Taking the Pulse of the Chinese Economy

Challenges & Opportunities

Speaker: Victor Y. Yuan

Horizon Research Group, Inc.

China:A Socialist Economy?

1. Private economy become the major role in national economy, occupied about 70% GDP.

2. Fully market-driven price for about 96% products and services.

3. Strong privatization is an on- going policy for new cabinet

4. Relatively free mobility of labor force5. Land-Contract and free trade system.

Side A

1. Limited state planning on strategic products, financial resources and population

2. Corporate government: Government dominated economic policy-making process.

3. A constructing social safe net without sufficient coverage to rural population.

4. Bureaucrats is still a most competitive and large size employment opportunity.

Side B

YES or NO

China's National Economy Has Maintained Stead Growth Momentum

China’s economy has been increasing stably in a high growth rate

China’s annual economy growth rate was fluctuating between 7-8% in the recent 5 years

China's GDP & Growth Rate

60000

70000

80000

90000

100000

110000

1998 1999 2000 2001 2002

5.00%5.50%6.00%6.50%7.00%7.50%8.00%8.50%

GDP Growth Rate

Number of Home-use Lights Reflects the Actual Growth of China’s Economy

Horizon Research

Average Number of EB in Different Parts of the World Per Family in 1995

All Counties 12 West Europe 19

North America 19 Southeast Asia 9

Latin America 11 China’s Cities 6.5

According to the research findings from Horizon Research in 6 China’s cities, every urban household had 6.5 home-use lights in 1995.

Average Number of EB in Different Provinces’ Rural Family in 2002

Fujian 11 Jilin 5.8

Guangdong 10 Henan 5.4

Sichuan 9 Inner Mongolia 5.2

Overall 7.5

Horizon Research’s latest research shows: 7 years later, the overall number of home-use lights in rural households has exceeded the number in urban households in 1995.

To get more first hand data, please visit www. horizonkey.com

1. 0% 0. 7%4. 9%

18. 1% 18. 6%

59. 0% 63. 1%

10. 6% 8. 4%6. 4% 5. 2%

4. 0%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

year 2001 year 2002

worsen a great deal worsen somewhat stay the same

i mprove somewhat i mprove a great deal don' t know

An optimistic sentiment to economy development existed in ordinary Chinese

Chinese are optimistic about its own economic future in China, 70% of rural and urban residents think the economic situation in China is likely to improve

70%

Data resources: Research on Chinese rural people’s international consciousness conducted by Horizon Group in Apr. 2002

2001 survey 2002 survey

The secondary industry led the growth of China’s economy

The Composition of GDP

0%

20%

40%

60%

80%

100%

1998 1999 2000 2001 2002

Pr i mary I ndust ry Secondary I ndust ry Tert i ary I ndust ry

The service industry growth rate has been relatively stable (about 7.5%)

The secondary industry attributes to the fluctuation of China’s economy

GDP's growth rate & it's composition

0. 00%

2. 00%

4. 00%

6. 00%

8. 00%

10. 00%

12. 00%

1998 1999 2000 2001 2002

GDP growth rate Pri mary i ndustry growth rateSecondary i ndustry growth rate Terti ary i ndustry growth rate

Composition of GDP by Expenditure

Total investment in fixed assets mainly from government was the major strength of pushing China’s economy growth. Chinese government decide not to invest any more directly in industry.

Final consumption expenditure was increasing stably

Due to the slowdown of world economy, the net export drop sharply in 1999. Although it went up in the next two years, it remained negative growth

Growth Rate of GDP By Expenditure

- 0. 3

- 0. 2

- 0. 1

0

0. 1

0. 2

1998 1999 2000 2001

Fi nal Consumpt i on Expendi ture

I nvestment

Net Export

China’s economy: The dependence on domestic demand has been increasing.

• Oct. 2002• Apr. 2002• Oct. 2001

•0.40%•Iran•0.20%•Iran•0.40%•Pakistan

•0.40%•Indonesia•0.30%•Indonesia•0.40%•Iran

•0.50%•Pakistan•0.40%•Viet Nam•0.50%•Viet Nam

•0.60%•Viet Nam•0.60%•Pakistan•0.50%•Indonesia

•0.90%•India•1.10%•India•1.00%•India

•1.50%•North Korea•1.80%•North Korea•1.50%•North Korea

•3.10%•France•2.50%•Australia•3.90%•Australia

•3.90%•Australia•2.60%•France•4.10%•France

•4.30%•Singapore•4.10%•Singapore•6.50%•South Korea

•5.00%•Britain•5.10%•Germany•6.60%•U.S America

•6.00%•Germany•5.60%•Britain•7.40%•Singapore

•9.50%•South Korea•6.00%•South Korea•8.30%•Germany

•12.00%•Russia•12.40%•Russia•15.40%•Russia

•49.60%•Japan•48.60%•Japan•45.30%•Japan

•81.20%•U.S. •81.80%•U.S. •82.40%•U.S

A more globalized economy

List of countries which are important to economic developing of China

Data resources: three times of Research on Chinese people’s Living Index conducted by Horizon Research Group from 2001 to 2002

List of the countries which are mostly friendly to China

Insecure sense on the dependency on US economy due a nationalistic hostile

• Oct. 2002• Apr. 2002• Oct. 2001

• 2002年 10月 • 2002年 4月 • 2001年 10月

• 1.6%• Indonesia• 1.1%•Iran• 1.1%•Iran

• 2.1%• Iran• 1.4%•Indonesia• 1.4%•onesia

• 3.1%• Britain• 2.0%•Britain• 2.0%•Japan

• 3.6%• Viet Nam• 2.9%•India• 2.5%•Britain

• 4.7%• India• 3.4%•Japan• 3.2%•Viet Nam

• 6.3%• Japan• 4.2%•Viet Nam• 4.3%•India

• 7.3%• Germany• 5.1%•Germany• 5.2%•U.S

• 7.8%• France• 5.2%•U.S.• 5.5%•Germany

• 9.0%• Pakistan• 7.5%•France• 8.1%•France

• 10.0%• U.S.• 12.0%•Pakistan• 11.0%•South Korea

• 12.2%• Australia• 12.5%•Australia• 12.2%•Pakistan

• 18.6%• South Korea• 13.1%•South Korea• 15.9%•Australia

• 25.0%• North Korea• 29.4%•North Korea• 33.0%•Singapore

• 28.1%• Russia• 30.0%•Russia• 35.4%•Russia

• 28.6%• Singapore• 31.7%•Singapore• 39.8%•North Korea

Data resources: three times of Research on Chinese people’s Living Index conducted by Horizon Research Group from 2001 to 2002

Investment: Major Strength of Pushing China’s Economy Growth

Growth Rate of Investment

5. 00%

10. 00%

15. 00%

20. 00%

25. 00%

2000 2001 2002

Total East Cent ral West

Total Investment Devided by Regions

0

10000

20000

30000

40000

50000

2000 2001 2002

Total East Cent ral West

Due to the influence of active fiscal policy, total investment in fixed assets increased quickly

FDI obtain a growth again after the Asia Financial Crisis. The transparency, efficiency and honesty has become the major reasons for choosing investment areas. China got more than 50 trillion US$ FDI in 2002.

Caused by the development of west regions policy, the growth rate of investment in west regions was much higher than central and east regions.

The contribution of investment to GDP growth was 58%

Consumption: support the economy steadily

The central government improved the wage of civil servant and the minimum living guarantee of people living in urban areas sharply so that the urban resident’s expectancy of the income took a favorable turn.

Some consumption hot-points emerged. Private cars, housing, telecom and tourism has become popular consumption items in almost all medium to large size cities.

Composition of GDP by Expenditure

0%

20%

40%

60%

80%

100%

1998 1999 2000 2001

Net ExportGross Capi ta l F or m a ti o nFi nal Consumpt i on Expendi ture

The contribution of consumption to GDP growth was 43%

Income Expectancy Accounts for the Increase of Consumption

Percentage

Expectancy of Income

Year 2001 Year 2002

Decrease sharply 1.3 1.4

Decrease slightly 9.3 14.0

Same as present 23.9 22.2

Increase slightly 41.2 42.3

Increase sharply 6.7 5.2

Don’t know 17.9 14.9

Total 100 100

Horizon Research

To get more first hand data, please visit www. horizonkey.com

Horizon’s survey to 4728 residents in 10 cities in year 2002, over 47% residents believed their income would increase.

However, although residents actual income remains growth with a steady decreasing of growth rate of personal income.

New Consumption Items Emerged in China

Horizon Research

To get more first hand data, please visit www. horizonkey.com

HousingHousingIn 2001,• 28.2% residents had bought their own houses in the past 2 years• 26.9% residents had the plan to buy their own houses in 2 years.

CarsCars

• A survey to 1958 people who took part in the 7th Beijing Automobile Industry Exhibition found 76% of them would buy cars. 67% people consider the possibility of buying a car would increase if the country applies the policy of road-construction fees into taxes

TravelingTraveling• According to a report of Horizon Research, the people who chose traveling during the Lab

or’s Day holiday increased by 10 percent in 2002 than in 2001.But obviously not in 2003 due to Sars.

Personal ComputerPersonal Computer

• An research result released by horizonkey.com in 2001 showed over 40% families in six cities of Beijing, Shanghai, Guangzhou, Dalian, Chendu, and Xian had Personal computer.

• At the end of 2004, the rate of families hold PC would be 70% in large sized cities in China.

The Quality of Economy Growth Has Been up

Major Indicators of Main Industry Enterprises

0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

1998 1999 2000 2001 2002

1.251.301.351.401.451.501.551.601.651.70

Total Profi tNumber of Ti mes of Annual Turnover of Current Assets

The total profit of All large size state-owned and non-state-owned doubled in year 2000, then kept stable increasing.

The annual turnover of current assets of these enterprises has become faster.

The proportion of products sold also rose slowly from 96.5% in 1998 to 98% in 2002

Economy Restructuring In the future, China’s economy growth will put more emphasis on the improvement of products’ technological content, and the combination of industrialization & informatization.

Infrastructure productsInfrastructure products High technology productsHigh technology products

Influenced by the active fiscal policy Smelting equipments, steel products, sheet glass, etc. Growth rate of 20-30%.

Upgrading structure products Mobile telecom equipments, computer, program-control exchange equipments, and optical telecommunication equipments. Growth rate of above 30%

The economy Restructuring has made some advancement.

Insufficient Domestic Demand Is the Major Problem in China’s Economy

ReasonReason

The economy structure is not rational.

The gap of income between the resident in urban & rural areas is getting larger.

The unemployment rate remained increasing

ResultResult

Insufficient Domestic Demand

1

2

3

Economy Restructuring Need to Be Push Forward

Heavy VS. LightHeavy VS. LightSecondary VS. ServiceSecondary VS. ServiceDemand VS. SupplyDemand VS. Supply

The structural conflict in demand and supply is very heavy.

Supply: low technological content products

Demand: hi-tech, deep-processed products

The structure of secondary industry and service industry need to be re-organized.

The growth rate of service industry is lower than the rate of secondary industry.

In the secondary industry, the heavy industry has a higher growth rate than the light industry, which is closely related to people’s life.

The Gap of Income Between the Resident in Urban Areas & Rural Areas Is Getting Larger

Differences in PDI of Urban and Rural Areas

0

2000

4000

6000

8000

1997 1998 1999 2000 2001

PDI i n rural areas PDI i n urban areas

Due to the dual structure of China’s society, there is a huge gap of income between the people living in the two areas.

The residents living in urban areas have a much larger growth rate of PDI.

The low income level hampers the formation of consumption demand in rural areas.

Rural Residents Spend More on basic demand Urban residents spend more on higher demand

Horizon Research

To get more first hand data, please visit www. horizonkey.com

Composition of Living Expenditure of Urband & Rural Family

0

10

20

30

40

50

60

Food Cl othes Housi ng Helt h ca r eEducati on &Ent e rt ai n m en t s

Otherexpen d i tu r e

Urban Rural

Since the large gap of income between urban & rural residents, the expenditure structures were quite different. Rural residents spent more on living, such as food, housing, etc.

Change of Living Expenditure in Urban & Rural Households

Per Capita Annual Living Expenditure of Urban & Rural Households

44. 48% 41. 86% 39. 18% 37. 94%52. 56% 49. 13% 47. 71%

11. 10% 10. 45% 10. 01% 10. 05%

5. 83% 5. 75% 5. 67%8. 24% 8. 57% 8. 79% 8. 27%

14. 75% 15. 47% 16. 03%4. 74% 5. 32% 6. 36% 6. 47%

5. 22% 4. 52% 4. 42%5. 94% 6. 73% 7. 90% 8. 61%

4. 44% 5. 24% 5. 55%11. 53% 12. 28% 12. 56% 13. 00%4. 36% 5. 58% 6. 32%

9. 43% 9. 84% 10. 01% 10. 32% 10. 67% 11. 18% 11. 06%4. 55% 4. 96% 5. 17% 5. 35% 2. 18% 3. 14% 3. 24%

0%10%20%30%40%50%60%70%80%90%

100%

1998 1999 2000 2001 1999 2000 2001

Food Cl othi n g

Househol d Faci l i t i es, Art i cl es, Servi ces Medi ci ne & Medi cal Servi ces

Transport, Post and Communi cati on Servi ces Recreati on, Educati on and Cul tural Servi ces

Resi dence Mi scel l aneous Commodi ti es and Servi ces

Urban Households Rural Households

The urban families has a higher decreasing speed of expenditure on food than rural families.

The urban residents spent almost twice times than the rural residents on clothing & education

Both urban and rural families spent quite much on housing, and the rate was keep rising

Unemployment Problem was deteriorating Although the number of employed person was rising stably, the unemployment rate also was going up

The laid-off people from state-owned enterprises (43%) and job-off after graduation (20.4%) accounted for the increase of unemployment rate.

More migrants (current 120 million+ coming 150 million ) from countryside coming to city to look for job, though it will enhance China’s advantage of low labor costs worldwidely.

Employment

2.00%

3.00%

4.00%

5.00%

1998199920002001200268000

70000

72000

74000

76000

10,0

00

Number of empl oyed personUnempl oyment rate i n urban areas

Unemployment Has Become the Most Concerned Issue by Citizens

Top 5 Social Issues Concerned by Citizens

2000 2001 2002

Environment Protection (49.2%) Laid-off & Unemployment (45.2%)

Laid-off & Unemployment (53.5%)

Laid-off & Unemployment (43.7%) Environment Protection (41.3%) Social Security (34.5%)

Juvenile Education (34.7%) Social Security (32.6%) Environment Protection (29.5%)

Public Security (33.4%) Economy Growth (25.8%) Reform of Medical System (26.3%)

Buliding a Clean & Honest Government (29%)

Housing System Reform (25.8%) Economy Growth (25.7%)

Horizon Research

To get more first hand data, please visit www. horizonkey.com

In 2001, Horizon Research’s survey revealed: with the reform of government institutions & State-owned enterprises, the unemployment has become the most concerned issue.

Due to the influence of laid-off, the concern of social security and medical system reform also increased.

Low income in rural areas and uncertainty on employment enhance a high rate of personal saving

Savings Deposit in Urban and Rural Areas

4000045000500005500060000650007000075000800008500090000

1998 1999 2000 2001 2002

100

mill

ion

Savings deposit in urban and rural areas increased dramatically in the recent years. The savings of year 2002 is almost equal the GDP in 2001.

People are inclined to save money for future (self-security)when they are threatened by unemployment & poor social security system.

China’s people: Saving is the main way of investment

Horizon Research

A survey made by Horizon Research shows about 60% urban people chose saving as their investment method.

Over 30% urban people will choose life insurance which is also a very frontward investment way in urban China so far.

To get more first hand data, please visit www. horizonkey.com

The Investment Ways Mentioned by Citizens %

0 10 20 30 40 50 60

Treasury bonds

Real estate

Lot tery

Stock

Li f e I nsurance

Savi ng

Consumption Confidence Is Relatively Low

Horizon Research

To get more first hand data, please visit www. horizonkey.com

Index Positive NegativeEvaluation of National Economy 57.80% 27.70%Evaluation of Individual Income 31.00% 36.20%

Identificaiton of "Now is the best time for consumption" 24.50% 63.10%

Evaluation of Citizens Consumption Confidence

The urban residents’ consumption confidence is stable at a very low place.

Although most people held a positive attitude to the national economy, over 63% people didn’t agree the sentence “Now is the best time for consumption”.

International brands are more competitive in China’s market

Basically foreign rather than local brands have more loyal consumers

Chains of foreign brand

51%

Chains of domestic brand2%

No characters47%

To get more first hand data, please visit www. horizonkey.com

Price Stability & Deflation

Changes of Consumer Price Index

- 2. 00%

- 1. 50%

- 1. 00%

- 0. 50%

0. 00%

0. 50%

1. 00%

1998 1999 2000 2001 2002

Changes of Consumer Pr i ce I ndex

In the year 2000 and 2001, the increase of CPI was influenced by the improvement of services items price by government.

The price of primary products have been driven down by the import products after China’s entry into WTO.

China’s economy is under the pressure of deflation again, due to the influence of insufficient domestic demand & the decreasing price of the primary products.

Reform of banking system is lag behind economy development

conflictBan

ks

Sm

all t

o m

ediu

m s

ized

en

terp

rise

sThe four state-owned banks have strict rules for loan granted by their branches, which ask for small to medium size companies to provide guarantors or mortgages.

For farmers and the small to median sized companies in countryside or small county, it’s very difficult to find qualified guarantor or valid mortgages.

The small-medium sized enterprises can’t get effective, full loan in time.

Does SARS Matter to China’s Economy?

Vic

tim

Ben

efic

iary

• Tourism

• Retailing

• Entertainment

• Restaurant

• Transportation

• Real estate

• Government service

• Hospital and medicare

•Telecommunication

•Medicine

•Hygiene products

•Public health

•News media

Effects on Competitiveness: Increased labor and communication Cost; more reluctance for new FDI; diminishing off-shore P/O.

13% of BJ,SH&GZ residents stay at home, 32% give up or postpone schedule business trip,2% resign their job .

Does SARS Matter to China’s Economy?

Merrill Lynch 7.5%

CitiGroup

BNP Parisbas

JP Morgan Chaso

Morgan Stanley

Goldman Saches

Standard Chartered

8.0%

7.6% 6.5%

7.4% 7.4%

8.0% 7.4%

7.0% 6.5%

7.5% 7.0%

7.9% 7.1%

Major investment banks predict that China will suffer a limited negative impact from SARS, based on the fundamental competitiveness on labor costs and attractive local demand to foreign

products and services. But we still need to observe the effects in the coming two years.

Note: Data in April 2003

New Thinking Paradigm for China from SARS

All these assumption based on the following conditions:

• Chinese government can contain SARS at an internationally acceptable standard no later than September;

• China is able to launch a new persuasive state-plan to build up a Reliable system of public health to develop sustainable and comfortable investment environment and working conditions to deal with the possible long-lasting existence of SARS Virus.

•Chinese government should constantly make efforts to create a more transparent and honest public policy process.

Conclusion and Discussion• The China’s economy will keep high speed growth in the next 10 years• Investment will still be the main driven power of China’s economy growt

h• Urbanization will partially shorten the income gap, but migrants from rur

al areas will worsen the problem of unemployment.• Urban unemployment rate could be higher due to the further restructuring

urban industry and extended policy of privatization of SOEs• Deflation will continue in the future 2-3 years• Active fiscal policy will continue, but will be adjusted by Wenjiabao adm

inistration.• Expanding the domestic demand continue to be the main economy policy• New wave of FDI could be expected happen due to the end of transitional

period for China’s WTO entry.

For more information about Horizon, please log on

www.horizonkey.com