1. China Market Forecast 2011 - prepared for the Australia- China Business Council Victorian Division 10 February 2011 Dr He-ling Shi Department of Economics Monash University

2. Three overarching themes Potential downturn for Chinese resource demands? Expanding opportunities in the high- end manufacturing and services sectors? Emerging China market entry challenges for foreign firms

3. Chinas contributions to the mining boom in Australia 2009 – China became the largest trading partner of Australia with two-way trading of goods and services valued at $85.1 billion (47.9b(e):37.2b(i) ) Export of iron ore was 260 million tonnes and valued at $21.7b (43.8% of total exports)

4. Historical perspective – iron ore exports to China Since 1999, – Export value has increased by 41.8% per annum, and – Export volumes have increased by 25.7% per annum During 2004 – 2009, 140% per annum (2.7b, 5.5b, 7.6b, 9.0b, 17.9b, 21.7b) In 2009, 72.4% of iron ore was exported to China

5. At the States level – exports overview

6. Western Australia: – Iron ore & con: 21.4b – Crude petroleum: 468m – Nickel ores & con: 345m – Copper ores & con: 306m Queensland: – Coal: 1.96b – Copper: 443m – Copper ores & con: 360m – Other ores & con: 265m New South Wales – Coal: 525m – Copper ores & con: 421m – Wool & other: 240m – Aluminium: 180m

7. The driving forces and trend forecasting of demands for Australias resources?

8. Consumers of steel products Capital goods industries (construction, machinery, heavy transport, etc.) Consumer goods industries (automotive, home appliance, etc.)

9. Chinas steel production 2000-2009 Production of raw steel – Component growth rate: 18% – Share of world production from 15% to 46% – 40% of iron ore is imported from Australia Consumption of steel – Component growth rate: 16.7% – Share of world production from 16.8% to 47% Self-sufficient

10. Breakdown of steel consumption in China in 2009 Construction: 70% (USA, 29.5%) Machinery: 22% Automobile: 7% (USA, 14%) Household appliances: 3% Other manufacturing: 2% Shipbuilding: 1% TOTAL: 100% Housing: 69% Infrastructure: 25% Commercial: 6%

11. Very high density of steel use China produced 12.6% of GDP (PPP in 2009), but consumed 46.4% of steel (2008, in volume). In China, to produce 1 USD of GDP, steel consumption was 120g on average from 2005 - 2009 USA produced 20.2% of GDP (PPP in 2009), but consumed 7.7% of steel (in 2008, in volume) In the USA, to produce 1 USD of GDP, steel consumption was 11g on average from 2005 - 2009

12. Common explanation Urbanisation, for example In 2009, 50% of 1.3b population lived in urban areas; by 2030, 70% will be in urban areas – another 200-300 million migrants Urbanisation demands housing, infrastructure, and etc. which drive up steel demand

13. Urbanisation

14. However … South Korea and Malaysia had similar patterns of urbanisation South Korea consumed 58g (48.3% of the Chinese level) for 1 USD GDP Malaysia consumed 46g (38.3% of the Chinese level) for 1 USD GDP

15. Two key industries Housing construction (using 49% of total steel consumption) Infrastructure investment (using 17.5% of total steel consumption) Weird stories of these two industries

16. Housing May 2010, it was estimated that there were 65.4 million apartments with no use of electricity for consecutive 6 months – it may indicate these apartments have not be sold or rented out. Meanwhile, the housing price continue to climb – the housing price in 4 central districts in Beijing is comparable to 5 districts in the New York city

17. Infrastructure China has constructed 7,500 km of high speed rail (with average speed is 350km/h) A sample survey indicated that the there were only 40% of passengers from Wuhan – Guangzhou line – the best of the current 7 lines.

18. Common features of these two industries in China Drive up GDP in a visible and significant way Public sector participation (leading role) Supply driven – mismatch in demand and supply GPS - GDP centric, Public sector led, and Supply driven

19. Unique political contracting system in China Top-down 5 layers public administrative hierarchy - Central, provincial, municipal, county, and village (gradually towards a 3 layer system) Since 1978, the dominant task of each level of public administration is economic growth - which is normally measured by GDP growth Implicit political contract with leaders (party secretary + governor) at each level of government - that if youre doing well in economic growth, get promoted; if not, step down (Deng Xiaoping, 1980)

20. Incentives GDP has become the only measurable indicator for economic performance – which could affect the promotion of demotion of government officials – GDP centric Public sector dominates the economic growth through (a) public investment – infrastructure; and (b) regulating the private sector via excessive regulations Supply driven – excess capacity in almost every industry in which the public sector has influence

21. Consequences Expansionary lust - Regional GDP competition has generated outstanding GDP growth in the last 32 years Infrastructure is world-class, but not necessary economical (fails cost-benefit analysis – but accidently capture the spill over effects) A good system to weather GFC but may not be sustainable – environment, allocative inefficiency, inflation)

22. Implications for the Australian resources sector Chinas demands for Australias resources have an element of irrationality (in economic terms) – which has so far caused environment degradation, and the supply-side inflation If China becomes more rational, demand for steel and iron ore will inevitably slow down The overarching objective of the 12 th Five Year Plan (2011- 2015) is to adopt a more scientific modality in economic development – resources saving, environment friendly, income equality, higher value-added production, and etc.

23. Economic rationality? I do not think so – why? China will continue to import minerals as long as the desire for GDP growth continues – which could last another 10 – 15 years (2 years for the current administration (H&W) + 10 years for the next administration (X&L)

24. Political & Economic profiles in China after 2008 Why 2008? – 2008 Beijing Olympic Games – Start of the GFC Public perceptions: CCP-led China survived the GFC and saved the world Since 2008, China has gradually shifted back to a partial planning economy - which is featured by – NDRC regains the power of economic planning and price control – 4 trillion yuan fiscal stimulus revives SOEs

25. Some anecdote evidences Public servant has become the most attractive position for fresh university graduates (on average: 112 applicants for one position, and 10,000 applicants for an overseas post at the Ministry of Science and Technology) – run forward, means bribe the ministries and get monetary favour

26. the state advances as the private sector retreats That implies: – GPS will continue to dominate the political and economic landscape in China in the coming years – economic rationality is far from reality – GDP will continue to be higher than the 8% target set by the central government – Good news for the Australia resources sector – Mixed news for other sectors (for example, high- end manufacturing and services sector) in Australia

27. Housing & infrastructure industry Despite a series of policies to suppress the housing sector by the State Council, housing price continues to increase (14% in Beijing in 2010) – why? Because a lower land and house price violates the interests of all levels of governments For infrastructure, China will continue to build High Speed Railway (gaotie) Next big project is to build subways – NDRC has received applications from 33 cities to build subways and approved 28. By 2020, the total mileage of subways could reach 6100 km (1.15 trillion public investment during 2010 – 2015)

28. Entry barriers of FDI China has never ever regarded foreign companies having the rights to enter into the Chinese market. The Chinese government has been having an opportunists view on FDI – that is, whether FDI is useful to the objectives of the government (not consumers) Consequently, the government could use its statutory power to abruptly close an initially open market – evidence: lots of complains from foreign firms after 2008 – Why? SOEs lobbied the government for monopoly powers

29. Instruments in controlling FDIs NDRC continues to maintain an Industry Catalog of Foreign Direct Investment Administrative approval system The Anti-Monopoly Law (2008) has been used to block M&A (Coco-colas failed merger application) Government procurement policy significantly favors SOEs Industry-based regulations and rules

30. Opportunity for Australias services sector Im quite pessimistic Take the financial services as an example: – Financial services industry is regarded by the vested interest group as the next opportunity to make big money – following the their manipulation of the stock market and the land (real estate) industry – Very strict and non-transparent industry regulations – Other financial service providers have already adopt the policy of if you can beat it, join it by employing relatives of government leaders and etc.