WORLD ECONOMIC FORUM

China Business Summit 2006

Sustainable Growth through Innovation:

China’s Creative Imperative

Beijing, 10-11 September

INSIGHTS
 Contents
This publication is also available in electronic form on the World Economic Forum
website at the following address:

China Business Summit 2006 report:

http://www.weforum.org/summitreports/china2006 (HTML)

The electronic version of this report allows access to a richer level of content
from meeting, including the weblog, photographs and session summaries. Preface 3

The report is also available as a PDF:

http://www.weforum.org/pdf/summitreports/china2006.pdf (PDF)
Summary – Sustainable Growth through Innovation: China’s Creative Imperative 4
Other specific information on the China Business Summit 2006, Beijing, 10-11
September, can be found at the following links:

Innovation 6
Meeting News www.weforum.org/china
Photographs www.pbase.com/forumweb/china2006
Programme www.weforum.org/china/programme
Interviews www.weforum.org/china/indepth
Partners www.weforum.org/china/partners Risk Management 9
KnowledgeConcierge www.weforum.org/china/kc
Weblog www.forumblog.org

Sustainable Growth 12

Globalization 15

The Creative Imperative in China 18

The views expressed in this publication do not

Acknowledgements 20
necessarily reflect those of the World Economic
Forum.

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1
China Business Summit 2006
 Preface

The China Business Summit 2006 was designed to generate insight and guide action to
improve the alignment of China’s public policy, development and industry agendas. The
frank and open discussions in Beijing laid bare the reality that China today is something
of an anomaly in terms of modern economic history. It has accumulated now close to
US$ 1 trillion in foreign currency reserves, while at the same time hundreds of millions of
its citizens still live on less than US$ 500 a year. Or, as one pundit put it recently, China is
“a developing country that has vast global impact.”*

The report that follows examines this duality, particularly in the context of the newly
endorsed 11th Five-Year Plan (2006-2010) which focuses on implementing “people-
centred” and “scientific” development policies. Concepts, still not yet fully understood in
terms of their long-term policy and economic impact, but much better appreciated in
terms of their growing importance by those executives who engaged the senior officials
participating in the Summit.

China is now the world’s fourth largest economy – its per capita GDP is well over US$
1,000 and it has surpassed the United States as the leading destination for foreign direct
investment. These accomplishments, however, have led to the realization that this rapid
economic success has also introduced new challenges requiring innovative government
policies and creative business solutions if the country is to maintain its strong record of
growth. During the week of the Summit, the Chinese government released its first
measurement of the country’s “Green GDP” which subtracts the cost of natural
resources and environmental degradation from total GDP. In 2004, the economic loss
from environmental pollution amounted to 3.05% of GDP (US$ 64 billion). Thus, the
China Business Summit 2006 was timely in bringing key stakeholders together to rethink
and reshape the country’s growth and industry agendas in this changing development
context.

China’s first quarter GDP is already 10% greater than a year before and concerns are
growing over excessive investment in specific industries and the need to tighten
monetary policy. Although fears of excessive growth loom large, the new Five-Year Plan
is focused squarely on reducing rural-urban income disparities and uplifting the living
standards of the 800 million Chinese earning less than US$ 1,000 a year. Readers of this
report will find that addressing both challenges requires shifting from investment and
export driven economic growth to sustainable growth driven by technology innovation
and domestic consumption. The modalities of achieving this appear to be at the centre
of many more discussions in the future.

Lee Howell
Director, Asia

* Martin Wolf, “Why Beijing should dip into China’s corporate piggy bank,” Financial Times, 4 October 2006

3
China Business Summit 2006
 Summary – Sustainable Growth through
Innovation: China’s Creative Imperative
“We have to switch from
our previous industrial
development mode, from
consuming large amounts of
natural resources to a
development mode based
on science and technology
as well as innovation.”
Zhang Xiaoqiang
Vice-Chairman, National
Development and Reform
Commission, People's Republic
of China
The economic model that has given China over two
decades of remarkable growth is getting an overhaul.
From now on, sustainable growth and development will
depend on China’s ability to innovate. That was the
message from the more than 500 senior government,
business, media and academic leaders at the China
Business Summit 2006. To accomplish this will require
that policy-makers and businesses keep the following
priorities at the forefront of their agenda:
• Increase the protection of intellectual property rights of
Chinese and foreign companies
• Improve environmental protection at the provincial and
local levels
• Address corruption at the local level
• Promote the growing presence of Chinese multinational
corporations in major industries and markets
throughout the global economy
The priorities emerged from a survey prior to the Summit
that asked which issues would have the most impact on
China’s development. The Summit began with the focus
on how innovation has become the bedrock of the 11th
Five-Year Plan. What became clear in those discussions
was that China can no longer behave as merely the
largest emerging economy, but must assert a role in
global affairs proportionate to its size. “Whatever future
China has,” said Ged Davis, Managing Director, World
Economic Forum, “it will be a major shaper of the global
system.”
4 5
“What will truly spur
innovation within Chinese
companies is the recognition
of the real value of
intellectual property rights.”
Maurice Levy
Chairman and Chief Executive
Officer, Publicis Groupe, France;
Co-Chair of the China Business
Summit 2006
Acquiring adequate energy for China’s development will
continue to be the paramount challenge, one
compounded by the urgent need to find cleaner and more
efficient means of delivering it. China’s leaders must also
solve the riddle of how to ensure that future development
reverses growing disparities of income. Moreover, they
must somehow unleash the nation’s innovative potential in
a way that can arrest China’s growing trade deficit in
intellectual property.
Unleashing China’s creative impulse will require dramatic
changes to the nation’s educational system, particularly its
universities – the crucibles of China’s creative leadership.
China will continue to need foreign cooperation and
investment in order to make the transition. But Chinese
companies must take the lead to innovate new products
as well as their management processes. It will also need
more dynamic capital markets that can channel the
nation’s vast savings towards innovation and ensure that
profit rewards those who dare to take risk.
"Whatever future China has,
it will be a major shaper of
the global system."
Ged Davis
Managing Director, World
Economic Forum
China Business Summit 2006
“One major question is
whether Chinese innovation
will occur only in products,
or more importantly will
occur in business institutions
– in processes, organization
and management style.
That locus of creativity could
actually be more powerful
than innovation in new
products.”
Tom Manning
Chief Executive Officer, China
Board Directors, Hong Kong
SAR
Innovation
China needs innovation to produce less energy-
intensive economic growth and to reduce its
dependency on foreign technology.
• China’s companies have to innovate to fend off rival
low-cost manufacturing centres and increasing
foreign competition in Chinese markets.
• China’s emphasis on R&D in cutting-edge industries
presents new opportunities for foreign investors.
• Universities need to work more closely with the
private sector to develop curricula that produce
graduates more suited to the workplace.
• Innovative industries will not flourish without freer
capital markets and a vigorous venture capital
community.
• China’s emphasis on protecting intellectual property
rights is crucial to stimulating domestic innovation.
Risk Management
As China expands, a growing number of risks threaten
to impede its growth.
• Foreign companies fear the risk of China’s economy
overheating.
• Growing global protectionism is an even greater risk
to companies in China, imperilling the global supply
chain and requiring greater regional focus.
• China is particularly vulnerable to oil shocks.
Securing stable energy supplies is therefore a
priority in government policy.
• Hedging against risks would require more
developed Chinese capital markets.
• Other risks are posed by political and geopolitical
tensions.
China Business Summit 2006
Sustainable Growth
The chief economic challenge is to shift from an export-
led growth model to one driven by domestic consumption
and innovation.
• A key obstacle is the lack of social safety nets, which
hinders the deployment of savings to more productive
purposes and discourages entrepreneurship.
• Reflecting the macroeconomic paradigm change that
needs to take place, Chinese firms must transform
themselves from focusing on market share to focusing
on sustainable profits.
• Achieving energy security with environmental
responsibility and efficiency is top priority.
• Addressing the absence of safety nets and the need for
energy efficiency and environmental protection offers
commercial opportunities that could drive new,
sustainable growth.
Globalization
Both rich and poor, China is a paradox. It is the fourth
largest economy in the world but still has millions living
below US$ 1,000 per capital GDP.
• China’s population and economic size are giving it
greater clout in the global community, with increasing
influence in international organizations.
• China is using this influence to exercise greater
responsibility in issues where it has a major stake, such
as the Korean Peninsula, energy security and the
environment.
• Chinese diplomacy has been largely economic, but its
value-neutral foreign policy may not be sustainable,
particularly with its major trading partners.
• More and more Chinese enterprises are venturing
abroad, reflecting China’s increasingly open economy
and presenting new opportunities and challenges.
"Xu Guanhua
Minister of Science and
Technology of the People’s
Republic of China
 Innovation

“We need to increase the “We have to constantly “China has to move up the “We hope to absorb
development of our conduct systematic levels of development with technologies from abroad
independently owned innovation or else we will innovation to the high end and adapt them into our
technologies.” be eliminated by the market and only in this own.”
competition.” way can we continue to
Cheng Siwei develop.” Chen Yuan
Vice-Chairman, Standing Chen Tonghai Governor, China Development
Committee, National People’s Chairman, China Petroleum & Wang Jianzhou Bank, People's Republic of
Congress, People’s Republic of Chemical Corporation (Sinopec), Chief Executive, China Mobile China; Co-Chair of the China
China People’s Republic of China Communications Corporation, Business Summit 2006
People’s Republic of China; Co-
Chair of the China Business
Summit 2006

It should come as no surprise that intellectual property
rights once again topped the agenda in discussions about
China. What is remarkable is that, this year, it was China’s
own officials and executives – not foreigners – who were
banging the drum loudest for greater copyright
enforcement and patent protection.
For good reason: In its newest Five-Year Plan, the
government has laid out an ambitious plan to reclaim
China’s mantle as a world leader in science and
technology. Staggering in scope, the plan seeks to redraw
the economic landscape in a way that will promote
innovation not only in China’s universities and companies,
but in the very way policies are created and implemented.
“Innovation is the soul of a nation’s advancement and the
everlasting, driving power of national prosperity,” said
Zeng Peiyan, Vice-Premier of the People’s Republic of
China.
After 20 years of stunning growth, China’s old resource-
guzzling, pollution-spewing engine of an economy cannot
run at the pace it has for much longer. Not only is China
choking on the environmental problems created by
inefficient use of coal and oil, but it faces growing risks to
future growth. China is far too dependent on imported oil
and other raw materials, too reliant on exports –
particularly to the United States – and too accustomed to
competing largely on price rather than quality.
China’s entry into the World Trade Organization five years
ago has made innovation an even more pressing
imperative. As China opens up its markets, its companies
and banks face greater competition from more advanced
global players. At the same time, rising wages at home
are eroding China’s cost competitiveness, turning
countries like Vietnam, Indonesia and even India into the
new Chinas.
China’s stress on “indigenous innovation” doesn’t mean it
won’t welcome further foreign investment and technology.
On the contrary, the business opportunities are manifold
for companies that can help China move up the value-
added ladder. In addition to offering incentives for
research into cleaner and more efficient energy use and
renewable energy, China is promoting the development of
less polluting industries. More broadly, the government
aims to promote research and development in every field
from aerospace and biotech to semiconductors and
space shots – even missions to the moon.
Figure 1: R&D Spending Increasing…and
Shifting towards the Private Sector
China has already made significant progress. Figure 2: China Equity Markets Lagging
Spending on R&D has risen above 1.2% of GDP from
less than 0.6% a decade ago (see Figure 1). China’s
aim is to push that figure up to 2.5% by 2020, vaulting
it above where most OECD countries are today.
Spending won’t be enough, however. While some of
China’s top universities have become nascent centres
of innovation, most Chinese institutions still specialize
in churning out graduates who can ace exams but
cannot think outside the box. Universities also need to
work with companies to devise more practical
curricula that will produce graduates who can go
straight to work. “We need to get away from trophy
degrees and concentrate more on hands-on
education if we are to encourage innovation in China,”
said Nandani Lynton, Vice-President, Asia,
Thunderbird, The Garvin School of International Source: Datastream
Management, People’s Republic of China.
Too much of the research at Chinese universities stays The good news for innovators is that the government is
locked in the lab. The government is trying to get determined to beef up its intellectual property regime. “Let
educational institutions to work with companies to me put it this way,” said Xu Guanhua, Minister of Science
move discoveries more quickly into profitable and Technology of the People’s Republic of China,
applications. Despite China’s massive foreign “without effective protection for intellectual property what
exchange reserves and vast public savings, however, we have said about indigenous innovation would be
venture financing remains scarce for researchers trying nothing more than empty words.”
to commercialize discoveries. With the largely state-
owned banking sector unreceptive and the stock
market still struggling (see Figure 2), financial experts
say venture finance will not take off until China’s
capital markets are more mature.

Source: OECD Main Science and Technology Indicators 2006-1

6 7
China Business Summit 2006 China Business Summit 2006

Figure 3: Chinese Companies Raising More
Equity Overseas
Source: Bloomberg, Datastream
The government is also adamant that companies will have
to be at the forefront of China’s innovation drive (see
Figure 3). Caught between a looming invasion by foreign
imports, they must venture abroad into markets where
consumers see them just as they saw the Japanese,
Taiwanese and Koreans that came before them – cheap
and inferior. Only by innovating in quality can they hope to
win market share overseas.
As they try to shift from manufacturing into services,
however, companies also need to find innovative ways to
run. “China may need technological innovation less than
innovation in management, institutions and processes,”
said Wang Jianzhou, Chief Executive, China Mobile
Communications Corporation, People’s Republic of China;
Co-Chair, China Business Summit 2006.
Ultimately, however, the most difficult hurdle China may
face in igniting its innovative spark is itself. Beyond deep
pockets, governments have generally proven poor agents
of creativity, tending instead to stifle it. China may also
need to overcome its traditional fear of failure if it is to
successfully reintroduce innovation to its cultural mix.
8 9
China’s policy imperatives
“We are going to conduct another major round of
innovation. We will be a society based on scientific
development with innovation taking centre stage,”
declared Zeng Peiyan, Vice-Premier of the People’s
Republic of China, at the opening of the China Business
Summit 2006. “China’s 11th Five-Year Plan outlines the
national strategy to develop indigenous innovation. Our
ability in indigenous innovation still lags behind, and some
technologies rely on imports. For example, 80% of
integrated chips in China are imported,” echoed Zhang
Xiaoqiang, Vice-Chairman, National Development and
Reform Commission, People’s Republic of China.
Those in the business community welcomed China’s
creative imperative. “We have to constantly conduct
systematic innovation or else we will be eliminated by the
competition,” said Chen Tonghai, Chairman, China
Petroleum & Chemical Corporation (Sinopec), People’s
Republic of China. “China is one of the fastest-growing
economies in the world and one of the engines of the
global economy. We have to bring the latest, cutting-edge
technology to China. There’s no way out,” said Winfried
Vahland, President and Chief Executive Officer,
Volkswagen Group China, People’s Republic of China.
China’s Patent Office Busier
Source: World Intellectual Property Organization
…And Chinese Inventors Active in Overseas
Patenting
Source: World Intellectual Property Organization
China Business Summit 2006
Risk Management
“Even an unfriendly
external environment will
not block China’s
development.”
Li Ruogu
Chairman and President, Export-
Import Bank of China, People's
Republic of China
As solid as China’s growth has been (see Figure 1) and as
steady as the government’s hand might seem, a growing
list of risks could impede or alter China’s progress.
Figure 1: China’s Growth Still Outpacing World
Source: IMF World Economic Outlook April 2006
Foreign multinationals tend to focus on risks to China’s
domestic economy. What is the likelihood of
overinvestment and overcapacity caving in? How is
deregulation changing the business landscape and will it
increase or reduce corruption? Some even discuss the
need to offset their China risk with a presence in Vietnam
or Malaysia. Perhaps the biggest risk foreign firms are
trying to fathom, however, is the risk of not being in China
at all.
China Business Summit 2006
"We need to improve our
legal system and also the
corporate system as well as
our cultural system."
Tu Guangshao
Vice-Chairman, China Securities
Regulatory Commission,
People's Republic of China
Chinese companies, on the other hand, are pondering the
risks of greater foreign competition, how to offset it by
expanding overseas. “The risk for many Chinese
companies is integrating foreign companies into their
portfolio, how to make it work,” said Edward C. Tse,
Managing Director, Greater China, Booz Allen Hamilton,
People’s Republic of China.
Many risks lay beyond companies’ control. Political
manoeuvring in anticipation of the 2007 meeting of the
Central Committee of the Communist Party of China to
elect the new Party leadership, for example, has
distracted the bureaucracy, imposing delays and
constraints on foreign investment. And there are utter wild
cards, such as an avian flu pandemic or the possibility of
an armed conflict on the Korean peninsula.
One of the greater risks, though, is raised in the World
Economic Forum’s scenario report China and the World:
Scenarios to 2025: an increasingly protectionist world that
forces China and the rest of Asia to turn within for growth.
The breakdown of the Doha Round appears to have
increased the plausibility of this scenario, raising the risks
to China and businesses in the country. “What this implies
is that the global supply chain is going to be severely
affected and that you’re going to, as a business, have to
develop and depend upon regional supply chains,” said
Jean-Pierre Lehmann, Professor of International Political
Economy, IMD (International Institute for Management
Development), Switzerland. As bilateral trade agreements
multiply, the danger is that increasingly complex rules will
raise transaction costs and complicate trade.
 "Today we see a lot of risks
in the private sector and the
country in general is borne
by the banking system,
which takes on most of the
corporate risk."
John P. Drzik
President, Mercer Oliver Wyman
(MMC), USA
China’s vulnerability to imported oil supplies is also
fostering a well publicized push overseas to secure oil-rich
friends. Beijing’s diplomats and executives have become
frequent visitors to Central Asia, Africa and South
America. China has also assumed a more proactive role in
settling diplomatic disputes in areas it depends on for oil,
such as Iran.
While those efforts may help mitigate the risk of an oil
supply shock, for those in China the ability to offset risk
would be greatly enhanced if its stock and bond markets
were more developed. “Today we see a lot of risks in the
private sector and the country in general is borne by the
banking system, which takes on most of the corporate
risk,” said John P. Drzik, President, Mercer Oliver Wyman
(MMC), USA (see Figure 2). Insurers also want the
freedom to invest in a wider range of assets to enable
China’s savers to better hedge risks to the value of their
nest eggs. “Rome was not built in a day,” cautioned Tu
Guangshao, Vice-Chairman, China Securities Regulatory
Commission, People’s Republic of China. Before China
can further liberalize its capital markets, he said: “We
need to improve our legal system and also the corporate
system as well as our cultural system.”
10
These home improvements are vital, as David Dollar,
Country Director, China and Mongolia, World Bank,
Beijing warned: “To keep growing quickly, China needs to
improve its institutions.” For example, a basic impediment
to implementing much of China’s transformation plan is
the lack of safety nets for unemployment, healthcare and
retirement. Without them, the Chinese will continue to
save at prodigious rates, instead of channelling funds to
more productive purposes. The absence of social security
also limits entrepreneurship and the willingness of
investors to take risks. “Savings are high because there is
insecurity,” said Pierre E. Cohade, President, Asia Pacific
Region, Goodyear Tire Management Company
(Shanghai), People’s Republic of China.
The weak rule of law is another risk. Take intellectual
property rights. Enforcement of IPR protection, while
improving, remains patchy due to feeble commitment at
the local level and the lack of a sufficiently independent
legal system. This is not just a problem for foreign
investors. In fact, about 90% of IPR infringements involve
domestic firms. “The general issue is the extraordinary
degree of decentralization in China,” Dollar explained.
Figure 2: Bank Loans Dominate Capital
Structure in China
Source: Nicholas Lardy, Institute of International Economics
China Business Summit 2006
“It is not easy for companies
from the West, who are
often seen as ‘wolves’, to
get a foothold in the Chinese
market and generate a
profit.”
Liu Changle
Chairman of the Board and
CEO, Phoenix Satellite Television
Co., Hong Kong SAR; Co-Chair
of the China Business Summit
2006
Yet, the obstacles and risks that could block China’s
economic transformation offer the very commercial
opportunities that could drive new, sustainable growth.
Japan and the US could supply China with the technology
to enhance energy efficiency. The lack of social safety
nets represents a “humongous opportunity not just for
improving the quality of life in China but for unleashing all
these savings,” said Cohade. He predicted that “empty
nesters”, parents born during the years of the Cultural
Revolution whose single child has already grown up and
left home, would be “the engine of consumption” in
coming years. “Understanding the empty nesters is going
to be critical” for retailers and financial services providers.
China Business Summit 2006
Environmental risk to sustainable Chinese growth
China’s GDP is expected to quadruple by 2020,
propelling aggregate energy use towards US levels and
presenting challenges to overall environmental
management. Pressure is rising on policy-makers and
CEOs alike to improve energy efficiency and to take
measures to mitigate widespread potential
environmental damage to water supplies and air quality.
There is an increasing recognition of environmental
stress in Chinese cities, the fragility of several of China’s
multiple ecosystems and the risks posed by
environmental degradation to China’s long-term
sustainable growth path. “The central government
attaches great importance to building an
environmentally friendly society,” said Zhang Xiaoqiang,
Vice-Chairman, National Development and Reform
Commission, People’s Republic of China. Zhang told
participants that China aims to reduce energy
consumption of per unit GDP by 20% and reduce total
emissions by 10% over the next five years. This goal
will be achieved through the reduction of pollution at
source, implementation of new technologies and
innovation. Market factors, such as adjustment to the
price of oil, may also help this process. While Zhang
said that China would continue to rely on coal as its
major source of energy, the installation of clean coal
technology and the increasing use of nuclear power –
set to rise to 4% of overall energy production by 2020
– will help China to achieve its ambitious goals. Failure
to act now to shore up the environmental foundations
of China’s growth – locally, nationally and globally –
risks human and political costs and future economic
growth.
China’s Spending on the Environment
Rising…
Source: State Environmental Protection Administration Reports on the Economy 2000-
2004, China Statistical Yearbook, press accounts
11
 Sustainable Growth
“The domestic service sector
will grow very fast, faster
than the rest of the
economy, but it will mainly
cater to the local market. In
general, we will not see
large-scale service practice
to the world.”
David Li Daokui
Mansfield Freeman Chair
Professor of Economics,
Tsinghua University, People's
Republic of China
China’s chief economic challenge for the next decade is
clear: how to shift from an export-led growth model to
one driven by consumption and innovation, while
maintaining social stability and avoiding a hard landing.
When an economy as big as China’s – now the fourth
largest in the world – is growing at a 10%-plus clip, that
task is the macroeconomic equivalent of getting a
charging elephant to turn the right corner without
crashing or slipping. But make the turn the giant must.
Heavy fixed asset investment has led to overcapacity in
many industries, while China’s high savings rate of over
40% of GDP is unsustainable, particularly as the
population ages. Meanwhile, in 2004, China has the
largest energy imbalance in Asia (see Figure 1) and
pollution was estimated to have resulted in economic
losses equivalent to 3.05% of GDP. “We cannot continue
with the traditional development approach and growth
pattern,” concluded Zeng Peiyan, Vice-Premier of the
People’s Republic of China, in a special address to open
the China Business Summit 2006. “We have to transform
our approach.”
Figure 1: China Has the Largest Energy
Imbalance in Asia
Source: IEA Energy Balances of OECD Countries and Non-OECD Countries 2003; World
Bank World Development Report 2005; CIA World Factbook
12
“I don't see China becoming
a service centre to the world
anytime soon. To be at the
same level of critical mass
as India at a global level –
it's probably about 7 to 10
years away.”
Sriram Venkataraman
Senior Vice-President and Head
of Asia Pacific, Infosys
Technologies, Japan
The key to that transformation was obvious from the
Summit theme: Sustainable Growth through Innovation:
China’s Creative Imperative. Among the buzzwords of
development, “sustainability”, “innovation” and “creativity”
are practically regarded as off-the-shelf ingredients for a
magic potion to combat the pressures of globalization.
But China’s current Five-Year Plan offers a real recipe for
action that can hardly be dismissed as glib: stimulate
domestic demand, shift investment away from industries
with too much capacity such as automobiles and steel,
shore up the financial system so that it can better absorb
the savings of Chinese, and mobilize more capital to
productive investments. As for innovation, the plan
commits China to increasing R&D spending from the
current 1.2% of GDP to 2.4%, just above the OECD
average. “Only by constructing new ways of development
can China enhance overall growth,” said Summit Co-
Chair Chen Yuan, Governor of the China Development
Bank.
But there are obstacles and risks. Perhaps the most
talked about risk is that posed by increasingly volatile oil
prices. Since becoming a net oil importer in 1993, China
has emerged as the world’s second largest energy
consumer, increasingly dependent on imported oil.
China’s policy-makers are cognizant that China’s
dependency on imported oil – and its wasteful use of it –
is not only a drain on development, but that its growing
demand for the increasingly scarce resource also raises
the long-term probability of China getting into a conflict
over oil, whether commercial or military.
China Business Summit 2006
"Local governments want to “Internationalization is not
focus on increasing GDP an end in itself; it is a means
and, in doing so, favour to help you grow and
vested local interests such as develop.”
factories that may also be
polluters." Yang Yuanqing
Chairman of the Board of
Pan Yue Lenovo Group, People’s
Vice-Minister of China's State Republic of China; Co-Chair of
Environmental Protection the China Business Summit
Administration 2006
For that reason, the government is trying to overhaul Protection Administration. He called for an honest
the economy to make China a greener, more energy- evaluation of the state of China’s environment and
efficient nation. China has been moving, for example, urged local governments to adopt sustainable
to gradually reduce subsidies on fuel in order to practices. “Not all central government policies are fully
remove the incentive for waste and make consumers implemented in the localities,” noted Zhang Xiaoqiang,
bear the true cost of oil. The government is investing Vice-Chairman of China’s National Development
in new technologies for oil and gas exploration and Reform Commission. “We need to improve the quality
financing the development of renewable energy such of our civil servants and the whole administrative
as hydropower, biomass and wind power (see Figure mechanism has to deal in a balanced way with short-
2). China is also trying to adopt cleaner ways to burn and long-term issues, all of which have to be
domestic coal and plans to build 40 nuclear power coordinated on a national basis.”
plants in the next 15 years. “In China, most of our
experts and the public believe nuclear energy is
relatively safe and clean. So the Chinese government Figure 2: Alternative Energy Expected to
believes we should still actively develop nuclear Rise with Demand…
energy,” said Zhang Xiaoqiang, Vice-Chairman,
National Development and Reform Commission,
People’s Republic of China.
At the same time, the government is trying to push
industry into shape, phasing out inefficient factories
and promoting cleaner, more efficient ones. It is
imposing tighter emission standards on vehicles,
clamping down on overloaded, gas-guzzling trucks,
and even changing the way it evaluates local officials
to rate them not just on economic growth but also on
energy efficiency.
Efforts to boost China’s energy efficiency, its economic
expansion and environmental protection have been
undermined by China’s decentralized political system.
“Local governments want to focus on increasing GDP
and, in doing so, favour vested local interests such as
Source: US Energy Information Administration, China Daily, International Energy Outlook
factories that may also be polluters,” said Pan Yue, 2006
Vice-Minister of China’s State Environmental
13
China Business Summit 2006

The onus for action must also fall on enterprises. “Many
companies in China have focused on the short term such
as on increasing revenues from sales and marketing,” said
Zhang Weiying, Vice-Dean, Guanghua School of
Management, Peking University. Instead of focusing on
racking up double-digit sales, enterprises have to put
more effort and investment into R&D and generating
sustainable profits, Zhang advised. Said Chen Tonghai,
Chairman of China Petroleum & Chemical Corporation
(Sinopec), which leads Chinese enterprises in annual
patent applications: “In our industry, we not only have to
look for new types of energy but to develop
environmentally friendly products. We have to constantly
conduct systematic innovation or else we will be
eliminated by the competition.”
Figure 3: Chinese Economy Gradually
Shifting towards Services…
Source: China Statistical Yearbook 2005
14
The maturation of China’s economy will surely speed up
its transformation – naturally. The services sector already
contributes almost 40% of GDP, Hellmut Schutte, Dean,
Asia Campus, INSEAD, Singapore, remarked (see Figures
3 and 4). “As manufacturing productivity growth comes in,
more people will be laid off with many of them starting
their own little shop along the street,” he explained. “It’s
pretty obvious that as China’s economy grows,
consumption patterns will change, with very high growth
in the leisure industries, healthcare and education.” The
elephant is making the turn, but will it keep its balance?
Figure 4: …But Services Sector Still Has
Room to Grow
Source: CIA World Factbook; 2005 estimates when available
China Business Summit 2006
Globalization
"I can assure you that
Japan's next administration
will share the basic
recognition that the rise of
China is an opportunity for
all of us rather than a threat
against us."
Yasuhisa Shiozaki
Senior Vice-Minister for Foreign
Affairs of Japan
In 30 years, China has transformed itself from a
command economy inhospitable to overseas investors
to an emerging free enterprise market that attracts the
biggest share of global foreign direct investment.
China is a key driver of globalization and one of its
major beneficiaries. The world’s third biggest trader
and the fourth largest economy, China combines
geographic and demographic heft with purchasing
power and manufacturing prowess.
Even so, China is still a developing country. China’s
per capita GDP is above that of the Philippines but
below that of Thailand. In the World Economic
Forum’s Global Competitiveness Report 2006-2007,
China’s competitiveness ranking dropped from 48th to
54th. According to the World Bank, over the past two
decades, China accounted for over 75% of the
poverty reduction achieved in developing economies.
Yet, today, more than 135 million people, mainly in
China’s western and interior regions, scrape by on
less than a dollar a day, without the benefits of clean
water, adequate healthcare and education.
That said, China has become a leading player in the
international community, both through the roles it has
sought such as its membership in the World Trade
Organization (WTO) and those that have been thrust
upon it. Beijing has emerged as a role model for
developing economies, its non-judgmental foreign
policy serving as a counterweight to western
developed countries, particularly the United States.
China Business Summit 2006
“China is engaged and
building partnerships to
send a message to the
world that it will play by the
rules of the game. Let the
rules of the game be fair.”
Kapil Sibal
Minister of Science and
Technology and Earth Sciences
of India
The recent agreement to increase China’s voting
power in the International Monetary Fund (IMF), albeit
by only a small percentage, is an acknowledgement of
its rising profile – and mounting responsibilities.
Geopolitically, China’s participation in the six-party
talks on North Korea’s nuclear programme has been
pivotal. And as a permanent member of the UN
Security Council, Beijing is playing a key behind-the-
scenes part in the selection of the next UN Secretary-
General, who is expected to be an Asian. “Anything
that happens in China will have a global impact so we
have to be globally responsible,” said Wang Jianmao,
Professor of Economics and Associate Dean, China
Europe International Business School (CEIBS).
Chinese diplomacy, however, has largely been driven
by pragmatic economic motives, particularly the need
to meet its burgeoning energy, raw materials and
components demands. China has been an
enthusiastic driver of integration with South-East Asia
and has also forged strong commercial links with
resource-rich countries in Central Asia, Latin America,
the Middle East and Africa, as well as Australia.
Energy imports rose by 55% in the first four months of
this year to US$ 21.3 billion.
15

Figure 1: China-US Trade Balance Shifting
Source: World Trade Organization
China’s exports, especially to the US, have increased to
all-time highs, pushing its trade surplus to monthly
records – US$ 18.8 billion in August 2006 (see Figure 1).
This has inundated China’s economy with cash, boosting
its foreign exchange reserves to nearly US$ 1 trillion (see
Figure 2).
Chinese enterprises, particularly industrial groups, are
now accompanying the country’s diplomats to far-flung
countries from Venezuela to Sudan. While some
companies, notably the state energy groups, have gone
global for strategic reasons, many others are seeking to
hone their competitiveness abroad. “The reason for going
global is simple: to create new opportunities to make
profits today and in the future,” said Wang Jianzhou, Chief
Executive, China Mobile Communications Corporation.
Added Yang Yuanqing, Chairman of the Board of Lenovo
Group, which went global through its acquisition of IBM’s
personal computing division: “Internationalization is not an
end in itself; it is a means to help you grow and develop.”
16
China’s foreign policy, its economic ascendancy and its
ambitious enterprises have at times put China at odds
with the global establishment. Beijing has clashed with
Washington over how to deal with the conflict in Darfur
and Iran’s nuclear programme. The bid by a Chinese state
firm to take over a US energy company alarmed many
American politicians. China’s trade surplus has fuelled
accusations and led to enormous pressure on Beijing to
move to a more flexible currency regime faster than it is
willing to allow.
The frequency of such friction is likely to increase. For
now, China has played the unassuming new kid on the
block with benign intentions. At the same time, it basks in
the acclaim of those who see its market as a glowing
opportunity no sensible investor can resist. After all, China
will be hosting the Olympic Games in 2008, what for the
previous Asian hosts – South Korea and Japan – was
something of a global coming-out party. “Our policy of
reform and opening up to the world means we embrace
globalization,” said Wu Jianmin, President of the China
Foreign Affairs University. “The most important feature of
China’s rise is to share the growth with the rest of the
world.”
Figure 2: China’s Foreign Reserves
Growing…and Diversifying
Source: State Administration of Foreign Exchange, People’s Republic of China, PwC
estimates of composition
China Business Summit 2006
“We are entering a new
phase in the relationship
The part China plays in the WTO in the aftermath of between Asia and the
Middle East, but we need to
the collapse of the Doha Round will be an immediate create the foundations for
indicator of its willingness to shoulder new better understanding of
responsibilities. Beijing could be instrumental in each other to take it to
reviving the talks. China’s trading partners, meanwhile, another level.”
will be assessing how well Beijing implements its WTO Rachid M. Rachid
commitments, including the opening of the banking Minister of Trade and Industry of
sector at the end of this year. Lastly, China’s attempts Egypt
to set its own industry and technology standards have
raised concerns among some trading partners and
investors.
China’s foreign investment strategy
Asia is the biggest investment destination for China which channels 60% of its overseas direct investment into the region,
according to Deutsche Bank. Latin America receives 16% of Chinese foreign investment. Africa, North America and
Europe tie in third place with roughly 7%, while Oceania receives 4%.
Chinese Investment Mostly to Asia…
Source: Deutsche Bank
The US and Chinese economies have become deeply integrated. In 2005 bilateral trade reached US$ 216 billion, and
through the first half of 2006 the figure rose 25% from last year, said Ma Zhengang, Director, China Institute of
International Studies, People’s Republic of China. Furthermore, China is now the fourth largest market for US exports. But
as China marks the fifth anniversary of WTO membership, market barriers and the trade deficit with the US could create
further problems and misunderstandings between the two sides, warned John Frisbie, President, US-China Business
Council, USA. “I am concerned about the rising voices of protectionism on both sides of the ocean,” Frisbie said. If Sino-
US relations suffer, said Ma, “both sides will suffer.”
17
China Business Summit 2006
 The Creative Imperative in China

Sustainable Growth Globalization

“Never has the world seen "Innovation is the soul of a
the simultaneous take-off of nation’s advancement and China should focus less on incentives to attract The collapse of the Doha Round indicates a
two such nations together. the everlasting, driving investment and more on institutional renewal to create disconnect between the reform-reluctant developed
This is the time for China power of national
and India to think out of the prosperity.”
a better business environment. The skills shortage, for world and the reform-eager developing world. Along
box so they can achieve example, must be addressed through an overhaul of with other Asian economies, China could be a catalyst
their stated goals.” Zeng Peiyan the education system to promote creativity and critical for the revival of the multilateral trade talks, even as
Vice-Premier of the People's
thinking over rote learning and exam-focused they forge their own regional arrangements.
Baba N. Kalyani Republic of China
Chairman and Managing assessment.
Director, Bharat Forge, India; A key challenge for China will be how well it continues
Co-Chair of the China Business The urgent need for China to become more energy to manage its integration into the global economy
Summit 2006
efficient can be addressed by cutting-edge technology which requires balancing its inherent market muscle
available in Japan and the US, thus creating an with the benefits of integration. A major policy
opportunity from a challenge. For this to happen, question of whether Chinese enterprises should adopt
China’s intellectual property regime has to work for the accepted world industrial and technology standards or
logical technology transfer to occur. The need to insist on setting their own remains to be answered.
create a social safety net system offers similar
The theme of the World Economic Forum’s China Risk Management opportunities to providers of financial services.
Business Summit 2006 – Sustainable Growth through
Innovation: China’s Creative Imperative – clearly spelled A key to mitigating the many risks confronting China is the
out the priority for China as it aims to achieve a new level appropriate sequencing of reforms. To mobilize the
of economic development. The discussions in Beijing enormous pool of savings to more productive uses and
neatly continued the Forum’s pursuit of the “creative stimulate consumption to head off an economic
imperative” since the Annual Meeting 2006 in Davos and slowdown will require significant progress in creating
through regional summits in São Paulo, Sharm El Sheikh social safety nets that encourage personal and
and Tokyo. The goal: to identify innovative approaches to commercial risk taking. Banking reform and strong capital
key challenges. By capturing these ideas, the Forum markets will have a similar domino effect in promoting
hopes to stimulate further debate and brainstorming at innovation, enterprise and the reform of state firms. The
upcoming regional meetings and in next year’s Annual transfer to China of much needed technology will also
Meeting. happen only if intellectual property rights enforcement is
sufficient.
This is a selection of some of the insights from the China
Business Summit 2006 in Beijing:

Innovation

While fast growing, the service sector in China is focusing

more on the domestic market than on global customers.
Key areas with strong growth potential include
pharmaceutical R&D, aviation engineering, and the
provision of business process outsourcing and call centre
services to the Japan market.

China’s innovation drive should focus not just on the

development of new products and services but also on
the creation of new business models to fit the specific
characteristics of the domestic market. Examples of such
inventive strategies include the varying of marketing
approaches according to a city or region’s tier level and
using offbeat sales techniques or promotions to generate
brand loyalty in a market where such affinities are minimal.

caption

18 19
China Business Summit 2006 China Business Summit 2006
 Acknowledgements

The China Business Summit 2006 is held in cooperation with the China Enterprise Confederation (CEC)
and with the special support of the National Development and Reform Commission (NDRC). The NDRC
serves as the World Economic Forum’s counterpart in China.

The World Economic Forum wishes to acknowledge the support of the following companies as Partners:

Strategic Partners

Accel Partners
Accenture
AMD
Apax Partners
Audi
Bombardier
Booz Allen Hamilton
BT
CA
Credit Suisse
Deloitte
Deutsche Bank
Ernst & Young
Fluor
HP
HSBC
Intel
Lehman Brothers
Manpower
Marsh & McLennan Companies
Nakheel
NASDAQ
NYSE Group
PricewaterhouseCoopers
Reuters
UBS
Volkswagen
Zurich Financial Services

Regional Partner

GeoPost Intercontinental
Phoenix Satellite Television
UPS

Summit Supporter

Ogilvy Public Relations Worldwide

The World Economic Forum would also like to thank The Coca-Cola Company and Nestlé for their
support.

20
China Business Summit 2006
 Contributors

Peter Torreele is Managing Director of the World Economic Forum. Lee Howell is Director, Head of Asia, at the
Forum. The China Business Summit 2006 was under his direct responsibility, with Li Zhang, Associate Director,
China; Dezhi Ma, Global Leadership Fellow, China; Yu Liu, Global Leadership Fellow, China; and Nadine Bonard,
Senior Specialist, Events.

Samantha Tonkin, Senior Media Manager at the World Economic Forum worked with Wayne Arnold and Alejandro
Reyes to produce this report.

The World Economic Forum would like to express its appreciation to the summary writers for their work at the
Summit. Session summaries are available at www.weforum.org.

Associate Principal, Editing: Nancy Tranchet

Design and Layout: Kamal Kimaoui, Associate Principal, Production and Design

Photographs: Doug Kanter

Special thanks to PricewaterhouseCoopers for their help in preparing data and statistics underpinning this report.
The World Economic Forum is an independent
international organization committed to improving
the state of the world by engaging leaders in
partnerships to shape global, regional and
industry agendas.

Incorporated as a foundation in 1971, and based

in Geneva, Switzerland, the World Economic
Forum is impartial and not-for-profit; it is tied to
no political, partisan or national interests.
(www.weforum.org)