377.1
1,385.6
1,393.8
1,401.6
1,408.9
1,415.8
1,422.1
11.1
14.4
10.8
7.8
8.3
8.5
8.0
8.0
8.0
8.0
4.3
4.1
4.1
4.1
5.0
5.0
5.0
5.0
5.0
5.0
e/f = BMI estimate/forecast. Source: National Sources/BMI
14
economic outlook
As implied by our below consensus real GDP growth forecast

of 7.3%, we do not expect significant stimulus measures to
come into play. While there is notable upside risk to this forecast given not only the economy's H114 performance, but also
recent comments from government officials suggesting that
the growth target would be hit, we also believe that there is a
growing awareness among senior government officials that aggressive stimulus measures could threaten economic stability.
With total debt in China well over 200% of GDP (it is likely
that figures provided by the government [above chart] are an
underestimate), it is becoming increasingly difficult to stoke
faster economic growth by loosening credit conditions. Not only
has growth become increasingly credit intensive, meaning that
each new unit of GDP requires progressively more new credit to
produce, but the ease of credit access over recent years has also
distorted China's investment landscape. Local governments have
increasingly borrowed in order to fund infrastructure projects
that will likely yield little cash flow, raising the potential that
they will be forced to perpetually roll-over a rising proportion
of their debt loads.
account for approximately 15% of total GDP.

While the fact that the central government has allowed local
governments to roll back their property curbs suggests that
concerns over the real estate market run deep, it also reflects
the fact that the party remains unwilling to see through the more
immediate economic implications of a deeper real estate correction. This contrasts with the policy mix that we have witnessed
in the region's other buoyant property markets, such as Hong
Kong and Singapore, where property curbs remain fully in effect
despite cooling market interest.
Rebalancing Yet To Materialise
Consumption, Investment & Net Exports as % GDP
Broad-Based Downturn
Residential Property Prices By Tier, % chg y-o-y
Source: BMI, China Statistical Yearbook
Source: BMI, NBS
Perhaps the most significant result of the cycle has been a considerable run-up in real estate prices, particularly in a number of
tier 3 and 4 cities. With affordability ratios in these cities looking
overstretched, we continue to believe that a price correction is
in the offing over the coming quarters. While reports indicate
that a number of tier 3 and 4 cities have begun to roll back their
property restrictions in an effort to support prices, oversupply
conditions will likely dictate a fall in prices regardless. This
will have knock-on effects for the broader economy, with IMF
figures suggesting that real estate related activities (including
mining, real estate services, and construction, among others)
Previously (see 'Positive GDP Print Masks Lurking Weaknesses',

July 16), we upgraded our 2014 real GDP forecast for China on
the back of both the economy's stronger-than-expected performance in H114, as well as indications that the government would
be slightly more aggressive in supporting economic growth via
fiscal and monetary easing. While we expect a lower growth
target for 2015, indications are that badly-needed reforms aimed
at rebalancing the economy away from over-investment will
continue to be balanced with growth supportive imperatives.
This means that harder hitting measures that would help to
unlock private consumption (such as interest rate liberalisation, which would allow Chinese citizens to earn higher rates
of return on their deposits but would raise lending costs) could
be shelved for the time being. As such, we have upgraded our
2015 real GDP growth forecast to 6.7% from 6.0% previously,
though we note that this is at the expense of future growth, as
credit availability will need to be tightened more aggressively
over the medium term.
15
china Q4 2014
Fiscal Policy
bonds, they have nevertheless racked up a substantial quantum of

debt. According to estimates from the National Audit Office, local
governments owed approximately CNY17.9trn in outstanding
debt at the end of June, or 30.6% of national GDP. Given their
inability to access traditional bond markets, local governments
have instead opted for more opaque borrowing methods, including local government financing vehicles (LGFVs).
Reforms To Stabilise Local Government

Borrowing Position
BMI View
The Chinese government's recent decision to allow some local governments to begin directly issuing bonds will increase transparency and
Local Government Expenditures Soaring

Expenditures (RHS), CNY100mn
most likely lower borrowing costs for participating local governments

over the near-term. That said, their overreliance on land sales and debt
issuances will need to be addressed in order to curtail rising indebtedness, and we believe that the introduction of property taxes over the
next two years will aim to achieve this objective.
Not Matching Up
Local & Central Government Revenues
Source: BMI, China Statistical Yearbook 2013
Not only do such methods lead to higher borrowing costs for

local governments as they are forced to raise funds through
somewhat unconventional means, but they also add an additional
layer of convolution to the country's increasingly murky local
debt picture. At the same time, borrowing via these channels
has become more strained over recent quarters, as evidenced by
the National Audit Office's report that nine local governments
failed to repay approximately CNY800mn worth of debt in
March of this year. For all of these reasons, we believe that the
move towards a more transparent and conventional debt market
for local governments is a step in the right direction in terms
Source: BMI, China Statistical Yearbook 2013
The Chinese central government has authorised some local

governments to begin directly issuing bonds, in a move that we
believe will be a boon for the maturation of the country's public
debt markets. Despite the fact that local governments were previously barred from funding themselves via the direct issuance of
Table: Fiscal Policy
2010
Revenue, % of GDP
Fiscal expenditure, CNYbn
Expenditure, % of GDP
Current expenditure, CNYbn
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
20.6
20.4
20.7
20.9
21.1
21.4
21.8
22.0
22.1
8,987.4
10,326.5
11,462.5
12,539.9
13,706.1
14,967.1
16,314.2
17,766.1
19,382.8
22.3
22.2
22.4
22.2
22.0
21.9
22.0
22.0
22.1
8,067.6
9,252.4
10,284.5
11,244.4
12,281.4
13,400.9
14,610.3
15,915.9
17,373.0
Current expenditure, % of total expenditure
89.8
89.6
89.7
89.7
89.6
89.5
89.6
89.6
89.6
Current expenditure, % of GDP
20.0
19.9
20.1
19.9
19.7
19.6
19.7
19.7
19.8
919.8
1,074.1
1,178.0
1,295.5
1,424.7
1,566.2
1,703.8
1,850.2
2,009.8
10.2
10.4
10.3
10.3
10.4
10.5
10.4
10.4
10.4
Capital expenditure, CNYbn

Capital expenditure, % of total expenditure
Capital expenditure, % of GDP
Budget balance, CNYbn
Budget balance, % of GDP
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
2.3
-677.3
-853.0
-852.1
-730.6
-562.3
-351.2
-163.5
-16.6
-35.8
-1.7
-1.8
-1.7
-1.3
-0.9
-0.5
-0.2
0.0
0.0
f = BMI forecast. Source: National Bureau of Statistics/ BMI
16
economic outlook
of the Communist Party of China (CPC)'s broader economic

reform drive, and that it will bolster macroeconomic stability
going forward. Likewise, access to traditional debt markets will
also help to stabilise China's short-term debt position, as local
governments will be able to more easily roll over existing debts.
Our expectations have been corroborated by fixed asset investment (FAI) growth, which despite easing credit conditions in
the months prior to July has failed to witness a pick-up.
Hitting Fresh Lows
New Total Social Financing (TSF), CNYbn
Property Tax A Potential Solution

However, the reforms will not be sufficient to solve China's
longer-term debt problems. A substantial portion of local government revenue is still derived from land sales (as much as
35% in some cases), a reliance that will become increasingly
tenuous should a real estate correction come to fruition. Meanwhile, although central and local government revenues have
risen relatively apace over the past decades, local government
expenditures have far outpaced central government spending
(see chart). This mismatch will need to be addressed over the
medium term in order to prevent local government indebtedness
from growing to unsustainable levels. This will necessitate either
a more direct transfer of revenues from the central government
to local governments, or, more likely, the imposition of property
taxes at the local government level, a stated goal of the CPC that
we believe will be rolled out progressively beginning in 2015.
Monetary Policy
Credit Creation Plummets In Sign Of
Renewed Economic Weakness
Source: BMI, NBS, Bloomberg
Instead, after stabilising over the past three months, FAI growth
hit a fresh 12-year nadir in July at 17.0% y-o-y. Given the state
of China's fast cooling property market, this suggests that the
People's Bank of China's (PBoC) efforts to lower borrowing costs
by providing additional liquidity to credit markets and pushing
banks to provide preferential lending for first-time home buyers
has so far failed to spur demand for new credit.
Lowest FAI In Over A Decade
Fixed Asset Investment, % chg y-o-y
BMI View
A renewed slowdown in the Chinese economy, as evidenced by surprisingly low credit creation in July as well as poor fixed asset investment growth, will keep the People's Bank of China (PBoC)'s monetary
policy relatively loose over the near-to-medium term. That said, we do
not expect the central bank to opt for a benchmark interest rate cut over
the coming quarters, and instead see officials opting for lighter touch
measures that will support liquidity as well as ailing property markets.
New total social financing (TSF, the broadest measure of money

supply and a proxy for credit creation) in China plummeted in
July to its lowest level since October 2008, dropping to just
CNY273.1bn versus CNY2.0trn in June. The result confounded
consensus expectations for new credit creation of CNY1.5trn,
and represented a remarkable 66.7% y-o-y retreat. We believe
that weakness in credit creation likely suggests that China's
transitory economic pick-up over recent months is losing steam,
and continue to expect a renewed slowdown as H214 progresses.
Source: BMI, NBS, Bloomberg
Faster Credit Growth A Must To Hit

2014 Growth Target
In light of the increasingly credit-intensive nature of Chinese
economic growth, it is highly unlikely that the economy will
be able to hit the government's target of around 7.5% economic
17
china Q4 2014
Exchange Rate Policy
growth this year without substantially stronger credit growth. In

consideration of increasingly confident rhetoric from top government officials (including Li Keqiang) over recent months, this
suggests that the PBoC will continue to ease credit conditions
over the coming months in an effort to achieve this year's target,
most likely by providing additional liquidity to the system and
potentially making broader reserve ratio requirement (RRR) cuts.
As such, we believe that the badly-needed, substantive reform
of China's credit markets is unlikely to take shape until at least
2015, when we expect the government to set a more modest
growth target in line with its longer-term reform objectives.
We remain below consensus on 2014 real GDP growth, with
a forecast of 7.3%.
CNY Facing Downside Pressures

Despite Recent Gains
BMI View
Despite the Chinese yuan's recent strength, we believe that the currency is still vulnerable to downside forces over the near-to-medium term
as the Chinese economy continues to slow. Nevertheless, owing to
recent strength, we have upgraded our end-2014 forecast on the unit to
CNY6.2000/USD from CNY6.3500/USD previously, and our end-2015
forecast to CNY6.2500/USD from CNY6.4000/USD previously.
Short-Term Outlook (three-to-six months): Owing to the

Chinese yuan's recent appreciatory trend, we are upgrading
our end-2014 forecast on the unit to CNY6.2000/USD from
CNY6.3500/USD previously. However, we also note that the
People's Bank of China (PBoC)'s daily midpoint trend, as well as
the spread between the spot rate and the CNY's 12-month nondeliverable forward, suggest another bout of weakness ahead.
That said, we do not expect the PBoC to cut its benchmark

interest rate in the near future, as this could endanger broader
macroeconomic stability. Instead, the PBoC will likely opt for
lighter touch measures aimed at keeping liquidity flowing and
real estate markets supported.
Long-Term Outlook (six-24 months): We believe that the

Chinese yuan will remain at the mercy of downside forces
over the coming quarters despite its recent recovery. Although
the CNY has been a surprisingly strong performer over recent
months, strengthening by 1.6% since the beginning of June,
fundamental factors continue to point towards weakness. More
specifically, the recent slowdown in the Chinese economy, as
Table: Monetary Policy
2010
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
3.3
5.4
2.7
2.6
2.6
2.8
2.7
2.7
2.7
Producer price inflation, % y-o-y, eop
3.9
3.2
2.9
2.6
2.6
2.6
2.6
2.6
2.6
Producer price inflation, % y-o-y, ave
3.7
3.2
2.9
2.6
2.6
2.6
2.6
2.6
2.6
Wholesale price inflation, % y-o-y, ave
3.9
3.8
3.6
3.0
3.1
2.9
2.7
2.7
2.7
4.0
3.8
3.6
3.0
3.1
2.7
2.7
2.7
2.7
M1, CNYbn
Wholesale price inflation, % y-o-y, eop
26,662.0
28,985.0
31,883.5
35,071.9
38,579.0
42,436.9
46,680.6
50,881.9
54,952.4
M1, % y-o-y
21.2
8.7
10.0
10.0
10.0
10.0
10.0
9.0
8.0
M2, CNYbn
72,585.0
85,159.0
96,229.7
105,852.6
116,437.9
128,081.7
140,889.9
153,569.9
165,855.5
M2, % y-o-y
19.7
17.3
13.0
10.0
10.0
10.0
10.0
9.0
8.0
Central bank policy rate, % eop
5.75
5.81
6.56
6.00
6.00
6.00
5.75
5.75
5.75
Lending rate, %, eop
2.2
3.5
3.0
3.0
3.0
3.5
3.5
4.0
4.0
Lending rate, %, ave
2.2
2.8
3.2
3.0
3.0
3.2
3.5
3.7
4.0
Real lending rate, %, eop
-2.4
-0.6
0.5
0.5
0.4
0.8
0.7
1.3
1.3
Real lending rate, %, ave
-1.1
-2.6
0.5
0.4
0.4
0.4
0.8
1.0
1.3
2.3
3.1
-2.4
-1.0
1.8
2.9
-1.5
-2.5
3-month money market rate, % eop

Real 3-month money market rate, %, eop
3-month money market rate, %, ave
Real 3-month money market rate, %, ave
f = BMI forecast. Source: National Sources/BMI
18
economic outlook
reflected by weak purchasing managers' indices (PMIs) and

an unexpected contraction in credit creation in July, is likely
to elicit further growth supportive measures from the Chinese
government. While the main thrust of these measures is likely
to involve both targeted fiscal expenditures (specifically certain
social and transport infrastructure projects) as well as the ongoing
provision of liquidity for lending markets, the People's Bank of
China (PBoC) may also choose to utilise the CNY as a tool to
boost demand for Chinese exports.
(the currency is currently trading at approximately CNY6.1480/

USD) has reversed much of these effects. The recent trend seen
in the PBoC's management of the CNY also suggests that the
central bank is looking to set the currency weaker, with the daily
midpoint (around which the currency is allowed to trade in a
range of 2%) breaking below three-month trend-line support
(see chart above).
Yet To Erase Previous Sell-Off
Exchange Rate, CNY/USD
Breaking The Trend
PBoC Daily CNY Midpoint, CNY/USD
Source: BMI, Bloomberg
Source: BMI, PBoC, Bloomberg
As we wrote previously (see 'CNY: Still At Mercy Of Downside

Risks', June 5), the Chinese yuan became somewhat less competitive against its Asian peers in 2013 as the currency bucked
an acute regional FX sell-off. Although the CNY's early-2014
weakness restored some of this competitiveness, the yuan's recent
recovery from a low of approximately CNY6.2600/USD in May
Technically, the CNY's appreciatory run dating back to early

May has not been nearly as resolute as was its February-May
sell-off, suggesting that the more powerful trend remains to
the downside. Meanwhile, the 12-month CNY non-deliverable
forward (NDF) continues to imply weakness over the coming
year, with the spread between the spot rate and the NDF trading at a nearly 1-year high. Given the combination of market
expectations for a weaker yuan, as well as an increasingly dovish
Table: Exchange Rate

2010
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
CNY/USD, ave % y-o-y
-0.9
-4.5
-2.4
-2.5
-0.3
1.6
0.4
0.0
0.0
CNY/USD, ave, PPP
3.96
4.17
4.19
4.23
4.16
4.19
4.32
4.35
4.38
Exchange rate CNY/EUR, ave
8.98
8.99
8.01
8.12
8.21
7.78
7.50
7.50
7.50
CNY/GBP, ave
10.49
10.41
10.06
9.53
10.17
10.02
10.25
10.31
10.44
CNY/CHF, ave
6.49
6.76
6.78
6.68
6.41
6.25
6.16
6.11
6.13
CNY/AUD, ave
6.21
6.67
6.53
5.93
5.45
5.04
4.78
4.69
4.69
JPY/CNY, ave
594.08
515.46
503.80
600.18
618.91
628.73
637.50
637.50
637.50
f = BMI forecast. Source: BMI/IMF
Table: BMI CURRENCY FORECAST

Spot
2014
2015
CNY/USD, ave
6.148
6.13
6.23
CNY/EUR, ave
8.5018
8.2142
7.7875
5.75
CNY Rate, % eop

Source: BMI Last Updated: September 3 2014
19
china Q4 2014
central bank owing to the economy's ongoing slowdown, we do

not expect the CNY's appreciatory trend to hold over the next
12-24 months. As such, despite the fact that we are upgrading
our end-2014 forecast for the unit to CNY6.2000/USD (from
CNY6.3500/USD previously) and our end-2015 forecast to
CNY6.2500/USD (from CNY6.4000/USD previously), this
still implies weakness from current levels.
Spread Implying Weakness Ahead
Exchange Rate & 12-Month Non-Deliverable Forward, CNY/USD
Source: BMI, Bloomberg
Risks To Outlook
Risks to our CNY outlook are relatively evenly balanced. Downside risks are mainly related to PBoC policy, as we continue to
see limited potential for a one-off devaluation that would take
the yuan considerably weaker than our forecast. However, the
central bank is unlikely to pursue such a policy-course unless
economic growth slows dramatically, as it would run counter
to its long-term objective of establishing the CNY as a global
reserve currency. In this vein, the CNY could outperform our
forecast in the event that the government unleashes a substantially
stronger-than-expected stimulus programme, bolstering shortterm sentiment towards the currency in line with a transitory
boost to economic growth.
20
Chapter 3:
10-Year Forecast
The Chinese Economy To 2023
Lower Investment Rate, Slower Growth
6.0% Is The New 10.0%

BMI View
China's economic growth in the coming decade will be much slower
than in the last, as the savings rate declines, the economic liberalisation process slows, and population growth falls. These dynamics will
It is widely agreed that to encourage sustainable high rates of

growth in the coming years, China must lower its investment
rate and boost consumption. Looking at historical precedents, it
is clear that an investment share of GDP at nearly 50.0% is too
high. However, it is this high savings and investment rate that
has allowed the economy to grow so fast over the past decade. A
lower rate of savings and investment will mean slower growth.
result in real GDP growth averaging 6.0% over the next decade as
opposed to the 10.1% average seen over the past decade. Private
consumption will be a major outperformer, averaging growth of 8.1%
and rising in importance as a share of GDP.
The unprecedented growth boom in China over recent decades

has its foundations in the vast improvement made to productivity
through economic liberalisation. A major supportive tailwind
in the form of demographic trends provided additional support,
allowing savings to be accumulated at a rapid rate. Growth in
the coming decade will be much slower than during the last, as
the 'low hanging fruit' of liberalisation has already been undertaken and further reforms are likely to be slow and piecemeal
as the Communist Party of China (CPC) would be reluctant to
give up too much economic power for fear of losing its political dominance. A harshly deteriorating demographic situation
(slowing growth and an ageing population) will further weigh
on economic dynamism, resulting in real GDP growth of 6.0%
over the next decade compared with the 10.1% average of the
past 10 years. Consumption will rise as a share of GDP and, as
a result, services' share of GDP will rise, presenting significant
opportunities in consumer-related fields.
Regarding the domestic imbalances that have built up as a result

of the high investment ratio, the problem is not high investment
itself but the lack of viability of such investment projects in
theory, there is nothing wrong with a high investment rate if
all the investments make a profit. Excessive state involvement
has resulted in excessive unproductive investment in an all-out
attempt to boost headline growth. This has come at the expense
of private consumption, with the consequences likely to be a
sharp slowdown in growth over the coming years.
Policy Reaction To Coming Slowdown

Will Be Crucial
Policies to 'boost' consumption using subsidies, wage hikes
and consumer loans, or persuading consumers to reduce their
savings rate by providing a more comprehensive social security
net, target the symptoms rather than the causes. Broad-based
structural reforms will be needed to rebalance the economy
and avoid a hard landing and, so far, these reforms have been
lacking. We believe the government missed a key chance to
accelerate economic reforms during the global financial crisis,
with the stimulus policy of forcing banks to extend record
Table: Long-Term Macroeconomic Forecast

Nominal GDP, USDbn
Population, mn
GDP per capita, USD
2014f
2015f
2016f
2017f
2018f
2019f
2020f
2021f
2022f
2023f
10,142.4
10,874.9
11,770.6
12,793.9
13,904.1
15,108.5
16,410.6
17,828
19,373
21,050.9
7.1
6.0
5.8
5.8
5.8
5.8
5.8
5.8
5.8
5.8
1,393.8
1,401.6
1,408.9
1,415.8
1,422.1
1,427.8
1,432.9
1,437.3
1,441.1
1,444.2
7,276
7,758
8,354
9,036
9,777
10,581
11,452
12,403
13,443
14,576
2.6
2.8
2.7
2.7
2.7
2.7
2.7
2.7
2.7
2.7
Current account balance, % of GDP
1.7
1.0
0.8
0.6
0.4
0.2
0.0
-0.3
-0.6
-1.0
6.13
6.23
6.25
6.25
6.25
6.25
6.25
6.25
6.25
6.25
Exchange rate CNY/USD, ave
f = BMI forecast. Source: National Sources/BMI f=BMI forecast
21
china Q4 2014
loans to state-owned enterprises (SOEs) and local government

investment vehicles representing a step backwards in terms of
its long-term liberalisation drive. In doing so, these policies
have ignited a property and investment bubble that is likely to
burst, ushering in a sharp slowdown and undermining growth
potential in the early part of this decade. It is how Beijing deals
with the impending economic slowdown that will determine
whether China can continue sustaining 7%-plus growth, and
our baseline case argues that positive economic reforms will
be hard to come by.
buy into overseas markets, and in January the city of Wenzhou

publicised a trial policy that would allow individual investors
to make direct overseas speculation). We expect further gains
to be made, improving capital allocation. This is by no means
guaranteed, however, as the impending growth slowdown could
raise the potential for a political backlash against this kind of
reform among the party's elite.
Demographic Deterioration China Estimated
Population Trends
Total Population, mn (LHS) & Aged Dependency Ratio, % (RHS)
Efficiency Gains Will Be Hard To Come

By
Agricultural land reform and the deregulation of the hukou
household registration system provide potential for gains in
productivity by allowing more labour market flexibility and
further freeing up labour for urban migration. There has been
progress on this front, with the Chongqing government initiating
a pilot scheme giving migrant workers who have been working
in the city the right to non-agricultural status, with the aim to
turn 10mn farmers into urbanites by 2020. While progress has
been slow since then, we expect this policy to continue to spread
over the long term, supporting further urbanisation and growth.
The idea of urbanisation as a driver of growth, however, is valid
only insofar as entrepreneurs in cities can generate profits sufficient to warrant expanding their labour force. Over the long
term, this will depend on the government's willingness to allow
further economic freedom. In this regard, we believe that progress over the next decade will be much slower than in the past.
Financial Liberalisation Unlikely

Perhaps the most important reform the CPC could make to boost
productivity would be to liberalise the banking system, allowing
interest rates to reflect market forces and removing the political
nature of lending, which results in excessive capital going to
inefficient state-owned enterprises. The response to the 2008
crisis has made it clear that this will not be forthcoming any
time soon. From a political viewpoint, the CPC would not want
to give up its major lever of economic power and therefore risk
losing its political strength.
Closely related is the outlook for general capital market reform
opening up the capital account and allowing a flexible exchange
rate. We have seen some progress here, with greater currency
flexibility allowed over the past year and gradual liberalisation of
foreign financial investment (one of the many goals of the 12th
Five-Year Plan is to make it easier for local private investors to
22
Source: BMI, UN
SOE Liberalisation Has Run Its Course

As well as allowing price liberalisation and greater external trade,
opening up SOEs to private competition was a major factor in
boosting productivity. However, these particular reforms may
have hit a brick wall. Although the CPC relinquished a great deal
of power in removing itself from a large number of industries,
it remains the monopoly force in several key industries. As
with the banking sector, it will be difficult for the CPC to allow
further private-sector involvement into these sectors given the
risk this would pose to its grip on economic power.
Minimum Wage Hikes And Social

Security Will Hurt Growth Outlook
In the name of boosting consumption (as well as placating the
working classes), the CPC seems intent on hiking minimum
wages and increasing the size of the social welfare system (for
example, boosting healthcare and pension spending, and ramping
up social housing construction). While these may be desirable
from a social perspective, we do not believe they hold the key to
raising consumption spending; rather, these policies are likely to
reduce labour market flexibility and increase the already heavy
tax burden, reducing the ability of businesses to generate profits.
In terms of the composition of demand in the economy, these
policies will help to lower the savings ratio and, by extension,
10-YEAR forecast
increase the share of consumption in GDP although they will

do so at the cost of reduced growth potential.
Demographic Dividend Reversing

Over the past decade, the working population has risen at an
average rate of 1.26% per year, providing a supportive tailwind
for growth. Over the next decade, we expect this figure to fall
to just 0.71% per year, acting as a direct drag compared with
the previous decade, particularly towards the end of our forecast period when we see the working age population actually
shrinking slightly.
BMI's long-term macroeconomic forecasts are based on a variety of quantitative and qualitative factors. Our 10-year forecasts assume in most
cases that growth eventually converges to a long-term trend, with economic potential being determined by factors such as capital investment,
demographics and productivity growth. Because quantitative frameworks often fail to capture key dynamics behind long-term growth determinants,
our forecasts also reflect analysts' in-depth knowledge of subjective factors such as institutional strength and political stability. We assess trends in
the composition of the economy on a GDP by expenditure basis in order to determine the degree to which private and government consumption,
fixed investment and the export sector will drive growth in the future. Taken together, these factors feed into our projections for exchange rates,
external account balances and interest rates.
23
Chapter 4:
Business Environment
SWOT Analysis
Strengths
China is continuing to open up various sectors of its economy to
foreign investment.
BMI Business Environment Risk

Ratings
While a vast supply of cheap labour and rapid economic growth ensure
that China remains the top destination for foreign direct investment in the
With its vast supply of cheap labour, the country remains the top
developing world, there still remains a number of crucial impediments for
destination for foreign direct investment in the developing world.
foreigners wishing to do business within the country. These shortcomings
Weaknesses
Foreign companies continue to complain about the poor protection
of intellectual property in China.
Chinese corporate governance is weak and non-transparent by
Western standards. There is a considerable risk for foreign companies
are underscored by our business environment ratings, which reveal

that bureaucracy and legal framework are the biggest drag on China's
overall score of 59.4, while the country also remains uncompetitive with
regard to its tax environment. While reforms are ongoing, we still expect
meaningful progress to remain gradual.
in choosing the right local partner.
Opportunities
China's ongoing urbanisation and infrastructure drive will provide
major opportunities for foreign investment in landlocked provinces
as well as the transfer of skills and know-how.
The Chinese government is giving more protection and encouragement to the private sector, which is the most dynamic in the economy
and accounts for most of the country's job growth.
Threats
China's government will block attempts by foreign firms to take over
assets of national importance.
China is experiencing rising labour costs, prompting some investors
to turn to cheaper destinations such as Vietnam.
Business
Environment
Trend
Regional
Rank
Global
Rank
Singapore
80.0
=
1
Hong Kong
78.7
=
2
Australia
78.0
3
New Zealand
75.7
=
4
South Korea
71.1
=
5
Malaysia
68.6
=
6
Japan
67.8
=
7
Macau
62.0
=
8
Taiwan
61.9
=
9
Thailand
61.7
=
10
China
59.4
=
11
Brunei Darussalam
57.8
=
12
Vietnam
53.1
=
13
Sri Lanka
51.3
=
14
Fiji
49.6
=
15
Philippines
48.5
=
16
Mongolia
47.9
=
17
India
46.0
=
18
Cambodia
40.4
+
19
Indonesia
40.2
=
20
Papua New Guinea
40.0
=
21
Bangladesh
38.3
=
22
Pakistan
37.2
23
Kiribati
35.9
=
24
Laos
34.4
=
25
Bhutan
33.7
=
26
Nepal
30.0
=
27
Timor-Leste
27.9
=
28
Myanmar
20.9
=
29
Afghanistan
19.9
=
30
North Korea
18.7
=
31
1
2
3
8
18
21
22
36
37
39
47
48
66
73
80
82
86
96
110
112
114
124
129
135
139
143
156
163
181
182
184
25
china Q4 2014
Business Environment Outlook

Introduction
While a major destination for foreign direct investment (FDI),
the attractiveness of China as a top FDI destination is being
threatened by rising wage demands and an uneven playing field
between local and foreign firms. Furthermore, the commanding
nature of China's economy means bureaucracy remains a key
obstacle to doing business within the country, while the legal
framework is still weak despite two decades of reform.
Institutions
Legal Framework
China operates a civil law system that includes some common
law elements, although relatively less emphasis is placed on legal
precedent. Two decades of reform have resulted in a number
of changes in institutions, laws and practices. A formal legal
system has resulted in a nationwide court system comprising
3,000 basic courts and some 200,000 judges. The courts are
divided into courts of general jurisdiction and the courts of
special jurisdiction.In 1979, economic courts were established
as part of China's Supreme People's Court and three levels of

provincial courts. The economic courts enjoy jurisdiction over:
contract and commercial disputes between Chinese parties; trade,
maritime, intellectual property and insurance; other business
disputes involving foreign parties; various economic crimes
including theft, bribery and tax evasion.
There is also an administrative legal system, which adjudicates
more minor criminal cases.
Judges are often vulnerable to corruption, political control and
the pressures of guanxi (connections based on family or local
ties). Their appointment, promotion and removal are all at the
discretion of local government and Communist Party of China
(CPC) leaders rather than the Supreme People's Court or provincial high courts. Both the judges and the litigants who appear
before them are subject to the influence of local protectionism.
Legislation is frequently inadequate, with numerous conflicts
between national and local norms; and a proliferation of regulations, interpretations and other edicts often producing incoherence and inconsistency. Laws and regulations in China tend to
be far more general than in most OECD countries, and therefore
need more specific implementing rules and measures.
Table: BMI Business & Operation Risk Ratings

Infrastructure Rating
Institutions Rating
Market Orientation Rating
Business Environment
Afghanistan
21.8
20.1
17.9
19.9
Australia
80.3
85.8
68.1
78.0
Bangladesh
40.5
35.2
39.1
38.3
Bhutan
28.8
43.3
29.0
33.7
Cambodia
37.4
31.8
52.0
40.4
China
66.0
56.6
55.7
59.4
Hong Kong
71.1
84.2
80.7
78.7
India
47.4
41.8
48.8
46.0
Indonesia
37.1
31.2
52.3
40.2
Japan
76.4
77.1
49.8
67.8
Laos
39.2
28.7
35.3
34.4
Malaysia
60.1
74.9
70.9
68.6
Maldives
42.7
43.7
41.3
42.6
Nepal
29.4
29.9
30.8
30.0
New Zealand
69.3
92.7
65.3
75.7
Pakistan
33.4
37.0
41.1
37.2
Philippines
48.6
36.8
60.1
48.5
Singapore
71.1
84.2
80.7
80.0
South Korea
63.0
79.1
71.3
71.1
Sri Lanka
54.3
51.8
47.9
51.3
Taiwan
56.1
68.2
61.4
61.9
Thailand
61.0
56.8
67.2
61.7
Vietnam
58.2
39.0
62.2
53.1
Source: BMI. Scores out of 100, with 100 representing the best score available for each indicator
26
business environment
Even government arbitration, which many foreign businesses and

Chinese turn to in an effort to avoid the vagaries of the courts,
sometimes suffers from the same types of pressures that distort
judicial justice. Prosecutors, who are supposed to guard against
such illegal conduct, are usually too weak politically, and China's
current legal and regulatory system can be opaque, inconsistent
and often arbitrary. Implementation of the law is inconsistent.
Although China is a member of the International Centre for
the Settlement of Investment Disputes and has ratified the UN
Convention on the Recognition and Enforcement of Foreign
Arbitral Awards, it places strong emphasis on resolving disputes
through informal conciliation and mediation.
Property Rights
Chinese law states that all land is owned by 'the public'. Individuals are not permitted to own land. However, both Chinese
nationals and foreigners can hold long-term leases for land use.
They can also own buildings, apartments and other structures
on land, as well as personal property.
Intellectual Property Rights

China lacks effective protection for intellectual property rights
(IPR). In spite of some reforms under its WTO commitments

China has committed to full compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS) enforcement is poor and penalties, in the rare cases
they are applied, are insufficient to act as proper deterrents.
Trademark and copyright violations are widespread. Lack of
coordination among public bodies undermines attempts at
enforcement. There is also wide variation in the application of
IPR protection.
Corruption
Corruption is prevalent, and anti-corruption efforts are obstructed
by weak or non-existent monitoring mechanisms. Embezzlement
and financial mismanagement have been identified by numerous audit reports. The use of guanxi is widespread in the upper
echelons of business. Many of those who come under investigation are able to deploy their connections to avoid prosecution.
However, anti-graft efforts have improved significantly under
President Hu Jintao, who has made tackling rampant corruption
one of his top priorities. January 2008 saw sports magnate Yu
Zhifei jailed for embezzlement and the launch of an investigation
against the former head of oil giant Sinopec, Chen Tonghai, while
Table: BMI Legal Framework Rating

Investor Protection Score
Rule Of Law Score
Contract Enforceability
Score
Corruption Score
1.9
20.1
17.9
19.9
Australia
78.9
85.8
68.1
78.0
Bangladesh
59.1
35.2
39.1
38.3
Bhutan
14.8
43.3
29.0
33.7
Cambodia
31.5
31.8
52.0
40.4
China
64.4
56.6
55.7
59.4
Hong Kong
93.7
84.2
80.7
78.7
India
61.5
41.8
48.8
46.0
Indonesia
53.9
38.7
64.7
50.8
Japan
80.7
77.1
49.8
67.8
Laos
14.0
28.7
35.3
34.4
Malaysia
80.1
74.9
70.9
68.6
Maldives
24.3
43.7
41.3
42.6
Nepal
41.8
29.9
30.8
30.0
New Zealand
94.6
92.7
65.3
75.7
Pakistan
46.4
37.0
41.1
37.2
Philippines
36.4
36.8
60.1
48.5
Singapore
96.2
87.1
81.2
80.0
South Korea
68.5
79.1
71.3
71.1
Sri Lanka
63.2
51.8
47.9
51.3
Taiwan
67.2
68.2
61.4
61.9
Thailand
53.7
56.8
67.2
61.7
Vietnam
24.4
39.0
62.2
53.1
Afghanistan
27
china Q4 2014
in 2007 there were two of China's most high-profile anti-graft

cases the sacking and arrest of Shanghai's former CPC boss
Chen Liangyu and the execution of Zheng Xiaoyu, the former
head of the food and drug watchdog. During a month-long
leniency offer, almost 1,800 officials confessed to corruption,
according to the CPC watchdog, the Central Commission for
Discipline Inspection.
Red tape is a major issue for investors. Given that many laws are
defined in very general terms, it is often left to the bureaucracy to
make decisions. With a lack of accountability, this process provides opportunities for corruption, while numerous bureaucratic
obstacles stymie the easy acquisition of licences. According to
World Bank data, 20 separate procedures are required to enforce
a contract, which takes an average of 180 days.
Infrastructure
Physical Infrastructure
As one of the fastest-developing economies in the world, China
has an insatiable appetite for infrastructural development. BMI
valued the country's construction industry at USD300.7bn in

2010, and expects the industry to be worth about USD488.0bn
by 2015, contributing 5.3% to the nation's GDP.
Much of the ongoing construction work in the country is at the
higher-value end of the industry (power plants, hydroelectric
schemes, high-speed rail links). Most of this will be funded
through private-sector involvement. However, public infrastructure spending will also need to increase substantially to
meet the government's targets.
However, site safety is a concern. The Ministry of Construction
put the industry death toll at 2,288 people in 2005; and, while this
represented an 11.4% y-o-y drop, the industry was still responsible for the highest number of deaths of any Chinese industrial
sector, including mining. As well as having to deal with these
social and structural problems, the industry is trying to reform
in other ways, such as improving environmental performance
and introducing a regulatory framework for building materials.
The major test for the Chinese government will be to eliminate
the physical and financial dangers from the industry. The action
it takes over the coming years to curb corruption and improve
Table: Labour Force Quality

Afghanistan
Literacy Rate,%
Labour Market Rigidity Score
Female Labour Participation, %
28.0
20.0
33.1
Australia
99.0
0.0
58.4
Bangladesh
52.5
28.0
58.7
Bhutan
54.3
7.0
53.4
Cambodia
75.6
36.0
73.6
China
93.0
31.0
67.4
Hong Kong
93.5
0.0
52.2
India
65.2
30.0
32.8
Indonesia
91.0
40.0
52.0
Japan
99.0
16.0
47.9
Laos
72.5
20.0
77.7
Malaysia
91.5
10.0
44.4
Maldives
97.0
18.0
57.1
Nepal
55.2
46.0
63.3
New Zealand
99.0
7.0
61.8
Pakistan
54.2
43.0
21.7
Philippines
93.3
29.0
49.2
Singapore
94.2
0.0
53.7
South Korea
99.0
38.0
50.1
Sri Lanka
90.8
20.0
34.2
Taiwan
96.1
46.0
n/a
Thailand
93.9
11.0
65.5
Vietnam
90.3
21.0
68.0
Source: BMI,World Bank,ILO. Labour Market Rigidity score from Ease of Doing Business report, 1 = highest score
28
working conditions will be crucial to the success of its ambitious

infrastructure building plans and, ultimately, to the country's
economic development.
The quality of roads in China is poor. In 2005, China had a total
road network of more than 3.3mn km, although approximately
1.47mn km of this network almost 45% are classified as 'village
roads'. Paved roads totalled 770,265km in 2004; the remainder
were gravel, improved earth standard or merely earth tracks.
Rail is the major mode of transport in China. The national
rail system the third largest in the world at approximately
76,000km is modernising and expanding rapidly, but still
possess a number of weaknesses, as highlighted by the January 2008 snow storms that brought the country's railways to a
virtual standstill.
Eight Chinese cities (Beijing, Tianjin, Shanghai, Guangzhou,
Wuhan, Shenzhen, Nanjing and Chongqing) currently have metro
systems, and at least seven more are planning them. Currently
proposed extensions and new networks amount to more than
2,000km, at a cost of at least CNY500bn (USD65bn). In Beijing
alone, which currently has around 114km of metro routes, there
are plans to expand the network to a total of 561km by 2020.
Some of this expansion was driven by the 2008 Olympic Games,
but most of it is aimed at relieving congestion and expanding the
city. Indeed, the World Bank urged China in June 2006 to do

more to improve public transport to ease traffic jams, rather than
build more highways to accommodate cars. Overall, with China
projected to have 125 cities with more than 1mn people each
by 2010, there is still huge scope for urban railway expansion.
As a result of the country's rapidly expanding civil aviation
industry, China had around 500 airports of all types and sizes
in operation by 2007, about 400 of which had paved runways.
China plans to build another 97 more airports by 2020.
China has more than 2,000 ports, 130 of which are open to foreign
ships and 16 'major' ports with a capacity of over 50mn tonnes
per year. China's total shipping capacity is in excess of 2,890mn
tonnes. By 2010, 35% of the world's shipping is expected to
originate from China. China also has more than 140,000km of
navigable rivers, streams, lakes and canals; and in 2003 these
inland waterways carried nearly 1.6trn tonnes of freight and
6.3trn passenger/km to more than 5,100 inland ports.
Labour Force
The Chinese labour force is expanding rapidly. Estimated in 2007
at 798mn, this represents a participation rate of around two-thirds.
The urban unemployment rate averages 4.2%. However, the
government admits that the statistics ignore many unemployed
workers, including those laid off by state-owned companies.
TABLE: ASIA ANNUAL FDI INFLOWS

2009
2010
2011
USDbn
Per Capita
USDbn
Per Capita
USDbn
Per Capita
1,827.7
Australia
26.6
1,212.4
35.6
1,596.7
41.3
Bangladesh
0.7
4.8
0.9
6.1
1.1
7.6
Cambodia
0.5
38.6
0.8
55.4
0.9
62.3
China
95.0
71.2
114.7
85.5
124.0
92.0
Hong Kong
52.4
7,497.7
71.1
10,076.2
83.2
11,675.6
India
35.6
29.5
24.2
19.7
31.6
25.4
4.9
20.5
13.8
57.4
18.9
78.0
11.9
94.3
-1.3
-9.9
-1.8
-13.9
Indonesia
Japan
Malaysia
1.5
52.0
9.1
320.5
12.0
414.6
Mongolia
0.6
233.4
1.7
626.0
4.7
1,725.2
-0.8
-176.1
0.6
145.5
3.4
761.8
Pakistan
2.3
13.7
2.0
11.6
1.3
7.5
Philippines
2.0
21.4
1.3
13.9
1.3
13.3
Singapore
24.4
4,937.2
48.6
9,562.1
64.0
12,336.9
South Korea
7.5
156.4
8.5
176.6
4.7
96.3
Sri Lanka
0.4
19.5
0.5
22.9
0.3
14.3
New Zealand
Taiwan
2.8
121.3
2.5
107.6
-2.0
-84.5
Thailand
4.9
71.6
9.7
142.8
9.6
139.7
Vietnam
7.6
87.5
8.0
91.1
7.4
83.7
Source: BMI, UNCTAD
29
china Q4 2014
Although China has a reputation for having a bottomless well

of cheap labour, the Chinese economy has actually experienced
labour shortages in recent years. Minimum wages are rising as
the economy responds to the labour shortage, setting a new salary
floor for employers. For example, textile factories in Bangladesh
and India are undercutting China on price. The affluent Pearl
River cities are also drawing labour away from traditional industrial sectors, with workers able to command higher wages.
Shortages of rural workers are spreading from the nation's
coastal areas inland. Out of 2,794 villages investigated in a 2007
nationwide survey, 74.3% no longer have a surplus of young
labourers as all had left for work in cities. The survey projected
that, by 2010, the total rural labour force would no longer be
able to satisfy the demand from non-agricultural sectors.
Education levels vary by region. English-speaking graduates
are most commonly found in Beijing or Shanghai. Companies
warn that technical skills or training in accounting and finance
are scarce. Skilled managers are also in short supply.
The labour market is heavily regulated. New labour rules state
that non-Chinese may be hired only where there is a demonstrable
need, and approval is required from local labour authorities. The

law provides for collective and individual contracts specifying
wage levels, working hours, conditions, insurance and welfare.
Since local CPC committees select union leaders, collective
agreements are usually not part of negotiations.
The Labour Law makes it more difficult to fire staff than previous regulations, which allowed foreign enterprises to dismiss
staff as a result of technical and production changes. Now, only
imminent bankruptcy and major production problems justify
redundancy. There is a minimum wage each province or municipality must set a minimum wage that must not be less than
half the local average wage. Furthermore, every month, foreign
companies have to contribute 2% of total wages (including those
payable to expatriate employees) to the trade union fund. This
contribution comes out of after-tax profits.
Foreign companies only rarely report strikes affecting their
Chinese operations. Workers have the right to organise and
participate in trade unions, but the law does not allow for the
creation of unions, which must be organised 'in accordance with
law'. The only permitted unions are state affiliates of the AllChina Federation of Trade Unions (ACFTU). The ACFTU is
Table: Trade & Investment Ratings

Openness To Investment Score
Openness To Trade Score
11.2
25.1
Afghanistan
Australia
71.1
39.1
Bangladesh
22.1
37.6
Bhutan
16.5
45.1
Cambodia
54.0
82.9
China
47.7
70.0
Hong Kong
49.5
98.9
India
53.8
42.0
Indonesia
56.8
58.3
Japan
7.8
40.1
Laos
69.0
19.8
Malaysia
50.6
98.7
Maldives
87.1
28.0
Nepal
New Zealand
4.8
59.5
40.9
52.6
Pakistan
31.8
51.7
Philippines
46.4
69.6
Singapore
47.7
99.2
South Korea
51.4
83.7
Sri Lanka
50.3
57.3
Taiwan
11.7
91.4
Thailand
61.6
89.5
Vietnam
79.7
96.5
30
more interested in maintaining relations between the government

and foreign companies than in seeking to promote industrial
strife. Although China does not allow independent trade unions,
it does tolerate some forms of activism.
Market Orientation
Foreign Investment Policy
As repeated surveys and FDI flows bear out, China remains
the top emerging market destination for foreign investors. Low
labour costs, as well as better competitive and productivity rates,
give China a leading edge in the manufacturing and assembly
sectors the dominant areas for FDI inflows.
Since the early 1990s, China has substantially reformed its investment regime and foreign investors are now able to manufacture
and sell a wide variety of goods on the domestic market. In the
mid-1990s, China authorised the setting up of 100% foreignowned enterprises the preferred vehicle for FDI. This precipitated the rampant FDI performances of recent years. However,
there is concern that the government's concentration on luring
investment to the manufacturing sector has led to saturation
and overcapacity. UNCTAD figures show that China pulled in
USD108.3bn in FDI in 2008, setting yet another record.
The government wants to make the service sector a key area to
attract foreign investment. China is to channel FDI into research
and development centres, new high-tech industries, advanced
manufacturing and the energy conservation sectors.
Wholly owned foreign enterprises are now the most popular
entry route for investors. Since the 1990s, the authorities have
attempted to direct FDI towards 'encouraged' industries and
regions, bringing in new incentive schemes for investments in
high-tech industries as well as in the central and western parts
of the country. A revised list came into effect in April 2002,

outlining areas and sectors where foreign investment would
be encouraged, restricted or prohibited. The raft of investment
incentives developed over the past two decades centre on the
special economic zones. The list is partly intended to abide by
the promised sectoral openings that were part of Beijing's WTO
accession agreements: opening up banking, insurance, petroleum
extraction and distribution. For example, the upper limit is 20%
for a single foreign investor in one Chinese bank, and combined
foreign shareholding in banks is not allowed to exceed 25%.
Regulations issued in November 2002 have eased foreign investment intended for the acquisition of stakes in Chinese companies.
Non-Chinese investors can now purchase traded and non-traded
(state-held) shares of Chinese companies. However, foreign
investors have been put off by the requirement to undergo an
extensive approvals process with trade unions.
China allows for full profit repatriation, and since the mid1990s foreign investors have broadly had free access to foreign
exchange. Since WTO accession, an overhaul of regulations
has been implemented to improve IPR. China has committed
to full compliance with the WTO TRIPS as well as with other
TRIPS-related commitments. However, enforcement remains
negligible, with penalties frequently failing to be imposed.
Most FDI remains focused on the export-oriented manufacturing
and assembly sectors. But services mainly tourism, telecoms
and finance form a growing proportion of the FDI stock in
China. The top sectors in terms of attracting FDI are chemicals,
machinery and industrial goods as well as IT, including software.
The main sources of investment are Japan, the US and Germany.
Foreign Trade Regime

In line with its WTO accession requirements, China has lowered
its import tariffs. In 2006, the general tariff level on imports
was 9.9%, a decline of more than 40% on the early 1990s level.
Table: Top Export Destinations

2003
2004
2005
2006
2007
2008
2009
Exports to US
92,633.20
125,155.00
163,348.00
203,898.00
233,181.00
252,786.00
221,384.00
Exports to Hong Kong
76,288.60
100,878.00
124,505.00
155,435.00
184,289.00
190,772.00
166,261.00
Exports to Japan
59,422.60
73,514.30
84,097.20
91,772.50
102,116.00
116,176.00
98,044.90
Exports to South Korea
20,096.40
27,818.40
35,116.80
44,558.10
56,128.50
73,905.20
53,638.80
Exports to Germany
17,535.70
23,755.90
32,537.00
40,302.20
48,728.60
59,191.80
49,943.30
Total
429,029.69
579,521.71
745,262.25
947,700.03
1,193,669.06
1,402,404.62
1,180,123.97
Top 5
265,976.50
351,121.60
439,604.00
535,965.80
624,443.10
692,831.00
589,272.00
61.99
60.59
58.99
56.55
52.31
49.4
49.93
% from top 5 trade partners
Source: IMF, Direction of Trade Statistics.
31
china Q4 2014
The commitment to lower tariffs has been borne out by thriving

import levels, which have surged faster than China's exports in
recent years. China is now the world's third-biggest importer.
The government has pursued multilateral agreements as a priority,
with a series of regional and bilateral free trade negotiations under
way as part of its wider commitments under the Doha Development Round. China's formal accession to the WTO in December
2001 cemented its integration into the global economy. The two
key bilateral deals were the EU-China agreement signed in May
2000 and the US-China agreement signed in November 1999.
Beijing is actively pursuing regional trade deals, with recent
progress towards a free trade agreement (FTA) between China
and the 10-member Association of South East Asian Nations
(ASEAN). It has also initiated FTA talks with the Southern
African Customs Union and the Gulf Co-operation Council.
In January 2002, China implemented tariff cuts required as part
of its WTO accession agreement and beefed up access to trading
rights. This was followed one year later by a further lowering
of tariffs, again dictated by the WTO. China has substantially
reduced the number of goods subject to import quotas, and is
committed to phasing out remaining quotas. Licensing procedures
have been streamlined to comply with transparency requirements.
Some WTO commitments have been met ahead of schedule, and
there are ongoing plans to liberalise trading rights further. China
may apply tariff rates significantly lower than the published most
favoured nation (MFN) rate in the case of the goods industry.
Import tariff rates are divided into three categories: general
rates, MFN rates and Bangkok Agreement rates, applying to
ASEAN members.
Non-tariff barriers remain in force. China has agreed to drop all
agriculture export subsidies as part of the WTO agreement. But
there has been criticism over its lack of adherence to trade agreements, particularly when discretionary elements are involved
specifically the absence of implementation on IPR protection.
US officials have also accused Beijing of intervening to keep
the yuan artificially low, thereby boosting its exports to the
US and creating a debilitating trade surplus. But the Chinese
government appears likely to resist pressure to adjust its currency regime solely to suit the US. Concerns also remain over
inconsistencies in the legal system, as well as over government
attempts to control trade flows through the deployment of import
and export licences. The government retains regulatory controls
through commodity inspections and a plethora of registration
32
requirements.
Tax Regime
China is pushing ahead with reform, with the emphasis on reducing taxes and unifying income tax rates for domestic and foreign
companies. China's dual-tier tax system offers separate rates for
domestic and foreign enterprises. A new tax reform will unify
the income tax treatment of domestic and foreign enterprises.
As of January 1 2008, both domestic and foreign-funded enterprises have been subject to a 25% statutory rate. The reform also
includes rules relating to controlled foreign corporations, thin
capitalisation (when a company has excessive debt in relation
to its arm's length borrowing capacity, leading to the possibility
of excessive interest deductions) and foreign tax credits.
Corporate Tax: The standard rate is 33%, comprising a 30%
national tax and a 3% local tax. Foreign investment enterprises
(FIEs) generally pay tax at concessional rates depending on the
location and type of business. The state tax rate of 30% may
be reduced to 15% or 24% if the FIE is located in one of the
specially designated zones. Qualified FIEs are entitled to a tax
exemption or reduction during a tax holiday period. The local
tax of 3% may be waived or reduced by the local government.
A unified tax for Chinese and foreign enterprises, involving the
removal of concessional rates and exemptions, is anticipated.
Income Tax: Income tax is levied on Chinese and foreign
individuals at progressive rates ranging up to a 45% limit.
Non-residents who are resident for less than a year are subject
to personal tax only on income sourced in China. Individuals
resident for one to five years are subject to personal tax on income sourced in China, plus foreign income actually remitted
to China. Those resident for more than five years are taxed on
their worldwide income.
Indirect Tax: China is obliged by WTO rules to offer identical tax treatment for domestic and imported products. VAT is
levied at two rates: a standard 17% rate and a lower 13% rate.
A 6% VAT rate applies to small enterprises. VAT is applied
to most products, with the lower 13% rate pertaining to grain
and edible oil, books, water and agricultural times. Exports are
zero-rated and exporters can obtain VAT refunds. The business
tax rates are 3-5% for most services, but a 20% rate applies to
entertainment.
Withholding Tax: There is no withholding tax on dividends,
but a 10% rate is applied to interest and 10% on royalties.
Operational Risk
Security Risk
Overall, China is a relatively safe country with a low albeit
growing crime rate. While violence against foreigners is fairly
rare, it does occur and severe injuries have occasionally been
the result.
The threat of political violence against foreigners in China is
low. However, the potential for violent outbreaks exists, and
foreigners operating businesses on Chinese soil should remain
aware of the political situation. It should also be noted that
violent incidents have taken place between members of various
ethnic groups in China.
There is a low threat from terrorism in China. However, the
British Foreign and Commonwealth Office advocates that
people should remain aware of the global risk of indiscriminate
terrorist attacks.
33
Chapter 5:
Key Sectors
Pharmaceuticals & Healthcare
In July 2014, China-based Yabao Pharmaceutical Group

entered into a strategic partnership with US-based drugmaker Eli Lilly to co-develop Lilly's diabetes treatment
glucokinase activator (GKA), LY2608204.
In June 2014, GE Corporation announced the opening of

a new healthcare facility in Tianjin, China, to better serve
the needs of the Chinese market. The facility, with an investment of USD100mn, will target magnetic resonance
imaging and other imaging products.
Executive Summary
A more 'rational' use of pharmaceuticals through pharmacoeconomics, and a crackdown on illegal rebates and corruption in
China's pharmaceutical market could hinder the sector's growth
potential. However, over the long term, the government is
likely to improve its investment in healthcare in order to retain
public support.
Headline Expenditure Projections:

Pharmaceuticals: CNY532.4bn (USD86.6bn) in 2013 to

CNY616.1bn (USD99.3bn) in 2014; +15.7% in local currency and +14.7% in US dollar terms. Forecast broadly
unchanged from Q 313.
Healthcare: CNY3,230.8bn (USD525.4bn) in 2013 to

CNY3,692.0bn (USD595.2bn) in 2014; +14.3% in local
currency terms and +13.3% in US dollar terms. Forecast
remains unchanged from Q313.
Risk/Reward Rating: China's Pharmaceutical Risk/Reward

Rating (RRR) score for Q414 is 64.4 out of the maximum 100
in our newly improved RRR system. The country scored above
average for the majority of the indicators and sub-indicators,
including overall market expenditure, sector value growth, patent respect and policy continuity. In this quarter, the country is
ranked sixth, behind Hong Kong but in front of Singapore in
the 19 key Asia Pacific markets.
Key Trends And Developments:

In August 2014, Shanghai Fosun Pharmaceutical Group,

a leading healthcare company in China, announced plans
to co-invest CNY680mn (USD110mn) with Taizhou City
Investment through its wholly-owned subsidiary, Shanghai
Medical Hospital Prudential Investment Management, to
explore new cooperation models between the private sector
and public hospitals. This is a significant development as
it is the first of its type in China.
BMI Economic View: China's above-consensus 7.5% y-o-y

real GDP growth print indicates a stabilisation of the economy
over recent months. While we have upgraded our 2014 real
GDP forecast to 7.3% (from 7.1% previously) to reflect the fact
that Beijing has proven itself unwilling to see through an acute
economic slowdown, we nevertheless reiterate that structural
weaknesses within the economy cannot be addressed by shortterm stimulus measures.
BMI Political View: The Communist Party of China (CPC)
has launched an official investigation against former politburo
standing committee member Zhou Yongkang, the party's most
high profile target since at least the 1970s. Zhou's downfall has
considerable implications for the party's top leadership moving forward, and suggests that President Xi Jinping's ongoing
political purge has further to go.
Industry Forecast
Pharmaceutical Sales: As the most attractive emerging pharmaceutical market, China continues to enjoy strong growth.
Combined sales of prescription drugs and OTC medicines are
forecast to increase by 14.7% in US dollars terms (15.7% in
local currency terms) from CNY532.4bn (USD86.6bn) in 2013
to CNY616.1bn (USD99.3bn) in 2014. However, government
cost-containment policies will pose a downside risk to our
forecast through to 2023. It is important to note that this growth
deterioration is not definite and that supplementary market
drivers may emerge.
BMI 's proprietary Pharmaceutical Expenditure Forecast Model
35
china Q4 2014
shows the value of China's pharmaceutical market is set to

surpass several developed states over the next few years. The
first was France in 2010, when medicine sales in the Asian
country topped USD45.8bn. China overtook Germany in 2011
to become the world's third-largest pharmaceutical market,
behind Japan. However, challenging the US in absolute terms
is unlikely. The reasons for this are manifold. First, in April
2009, the State Council announced an ambitious CNY850bn
(USD124.5bn) healthcare reform programme.China continues
its healthcare reform programme through widening insurance
coverage to include many more of its vast rural population, as
well as building thousands of community healthcare centres
during the 12th Five-Year Plan (2011 to 2015).With China's
healthcare industry already growing by double digits y-o-y,
Beijing expects to lift GDP expenditure on healthcare from
5.5% in 2012 to 6-7% over the forecast period.
Second, the reform of regulations on foreign direct investment
(FDI) has seen pharmaceutical regulation in particular undergo
considerable change in recent years. Many processes have
become increasingly aligned with international norms, making
the operating environment increasingly transparent for outside
investors.
Third, despite our bearish outlook on the Chinese economy,
these macro growth concerns do not translate into weakness
across all sectors. BMI believes the Chinese authorities will
increase their commitment to medical care provision in an effort
to diffuse potential social discontent. The idea of such a strategy is not new. In the midst of the Arab Spring, Saudi Arabia
increased the budget for healthcare and social development by
12% to SAR68.7bn (USD18.3bn) in January 2011, to stave off
the political unrest in neighbouring Middle Eastern countries
infiltrating the region's largest economy. However, despite the
bullish mood, one risk to the downside worth noting is growing
pricing pressures, especially on imported medicines.
Through to 2023, BMI's Country Risk team projects that China's

GDP will more than double. Some of this increased national
wealth will be directed towards the ambitious healthcare reform
plan and widening access to pharmaceuticals. Private spending
on both OTC Western medicines and high-end treatment options
will also rise significantly.
Inflation is not a major problem in China, but that has not always
been the case. The consumer price index (CPI), which BMI uses
as a proxy for inflation, went from 1.50% in 2006 to 4.80% in
2007, and then to 5.90% in 2008 and -0.7% in 2009. The figure
was 2.6% in 2013 and it is forecast to be 2.6% in 2014.
Healthcare Expenditure: In 2013, healthcare expenditure in
China reached CNY3,230.8bn (USD525.5bn). We forecast that
there will be a 14.3% increase in local currency terms (13.3% in
US dollars terms) to CNY3,692.0bn (USD595.2bn) in 2014. Per
capita healthcare expenditure in China in 2013 was USD379.22.
The government currently accounts for over half of spending
(56.2%) and total healthcare expenditure as a percentage of GDP
is 5.7%. By 2018, yearly overall healthcare spending will have
risen to CNY6,063bn (USD970.1bn).
China's growing and ageing population is another reason for
the rapid increase in healthcare spending. According to the UN
Population Division, the number of people living in the country
is forecast to increase from 1.35bn in 2010 to 1.42bn in 2018.
Mainly as a result of the one-child policy, China's population
will peak at 1.46bn in 2030 and then decline steadily thereafter.
The percentage of the population aged 65 or over is expected
to increase from 8.2% in 2010 to 23.3% in 2050.
In the third Plenary Session of the 18thCPC Central Committee held in November 2013, the party announced the relaxation
of the one-child policy. Couples in China will be permitted to
have two children if either parent is an only child. Under the
Table: Pharmaceutical Sales, Historical Data And Forecasts

Pharmaceutical sales, USDbn
Pharmaceutical sales, USDbn, % y-o-y
Pharmaceutical sales, CNYbn
Pharmaceutical sales, CNYbn, % y-o-y
Pharmaceutical sales constant exchange rate, USDbn
2010
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
45.802
58.505
71.820
86.585
99.324
111.663
126.536
140.323
154.277
25.14
27.73
22.76
20.56
14.71
12.42
13.32
10.90
9.94
310.038
378.203
453.149
532.393
616.086
703.475
790.852
877.019
964.228
24.00
21.99
19.82
17.49
15.72
14.18
12.42
10.90
9.94
50.422
61.508
73.697
86.585
100.196
114.408
128.618
142.632
156.815
108.5
Pharmaceutical sales, USD per capita
33.7
42.8
52.2
62.5
71.3
79.7
89.8
99.1
Pharmaceutical sales, % of GDP
0.77
0.81
0.88
0.94
0.99
1.04
1.07
1.09
1.11
Pharmaceutical sales, % of health expenditure
15.5
15.5
16.1
16.5
16.7
16.8
16.6
16.3
15.9
f= BMI forecast. Source: Southern Medicine Economic Institute (SMEI), Association of the European Self-Medication Society (AESGP), BMI
36
key sectors
previous regulation, both parents had to be only children before

they can have two children. This change will mainly affect the
urban population. BMI believes that the impact of the removal
of the policy on the economy will be inconsequential for at least
15 years, given that a child has to reach 15 years of age, before
he/she is classified as part of the working population. More
importantly, the crux of the issue remains: whether, over the
long term, the population will be willing to have more children,
even should the government relax its policies. BMI notes that
developed Asian countries such as Singapore, South Korea and
Japan are facing similar problems of a low fertility rate and an
ageing population despite incentives given to boost birth rates.
as consumers' preference for foreign formulation brands, we

expect strong growth opportunities for such companies should
there be a reversal in the policy.
Key Risks To BMI's Forecast Scenario: Sourcing accurate
and reliable quantitative data on China's pharmaceutical market
remains challenging. Both primary and secondary research firms
are faced with sub-standard audits, language barriers, porous
sales channels, a high prevalence of counterfeits, questionable
national statistics, dispensing without prescriptions, sizeable
'grey markets' and widespread usage of traditional remedies.
Downside Risks: Pricing Pressures: The government is presently using a basket of pricing reforms, including preventing
hospitals from drug profiteering, tendering systems that favour
cheap pharmaceuticals and launching investigations to study
pricing in the pharmaceutical sector. While the measures reflect
the authorities' intention to reduce healthcare and pharmaceutical
expenditures, they would conspire to further lower drug revenues.
If implemented ineffectively, the changes would certainly be
opposed by the pharmaceutical industry, which is already contending with price cuts and the difficult reimbursement regime.
Nevertheless, any sudden spike in the birth rate will be positive for infant-care related firms such as infant vaccines, milk
formulations. Even with the current low-birth rate in China,
multinational firms such as MeadJohnsonhave experienced
strong growth. In 2012, MeadJohnson saw a 7.1% increase in
revenues generated from China from USD1083mn in 2011 to
USD1160mn. This growth figure was however lower than historic growth in China, with the company citing inventory levels
as an issue. Nevertheless, given strong historic growth, as well
TABLE: Healthcare Expenditure Trends, Historical Data And Forecasts

Health spending, USDbn
Health spending, USDbn, % y-o-y
Health spending, CNYbn
Health spending, CNYbn, % y-o-y
Health expenditure constant FX rate, USDbn
Health spending, USD per capita
Health spending, % of GDP
2010
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
295.173
376.610
445.658
525.430
595.214
665.972
760.318
859.537
970.080
14.95
27.59
18.33
17.90
13.28
11.89
14.17
13.05
12.86
1,998.039
2,434.591
2,811.900
3,230.775
3,691.993
4,195.623
4,751.988
5,372.108
6,062.999
13.90
21.85
15.50
14.90
14.28
13.64
13.26
13.05
12.86
324.946
395.944
457.307
525.430
600.439
682.345
772.828
873.680
986.042
217.1
275.2
323.6
379.2
427.0
475.2
539.6
607.1
682.2
4.96
5.23
5.49
5.71
5.93
6.19
6.45
6.70
6.96
f = BMI forecast. Source: World Health Organization (WHO)/BMI
TABLE: Government Healthcare Expenditure Trends, Historical Data And Forecasts

2010
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
160.311
210.489
249.373
295.114
336.510
379.864
438.111
499.742
568.502
18.92
31.30
18.47
18.34
14.03
12.88
15.33
14.07
13.76
1,085.155
1,360.703
1,573.428
1,814.602
2,087.301
2,393.143
2,738.193
3,123.385
3,553.135
Govt. health spend, USDbn

Govt. health spend, USDbn, % y-o-y
Govt. health spend, CNYbn
Govt. health spend, CNYbn, % y-o-y
17.83
25.39
15.63
15.33
15.03
14.65
14.42
14.07
13.76
Govt. health spend, % total health spend
54.31
55.89
55.96
56.17
56.54
57.04
57.62
58.14
58.60
TABLE: Private Healthcare Expenditure Trends, Historical Data And Forecasts

Private health spend, USDbn
Private health spend, USDbn, % y-o-y
Private health spend, CNYbn
Private health spend, CNYbn, % y-o-y
Private health spend, % total health expenditure
2010
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
134.862
166.121
196.285
230.316
258.705
286.108
322.207
359.796
401.578
10.57
23.18
18.16
17.34
12.33
10.59
12.62
11.67
11.61
912.884
1,073.888
1,238.472
1,416.173
1,604.692
1,802.480
2,013.795
2,248.723
2,509.864
9.55
17.64
15.33
14.35
13.31
12.33
11.72
11.67
11.61
45.69
44.11
44.04
43.83
43.46
42.96
42.38
41.86
41.40
37
china Q4 2014
Upside Risks: Pharmaceutical and Healthcare Outperformance:

Although China's 2013 real GDP growth forecast of 7.5% is
significantly lower than it has been in previous years (and forecast at 6.7% for 2014), demographic trends such as the ageing
population as well as the rising affluence of various income
groups means increased capability to pay for healthcare services.
Greater spending on medical services has resulted in an upward
revision of BMI's pharmaceutical expenditure forecast for China.
Political Reform: According to BMI's Country Risk team,
the best case scenario for political change in China would be
a stable, elite-led transition, under which a reformist-minded
Communist Party phases in free, multi-party elections at city,
provincial and national level over a period of several years.
This fragmentation of political power would invariably affect
the provision of healthcare. Those parties on the left of the
spectrum generally advocate universal healthcare, which simultaneously increases volume sales and decreases margins for
pharmaceutical companies. Newly formed right-leaning groups
would encourage more individual responsibility and free market
economics. While this ideology constricts unit sales and leaves
some patients without care, it enables drugmakers to increase
prices as far as the market will bear, ultimately boosting the
overall pharmaceutical industry.
Regulatory Change: PhRMA's Special 301 submission for
2014 highlighted the lack of access to innovative medicines in
China. The trade group is particularly concerned about government pricing policies, some elements of China's essential drugs
policy (e.g. consistency in procurement procedures), and clinical
trial application approval times.
If China's acquiescence to international regulatory standards
improves, we expect innovative medicines to increasingly penetrate the market. These pharmaceuticals can generate higher
prices compared with generic drugs and will increase BMI's
growth projections.
Market Overview
China's CNY532.4bn (USD86.6bn) pharmaceutical market is the
third largest in the world, behind Japan and ahead of Germany.
However, the country has a very low per capita spending on
medicines at USD62.49. In 2013, pharmaceutical expenditure
as a percentage of GDP was 0.94%.
majority (63.6%) of China's pharmaceutical market. Sales of

OTC medicines CNY83.4bn (USD13.6bn) are supported by a
cultural acceptance of self medication and fairly liberal sales
channels. Patented drugs CNY110.5bn (USD18.0bn) account
for just 20.8% of the pharmaceutical market.
The private sector accounts for slightly under half of China's
CNY3,230.8bn (USD525.4bn) healthcare market. Per capita
spending on medical services is USD323.63, the secondlowest amount among the leading emerging markets Brazil
(USD1,0439.1), Russia (USD959.6), India (USD61.7), Mexico
(USD660.6) and Turkey (USD702.2). China's healthcare spending accounts for a relatively low 5.7% of GDP.
Like most countries, China has a negative pharmaceutical trade
balance. The country imported medicines worth CNY79.0bn
(USD12.5bn) in 2012. The leading countries of origin were
Germany (USD2.2bn), the US (USD1.9bn), France (USD1.2bn)
Italy (USD1.1bn) and Switzerland (USD935mn). In 2012,
China's leading pharmaceutical export partners were the
US (USD965.8mn), followed by Australia (USD649.5mn),
France(USD324mn),Germany (USD315mn) and Japan (USD292mn).
Telecommunications
Executive Summary
The Chinese telecommunications industry is the biggest in the
world in terms of size and growth potential, with its 1.27bn
mobile subscriptions translating to a penetration rate of only
90.8%. There are substantial growth opportunities in rural
regions, where markets are still untapped, and the arrival of
MVNO operators in Q214 should catalyse competition for these
lower value subscribers. In 2014, the key growth drivers for the
Chinese mobile sector are expected to come from mobile VAS
and 4G services. The Chinese government pledged to support
develop ment of China's e-commerce sector and the introduction
of 4G services.2014 should mark the transition into a high -speed
mobile era, which should drive mobile VAS. The 'Broadband
China' strategy roadmap, unveiled in 2013, should also boost
broadband coverage and speed in urban and rural regions. There
is however, downside to this bullish outlook due to the heavy
investment burden in the telecoms industry, a capability that
could weaken if the broader economy deteriorates.
Due to low purchasing power and a robust local manufacturing

sector, generic drugs CNY338.5bn (USD55.1bn) comprise the
38
key sectors
Key Data:

The latest data from operators show the mobile market

continued to expand in H114, with total subscriptions
increasing to 1.267bn at Q214.
The decline in fixed-line subscriptions accelerated in the

first half of 2014, with the total number falling 5.4% y-o-y
to a low of 258mn at Q214.
Fixed broadband still has strong growth momentum, with

total subscriptions up 9.4% y-o-y in H214 to 197.9mn at
Q214.
Key Trends And Developments: Regulatory developments

were of great significance for the mobile market occurred in
late 2013 and early 2014. The licensing of MVNOs took place
in December 2013 and January 2014, a development BMI
expects to catalyse subscription growth as new players target
underserved rural and low income consumer groups. MVNO
licences were awarded to 19 operators, including Suzhou Snail
Digital Technology, Love Strickland, Changjian Times
Communications, 35 Internet, Telling and Alibaba Group.
At the high end of the market, the provision of 4G TD-LTE
licences to China Mobile, China Telecom and China Unicom
in December 2013 is of greater significance. Furthermore, the
provision of FDD-LTE trial licenses to China Unicom and
China Telecom in June 2014 is important. Operators have been
awaiting licences to capitalise on demand for higher capacity
wireless data services. The rapidly expanding high value market,
particularly in coastal urban areas, is also a potential boom for
foreign investors.
As of June 2014, operations in the telecoms sector are no
longer subject to the flat 3% business tax, but to VAT. Basic
telecommunication services are taxed at 11% and value-added
communication services at a reduced rate of 6%. This will
depress company profits.
Ithas been widely reported that the Chinese government plans

to permit foreign investment and full foreign ownership in several telecoms VAS segments, namely app stores, call centres,
domestic multi-party communication, forwarding services and
home internet access providers for companies operating form
the Shanghai Free Trade Zone. The government will also allow
foreign investors to collectively own up to 55% of online data
and deal in analysis services. Although foreign entities need to
be based in the Shanghai Free Trade Zone, it is understood this
does not preclude foreign enterprises from providing services
to the entire country.
Mobile: BMI's forecast for mobile subscriptions remained
unchanged in the Q314 update, as mobile subscriptions reached
1.266bn at the end of June 2014, a figure which is very much
in line with the trend we estimated for 2014. In 2014, 3G/4G
subscriptions are expected to continue posting strong growth
due to the introduction of 4G services, availability of cheaper
smart handsets and the expansion in number of mobile valueadded services.
The latest data from China's three mobile operators show the
number of subscriptionsreached 1.266bn at the end of June 2014
with strong growth sustained by 2G demand in rural areas and
3G, as well as 4G demand in higher income urban areas. While
particularly the first three months of 2013 saw a surge in net
additions, the sectors expansion has been muted in the first half
of 2014.However, we expect further growth as all operators
roll out 4G and MVNOs enter the market.
Our medium-term outlook for a growth slowdown remains, as
market saturation will see diminished growth opportunities. It
is already the case that the market is saturated in larger urban
areas, and as such operators' emphasis has shifted to the migration of subscriptions from 2G to 3G technology. The launch of
MVNOs will provide additional growth momentum, but with the
majority of regions already well served by the mobile network
operators, the impact will not be transformative. BMI forecasts
a total of 1.65bn subscriptions at the end of 2018, equal to a
TABLE: Telecoms Sector Mobile Historical Data & Forecasts

2011
2012
2013
2014f
2015f
2016f
2017f
2018f
Cellular Mobile Phone Subscribers, '000
975,698.0
1,110,230.0
1,233,769.0
1,332,470.5
1,425,743.5
1,511,288.1
1,586,852.5
1,650,326.6
Mobile Phone Subscribers/100 Inhabitants
71.3
80.6
89.0
95.6
101.7
107.3
112.1
116.1
882,905.7
127,521.0
233,434.0
417,333.0
584,266.2
701,119.4
771,231.4
832,929.9
3G & 4G market, % of mobile market
3G & 4G phone subscribers, '000
13.1
21.0
33.8
43.8
49.2
51.0
52.5
53.5
Monthly Blended ARPU, CNY
67.8
62.5
61.8
60.3
58.8
57.5
56.6
55.9
f = BMI forecast. National Sources/BMI
39
china Q4 2014
penetration rate of 116.1%.

While growth momentum for total subscriptions is slowing,
3G and 4G net additions continue to reach new heights. 3G
and 4G subscriptions together make up 500.5mn at the end of
Q214.Operators continue their aggressive subscriber acquisition
tactics even though the efforts could weigh on profitability. We
believe that grabbing market share in the fledgling 3G market is
a higher priority to mobile operators than higher profit margins.
We envisage 3G subscribers migrating to the 4G servicesover
the medium term, with LTE device availability expected to be
the key driver. We forecast the number of 3G/4G subscribers
in increase to 882.9mn in 2018.
ARPU: BMI extended the forecast for mobile ARPU in China
to 2018 in the Q214 update, but with no new operator our
medium-term outlook remains unchanged for Q414. We hold to
our view there will be gradual medium term ARPU declines as
a consequence of price competition, mobile market saturation,
voice and SMS IP substitution but with increasing adoption
of 3G and 4G services offsetting some of the decline.
China Unicom and China Telecom reported slight improvement
in ARPU in 2013 and latest available data from China Unicom
indicate a slight decline in the first half of 2014. China Mobile,
meanwhile, continued to experience dip in its ARPU in 2013
due to its technological disadvantage TD-SCDMA technology
for 3G which has fewer compatible smart handsets compare to
the international 3G standard employed by China Unicom and
China Telecom. In the second half of 2014, 19 new MVNOs
would provide competition to the three incumbent players with
eight more potentially starting operating soon. As competition
intensifies, ARPU should fall if the mobile players engage in
price competition to win market share.
In the longer term, we believe the positive effect of 3G services
should gradually wear off as the market in urban cities approaches saturation. Operators would be forced to pursue lower
value subscribers in order to maintain their growth momentum,
which, in turn, would apply downward pressure on their overall

blended ARPU. That said, we see the increasing introduction of
value-added services to help support ARPU levels.
The market average ARPU in China reached CNY61.8 by
end-2013 and we believe this will fall to CNY55.9 by the end
of the forecast period. We envisage competition to intensify
as penetration rates approach 100%, and we would expect that
competition on pricing will become more fervent toward the
latter years of our forecast, which should contribute to lower
ARPUs as well.
Wireline: In addition to extending our fixed-line forecast to
2018 in the Q314 update, we also made a small downward revision to our forecast based on the latest data from the Ministry
of Industry and Information Technology (MIIT). MIIT data
covering development to the end of June 2014 show acceleration in the loss of fixed-line subscriptions, with a y-o-y decline
of 5.4% to 258mn subscriptions in Q214 and a decrease in
penetration of 19.0%.
The faster decline in 2013 was unexpected given the relative
stability of fixed-line subscriptions 2010-2012. On average, the
Chinese fixed-line sector contracted by 0.3% month-on-month
(m-o-m) in 2011. By comparison, the industry declined by 0.5%
m-o-m in 2010. The sector shrunk by an average of 0.2% a
month in 2012.BMI attributes the faster decline in 2013-2014
to the greater competition from mobile data services, reducing
the need for consumers to take fixed subscriptions. This could
bode poorly for wireline operators, as LTE services become
more widely available from 2014.As a result, we do not expect
a reversal in the downtrend that the Chinese fixed-line sector
has been experiencing.
While the expansion of broadband network and bundling tactics
could slow the decline in wireline subscriptions, these strategies
are unable to resolve the fundamental problem surrounding the
wireline industry, which is technological limitations preventing
operators from improving the attractiveness of services. BMI
table: Telecoms Sector Wireline Historical Data & Forecasts

Main telephone lines in service, '000
Main Telephone Lines/100 Inhabitants
Internet users, '000
Internet users/100 inhabitants
Broadband internet subscribers, '000
Broadband internet subscribers/100 Inhabitants
2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
285,120.0
278,153.0
266,985.0
254,970.7
248,086.5
241,388.1
234,870.7
228,529.1
20.8
20.2
19.3
18.3
17.7
17.1
16.6
16.1
488,783.2
537,461.4
576,550.3
653,821.6
780,451.1
892,763.7
976,809.5
1,020,157.9
35.7
39.0
41.6
46.9
55.7
63.4
69.0
71.7
158,490.0
175,183.0
188,909.0
215,356.3
258,427.5
297,191.6
326,910.8
343,256.3
11.6
12.7
13.6
15.5
18.4
21.1
23.1
24.1
e/f = BMI estimate/forecast. Source: BMI research/ Operators
40
key sectors
continues to see the expansion of mobile services, albeit at a

slower pace, continuing to erode the wireline sector. Further,
the deployment of wireless technologies is often cheaper and
more easily available than rolling out wireline infrastructure,
particularly in a geographically diverse and challenging terrain
such as China.
We expect the Chinese wireline industry to maintain a relatively
steady downtrend in the next few years. By end-2018, we forecast
229mn fixed-line subscriptions, a penetration rate of 16.1%.
Broadband: We maintain a bullish view for the development
of the broadband market in China over the medium term as a
result of operator investment and proactive government policy.
BMI expects the government to pursue its target aggressively to
facilitate the country's transition towards a consumption-driven
growth model. Miao Wei, head of Ministry of Industry and Information Technology, said small- and medium-sized enterprises
(SMEs) will benefit from the strategy through increased online
business, as the government will support third-party e-commerce
platforms to facilitate SMEs in online sales, purchasing and
other operations.
2016 to 2020:

Broadband speeds in urban and rural households to reach

50Mbps and 12Mbps respectively by 2020.
Although the relatively low penetration rate suggests significant

room for growth, we are cautious as latest figures indicate internet
user growth momentum has slowed significantly, which could
be attributed to market saturation in urban cities. Expansion into
rural regions is a costly exercise and there is no guarantee of
consumer demand in those areas due to low computer literacy
and computer penetration rates.
According to the CNNIC, 77.3% of the non-internet users in
China at end-2012 said they will definitely not use the internet,
and this was up from 69.5% in end-2011. The main reason cited
for not assessing the internet was computer illiteracy (66%).
Another 23% cited age (either too old or too small) as a reason
for not using the internet. Unless we see signs of the government
rectifying these perceptions, we expect internet user growth to
slow in future.
At present, less than 14% of the Chinese population has access

to broadband services and broadband speeds average 1.8Mbps,
far below international standards. The Broadband China strategy
will be carried out in three phases over eight years:
Phase 1 Facilitate fibre-optic networks and 3G mobile coverage in 2013:

By end-2013, at least 40% of China homes to have access

to fixed broadband and 25% of them will be able to access
3G or 4G mobile broadband services.
Phase 2 Expand Broadband coverage from 2014 to 2015:

Fixed broadband coverage of households to reach 50%;

32.5% coverage rate for mobile broadband. This translates
to 270mn fixed broadband subscribers and 850mn internet
users. The goal for fixed broadband is unattainable, as the
MIIT reported 198mn fixed broadband subscriptions in
Q214.
Internet speeds for cities will be as fast as 20Mbps, while

rural internet speeds will be around 4Mbps by 2015.
Phase 3 Broadband network and technology updates from

41
key sectors
Other Key Sectors

Latest Forecast Data
Below are the latest forecast tables for our other core key sectors:
table: Oil & Gas Sector Key Indicators

Oil Proved Reserves, mn barrels
Oil Production, 000b/d
2012
2013e
2014f
2015f
2016f
2017f
2018f
20,350.0
23,717.0
24,376.0
22,818.0
21,245.9
19,673.8
18,109.6
4,416.2
4,459.4
4,542.7
4,563.9
4,602.3
4,602.3
4,580.8
Oil Consumption, 000b/d
10,276.8
10,700.0
10,914.0
11,132.3
11,354.9
11,582.0
11,813.7
Oil Refinery Capacity, 000b/d
10,385.0
11,669.7
12,449.7
12,869.7
13,369.7
13,771.5
13,771.5
Oil Net Exports, 000b/d
-5,860.6
-6,240.6
-6,371.3
-6,568.4
-6,752.6
-6,979.7
-7,232.9
109.5
105.9
106.9
105.5
100.5
97.5
97.5
Value of Net Oil Exports, USDbn (BMI base case)
-244.1
-251.7
-257.9
-254.8
-253.4
-253.1
-262.3
Value of Net Hydrocarbons Exports, USDbn (BMI base case)
-265.5
-276.4
-288.2
-289.4
-291.9
-296.1
-312.3
Value of Net Oil Exports at constant USD50/bbl USDbn
-111.3
-118.6
-120.6
-120.9
-126.2
-129.9
-134.6
Value of Net Oil Exports at constant USD100/bbl USDmn
-222.7
-237.2
-241.2
-241.7
-252.3
-259.8
-269.3
Value of Net Hydrocarbons Exports constant USD50/bbl USDmn
-121.1
-130.3
-134.7
-137.3
-145.3
-152.0
-160.3
Value of Net Hydrocarbons Exports constant USD100/bbl USDmn
-242.2
-260.5
-269.5
-274.5
-290.5
-304.0
-320.5
-6,535.9
-7,046.8
-7,351.9
-7,703.2
-8,076.9
-8,509.1
-9,008.8
3.0
4.0
4.4
4.3
4.3
4.4
4.7
Gas Production, bcm
106.7
121.0
127.7
135.3
142.4
150.3
156.3
Gas Consumption, bcm
145.9
167.8
184.6
201.2
219.3
239.0
259.3
LNG Price, USD/mn btu
16.3
15.7
15.9
15.7
14.9
14.5
14.5
Reserves/Production Ratio
13.4
15.4
15.5
14.5
13.3
12.4
11.4
Oil Price, USD/bbl, OPEC Basket
Total Net Hydrocarbons Exports, 000boe/d

Gas Proved reserves, tcm
e/f = BMI estimate/forecast. Source: National Statistics, Industry Sources, BMI
table: Defence & Security Sector Key Indicators

Defence expenditure, CNYmn
Defence expenditure, CNYmn % change y-o-y
Defence expenditure, % of GDP
Defence expenditure, CNY per capita of population
Defence expenditure, USDmn, constant prices
2012
2013e
2014f
2015f
2016f
2017f
2018f
669,128
742,935.3
820,166.9
897,880
980,560.5
1,071,053.7
1,169,692.0
11.0
11.0
10.4
9.5
9.2
9.2
9.2
1.3
1.3
1.3
1.3
1.3
1.3
1.3
485.9
536.2
588.4
640.6
696.0
756.5
822.5
76,516.3
85,248.0
91,080.0
95,702.3
102,719.2
109,425.5
116,548.5
Defence expenditure, USDmn, constant prices % change y-o-y
11.3
11.4
6.8
5.1
7.3
6.5
6.5
Defence expenditure, constant USD per capita of population
55.6
61.5
65.3
68.3
72.9
77.3
82.0
table: Infrastructure Sector Key Indicators

2011
2012
2013e
2014f
2015f
2016f
2017f
2018f
Construction industry value, CNYbn
3,194.0
3,549.1
3,899.5
4,267.5
4,594.7
4,917.0
5,261.2
5,628.8
Construction industry value, USDbn
494.1
562.6
634.2
688.1
729.3
786.7
841.8
900.6
25.4
13.9
12.7
8.5
6.0
7.9
7.0
7.0
6.9
6.9
6.9
6.9
6.8
6.7
6.6
6.5
Construction industry, real growth, % y-o-y

Construction industry value, % GDP
43
china Q4 2014
table: Food & Drink Sector Key Indicators

2012
2013e
2014f
2015f
2016f
2017f
2018f
Food consumption, USDbn
679.7
780.9
865.4
933.9
1,013.2
1,108.7
1,214.8
Food consumption CNYbn
4,287.4
4,857.2
5,330.7
5,813.3
6,332.4
6,929.1
7,592.8
Food consumption, USD per capita

Confectionery sales, USDmn
493.6
563.6
620.9
666.3
719.1
783.1
854.3
81,085.8
90,299.2
100,264.1
109,879.6
120,439.8
133,301.2
146,998.0
Confectionery sales, CNYmn
511,497.1
561,660.8
617,626.7
684,000.7
752,748.9
833,132.4
918,737.2
Alcoholic drinks sales, USDmn
369,022.2
416,789.3
458,838.8
494,733.6
536,054.9
584,588.1
637,454.3
2,327,826.5
2,592,429.7
2,826,447.2
3,079,716.4
3,350,343.1
3,653,675.3
3,984,089.2
Alcoholic drink sales, CNYmn

Soft drinks sales, USDmn
123,935.3
141,854.3
157,614.6
171,503.4
187,473.2
205,413.7
224,571.3
Soft drink sales, CNYmn
781,795.3
882,333.9
970,906.0
1,067,608.5
1,171,707.5
1,283,835.8
1,403,570.4
116.1
127.9
140.8
152.0
164.9
179.6
195.8
Total mass grocery retail sales, USDbn
732.7
795.5
867.3
946.4
1,030.4
1,122.5
1,223.5
Exports of food and drink, USDmn
Total mass grocery retail sales, CNYbn
41,157.7
43,835.0
46,625.2
50,006.7
53,911.5
58,182.6
62,859.4
Imports of food and drink, USDmn
50,582.7
54,001.6
59,459.9
65,794.0
71,935.3
78,690.7
86,121.7
Food and drink trade balance USDmn
-9,424.9
-10,166.6
-12,834.7
-15,787.2
-18,023.8
-20,508.1
-23,262.3
table: Autos Sector Key Indicators

2013e
2014f
2015f
2016f
2017f
2018f
Vehicle production, units
22,116,800
23,879,542.4
25,660,877.2
27,547,651.2
29,320,988.9
30,946,828.2
Passenger car production, units
18,085,200
19,929,890.4
21,524,281.6
23,246,224.2
24,873,459.9
26,365,867.4
Vehicle sales, units
21,984,100
23,731,743.8
25,511,060.4
27,385,033.2
29,158,775
30,773,293.1
13.9
7.9
7.5
7.3
6.5
5.5
17,928,900
19,757,647.8
21,338,259.6
23,045,320.4
24,658,492.8
26,138,002.4
Vehicle sales, units, % chg y-o-y

Passenger car sales, units
Passenger car sales, units, % chg y-o-y
Commercial vehicle sales, units
15.7
10.2
8.0
8.0
7.0
6.0
4,055,200
3,974,096
4,172,800.8
4,339,712.8
4,500,282.2
4,635,290.7
6.4
-2.0
5.0
4.0
3.7
3.0
78.9
95.2
114.7
138.2
166.3
200.1
Commercial vehicle sales, units, % chg y-o-y

Passenger car density, cars per 1,000 of population
table: Freight Key Indicators

Port of Shanghai container throughput, TEU
Port of Shanghai container throughput, TEU,
% y-o-y
Air Freight Tonnes (000)
Air Freight Tonnes % Change y-o-y
Rail Freight Tonnes (000)
Rail Freight Tonnes % Change y-o-y
Road Freight Tonnes (000)
Road Freight Tonnes % Change y-o-y
2012
2013
2014
2015
2016
2017
2018
32,529,000
33,617,000
35,667,873.5
37,947,668.6
40,457,015.4
43,173,741.8
46,115,679.6
2.5
3.3
6.1
6.4
6.6
6.7
6.8
5,416.0
5,578.5
5,779.3
5,993.1
6,220.9
6,469.7
6,767.3
-2.0
3.0
3.6
3.7
3.8
4.0
4.6
3,904,000
3,798,592
3,855,570.9
3,924,971.2
4,003,470.6
4,099,553.9
4,214,341.4
-0.7
-2.7
1.5
1.8
2.0
2.4
2.8
32,213,000
35,853,069
39,761,053.5
43,737,158.9
47,935,926.1
52,106,351.7
56,170,647.1
14.5
11.3
10.9
10.0
9.6
8.7
7.8
Source: BMI
This report is abstracted from BMI's industry report series, which covers 22 sectors across global markets. Every quarter, we will provide tables
showing the latest five-year forecasts for key industries as well as a forecast scenario for a key sector. If you would like to order a full report, or find
out about BMI's other 1,113 industry reports, please contact subs@businessmonitor.com
44
Chapter 6:
BMI Global Assumptions
Global Outlook
Developed States
Our developed states real GDP growth forecasts for 2014 and
2015 are 1.8% and 2.1% respectively, unchanged from our previous projection. We continue to believe that developed states'
growth troughed in 2013 and will continue to gain pace, with
the US leading the way.
Eurozone Downgrade On Poor Q214

With growth readings for Q214 pointing towards a significant
deceleration in economic activity in several of the world's largest
countries, our global real GDP growth forecast for 2014 has fallen
to 2.8%, from a previous forecast of 2.9%. Our 2015 projection
remains 3.2%. For developed markets, our aggregate forecast
is unchanged; we expect 1.8% real GDP growth in 2014 and
2.1% in 2015. However, our projection for emerging market
growth in 2015 has fallen to 4.6%, from 4.7% previously. Major
individual country changes to our forecasts since last month
include substantial downgrades to growth for Germany, France,
Italy, Russia and Brazil.
We have revised down our projection for eurozone growth to 0.8%

in 2014, from a previous forecast of 1.1%, and to 1.2% in 2015,
from 1.4%. This comes on the back of downgrades to the three
largest euro-area economies. We have moved even further below
consensus on German growth for 2014, as the recent damage to
sentiment from policy uncertainty and Russian sanctions will push
back the incipient recovery in investment and consumption. We
Table: Global Assumptions

2013
2014f
2015f
2016f
2017f
2018f
US
1.9
2.1
2.6
2.4
2.4
2.4
Eurozone
-0.4
0.8
1.2
1.4
1.5
1.5
Japan
1.6
0.9
0.8
0.7
0.7
0.7
Real GDP Growth (%)
China
7.7
7.3
6.0
5.8
5.8
5.8
World
2.6
2.8
3.2
3.2
3.3
3.3
Consumer Inflation (ave)

US
1.5
1.8
2.1
2.1
2.1
2.1
Eurozone
1.4
1.1
1.5
1.7
1.9
1.9
Japan
0.4
2.4
2.5
2.4
2.5
2.6
China
2.6
2.6
2.8
2.7
2.7
2.7
World
3.1
3.5
3.4
3.2
3.2
3.1
Interest Rates (eop)

Fed Funds Rate
0.00
0.00
0.75
2.00
3.00
3.50
ECB Refinancing Rate
0.25
0.15
0.15
0.15
0.50
1.50
Japan Overnight Call Rate
0.10
0.10
0.10
0.10
0.10
0.10
USD/EUR
1.32
1.34
1.25
1.20
1.20
1.20
Exchange Rates (ave)

JPY/USD
97.61
101.00
101.00
103.00
105.00
107.00
CNY/USD
6.15
6.20
6.30
6.25
6.25
6.25
OPEC Basket (USD/bbl)
105.87
106.90
105.50
100.50
97.50
97.50
Brent Crude (USD/bbl)
108.70
109.75
108.00
103.00
101.00
101.00
Oil Prices (ave)
f = forecast. Source: BMI
45
china Q4 2014
now forecast real GDP growth of 1.5% in both 2014 and 2015,
below Bloomberg consensus of 2.0% for both years.
1.1% respectively.
We have consistently been below consensus on French real

GDP growth in 2014 and 2015, but the escalating trade war
between Russia and the EU is likely to dampen business
confidence further, and we have downgraded our forecasts
for French real GDP growth once again. We now forecast
real GDP growth to arrive at just 0.3% in 2014 and 0.7% in
2015, compared with our previous projections of 0.7% and
The outlook for emerging markets growth continues to deteriorate, and we now project real GDP growth of 4.4% in 2014 and
4.6% in 2015, compared with our previous forecasts of 4.5%
and 4.7% in those years respectively. Among emerging markets
we see the strongest growth prospects in Asia and Africa, and
maintain a more subdued outlook for Latin America and central
and eastern Europe.
Emerging Markets
Table: Developed States, Real GDP GrowtH, %

2013
2014f
2015f
Developed States Aggregate Growth
1.2
1.8
2.1
2.0
G7
1.3
1.7
2.0
1.9
Eurozone
EU-27
2016f
-0.4
0.8
1.2
1.4
0.1
1.3
1.6
1.7
2.4
2.3
2.3
2.5
Selected Developed States

Australia
Austria
0.3
1.5
1.9
1.7
Belgium
0.8
1.2
1.6
1.9
Canada
2.0
2.1
2.3
2.4
Czech Republic
Denmark
-0.9
2.4
2.5
3.2
0.4
1.4
1.7
1.5
Finland
-1.4
0.4
1.3
1.2
France
0.2
0.3
0.7
0.9
Germany
0.4
1.5
1.5
1.5
2.8
3.0
3.7
3.8
Ireland
Hong Kong
-0.3
2.3
2.5
2.6
Italy
-1.9
-0.2
0.6
0.8
Japan
1.6
0.9
0.8
0.7
-1.3
0.4
1.5
1.8
Norway
0.6
1.7
1.9
2.4
Portugal
-1.4
0.6
1.1
1.2
4.1
3.4
3.2
3.3
Netherlands
Singapore
South Korea
Spain
Sweden
2.8
3.5
4.1
4.6
-1.2
1.3
1.7
1.8
1.6
2.5
2.4
2.5
Switzerland
2.0
2.5
1.9
1.4
Taiwan
2.1
3.1
4.1
4.1
United Kingdom
1.7
2.9
2.5
2.4
United States of America
1.9
2.1
2.6
2.4
f = forecast. Source: BMI
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %

2014
2015
US
Eurozone
Japan
Brazil
China
Russia
Bloomberg Consensus
2.0
1.0
1.4
1.2
7.4
0.5
BMI
2.1
0.8
0.9
1.1
7.3
0.6
Bloomberg Consensus
3.0
1.5
1.2
1.7
7.2
1.5
BMI
2.6
1.2
0.8
2.1
6.0
1.3
Source: BMI, Bloomberg. Last updated: August 20 2014
46
bmi Global Assumptions
With deteriorating economic activity evident in the first half of

2014, we have lowered our real GDP growth forecast for Brazil
in 2014 to 1.1% from 1.8% previously. We continue to see a
modest rebound in 2015, projecting growth of 2.1% (a small
reduction from our previous 2.2% estimate). This has dragged
down the Latin America aggregate growth figure to 2.1% in
2014 (from 2.4%) and 3.0% (from 3.1%).
Meanwhile, the fallout from the Ukraine crisis has worsened
the domestic demand outlook in Russia. We now expect real
GDP growth to slow to 0.6% y-o-y in 2014, down from our
previous forecast of 1.3%, and to 1.3% for 2015, from 1.5%
previously. With the government taking steps towards fiscal
consolidation, net exports will be the main driver of growth in
2014 and 2015. Our emerging Europe growth forecasts have
dropped to 1.7% in 2014 (from 1.9% previously) and 2.4% in
2015 (from 2.5% previously).

Apart from Brazil and Russia, there have been no major changes
to our emerging markets growth forecasts this month. Our emerging Asia regional aggregate real GDP growth forecasts for 2014
and 2015 remain unchanged at 6.6% and 5.9% respectively.
Our real GDP growth projections for Sub-Saharan Africa for
2014 and 2015 are 5.1% and 5.4% respectively. Our aggregate
Middle East and North Africa forecasts are 2.8% in 2014 and
4.8% in 2015.
Table: Emerging Markets, Real GDP Growth, %
Emerging Markets Aggregate Growth
2013
2014f
2015f
2016f
4.6
4.4
4.6
4.7
Latin America
2.6
2.1
3.0
3.1
Argentina
2.9
0.4
3.3
2.5
Brazil
2.5
1.1
2.1
2.2
Mexico
1.1
3.1
3.7
3.7
Middle East and North Africa
2.8
3.9
3.8
3.4
Saudi Arabia
4.0
4.3
3.6
3.2
UAE
5.2
3.7
4.0
3.4
Egypt
2.2
2.2
3.0
3.8
Sub-Saharan Africa
4.8
5.1
5.4
5.7
South Africa
1.9
1.8
2.3
3.0
Nigeria
5.5
6.5
6.5
6.9
Emerging Asia
6.8
6.6
5.9
5.8
China
7.7
7.3
6.0
5.8
India*
4.7
5.6
6.3
6.6
Indonesia
5.8
5.1
6.0
6.3
Malaysia
4.7
4.5
4.2
4.1
Philippines
7.2
6.3
6.0
5.0
Thailand
2.9
2.0
4.1
4.0
Emerging Europe
2.3
1.7
2.4
3.2
Russia
1.3
0.6
1.3
2.5
Turkey
4.0
2.4
3.3
3.7
Hungary
1.1
2.4
2.1
2.1
Romania
3.5
3.2
3.6
3.9
Poland
1.6
2.8
3.1
3.7
f = forecast; *Fiscal years ending March 31 (2013 = 2012/13). Source: BMI
47
Business Monitor International Limited,

85 Queen Victoria Street, London, EC4V 4AB, UK
Tel: +44 (0)20 7248 5162
Fax: +44 (0)20 7248 0467
Email: subs@businessmonitor.com
Website: www.businessmonitor.com
2014 Business Monitor International. All rights reserved.
Analyst: Andrew Wood

Editor: Stuart Allsopp
Sub-Editor: Paloma Banks
Subscriptions Manager: Yen Ly
Marketing Manager: Julia Consuegra
Production: Anupriya Singh
All information, analysis, forecasts and data provided by Business Monitor International Ltd is for the
exclusive use of subscribing persons or organisations (including those using the service on a trial basis).
All such content is copyrighted in the name of Business Monitor International, and as such no part of this
content may be reproduced, repackaged, copied or redistributed without the express consent of Business
Monitor International Ltd.
All content, including forecasts, analysis and opinion, has been based on information and sources
believed to be accurate and reliable at the time of publishing. Business Monitor International Ltd makes
no representation of warranty of any kind as to the accuracy or completeness of any information provided,
and accepts no liability whatsoever for any loss or damage resulting from opinion, errors, inaccuracies or
omissions affecting any part of the content.

BMI China Business Forecast Report Q4 2014

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

BMI China Business Forecast Report Q4 2014

Transféré par

Droits d'auteur :

Formats disponibles

IMPORTANT NOTICE:

Business Forecast Report

Beijing Treading The Middle Path

GDP per capita, USD

GDP per capita, EUR

Import cover, months

Foreign reserves ex gold, USDbn

Current account balance, % of GDP

Current account balance, USDbn

Balance of trade in goods and services, % of GDP

Goods and services imports, USDbn

Balance of trade in goods and services, USDbn

Goods and services exports, USDbn

Budget balance, % of GDP

Exchange rate CNY/EUR, ave

Budget balance, USDbn

Exchange rate CNY/USD, ave

Lending rate, %, ave

Consumer price inflation, % y-o-y, ave

Central bank policy rate, % eop

Unemployment, % of labour force, eop

Fixed capital formation, real growth % y-o-y

Fixed capital formation, % of GDP

Government final consumption, real growth % y-o-y

Government final consumption, % of GDP

Private final consumption, real growth % y-o-y

Private final consumption, % of GDP

Nominal GDP, EURbn

Real GDP growth, % y-o-y

Nominal GDP, USDbn

China - Macroeconomic data AND Forecasts

Business Monitor International Ltd

Chapter 1: Political Outlook..................................................................................................................... 7

Long-Term Political Outlook..................................................................................................................................... 9

Chapter 2: Economic Outlook................................................................................................................ 13

Exchange Rate Policy ............................................................................................................................................. 18

Business Monitor International Ltd

Chapter 3: 10-Year Forecast................................................................................................................... 21

Chapter 4: Business Environment......................................................................................................... 25

Chapter 5: Key Sectors........................................................................................................................... 35

Other Key Sectors.................................................................................................................................................... 43

Chapter 6: BMI Global Assumptions..................................................................................................... 45

Business Monitor International Ltd

Key Risks To Outlook

As evidenced by strong rhetoric regarding its economic growth target

A key downside risk to our economic outlook remains another collapse

in 2014, Beijing is likely to continue to implement targeted stimulus

in external demand, such as the one that occurred at the height of

measures in order to avert a more acute economic slowdown. As

the global financial crisis. This would seriously undermine growth in

a result of what we expect to be a balance between short-term

trade-dependent industries and hasten a fall in the property market,

stimulatory measures and longer-term economic reforms, we have

potentially leading to an outright recession. There is also a risk that

greater-than-expected fiscal and monetary stimulus by government

At the same time, we see the economy achieving a 7.3% rate of

and the People's Bank of China could usher in stagflation.

growth in 2014, versus our previous forecast of 7.1%.

financial crisis. While we believe that this eventuality will be averted

Jinping's anti-corruption campaign. The campaign has also served

over the next few years owing to the government's considerable

as a purge to eliminate hostile political forces, and we believe that it

resources, such an outcome cannot be entirely ruled out. In this

case, real GDP growth would slow dramatically.