Jack He May. 25 th, 2009 Dream with Central region.

Jack He

May. 25th, 2009

Dream with Central region

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申万研究 22

1. Time to see economic slowdown in Eastern region

2. The aspiration of Central region

3. The path of industrial relocation

Agenda

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申万研究 33

1.1 Slowdown in eastern region: export and FDI

source： CEIC,SWS research

The model, ‘developed country – processing country – resource-rich country’, asks for a change. For a long time in the future, U.S. deposit rate will step up and hover in highs, constituting constraints on China’s exports. China should rely more on domestic demands.

FDI growth rate in central area surpasses eastern area.

Saving rate in USA is on rise FDI growth rate in central area surpasses eastern area

saving rate，USA

-4

-2

0

2

4

6

8

10

12

14

16

Feb-

59

Feb-

62

Feb-

65

Feb-

68

Feb-

71

Feb-

74

Feb-

77

Feb-

80

Feb-

83

Feb-

86

Feb-

89

Feb-

92

Feb-

95

Feb-

98

Feb-

01

Feb-

04

Feb-

07

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total eastern area central area western area

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申万研究 44

1.2 Slowdown in eastern region: Urbanization pace decelerated

Urbanization in eastern region has reached a high level. Many coastal provinces, such as Jiangsu, reported a comparatively low level of urbanization because of regional difference within the province

Development tempo would certainly slow down, when urbanization level stood at highs

urbanization rate

0

10

20

30

40

50

60

70

80

90

100

Ch

ina

Tia

njin

Sh

an

xi

Lia

on

ing

He

ilo

ng

jia

ng

Jia

ng

su

An

hu

i

Jia

ng

xi

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na

n

Hu

na

n

Gu

an

gxi

Ch

on

gq

in

Gzu

izh

ou

Xiz

an

g

Ga

nsu

Nin

gxia


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申万研究 55

1.3 Slowdown in eastern region: infrastructures tend to be saturated

Demands for infrastructures construction tend to be saturated in the eastern region, leaving a small space for future development

Length of Highways（KM/10000KM2）

02000400060008000

1000012000140001600018000

Kore

a（

1975）

Kore

a（

2006）

Chin

a

Shan

ghai

Jiang

su

Zhej

iang

Anhu

i

Fujia

n

Shan

dong

Huna

n

Gua

ngdo

ng

Shaa

nxi

feed piping density（KM/10000 people）

5

7

9

11

13

15

17

19

21

23

Sh

an

xiS

ha

an

xiG

an

suH

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ei

He

ilon

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ng

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申万研究 66

1.4 Slowdown in eastern region: a must when a certain level of economic development is reached

What happened in Taiwan and in Japan? Economic development entered a new stage when GDP per capita exceeded $3000

Economic growth in Taiwan Consumption ratio in Taiwan

GDP增长率，台湾

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

消费占比

45.0%

47.0%

49.0%

51.0%

53.0%

55.0%

57.0%

59.0%

61.0%

63.0%

65.0%

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

GDP growth-Japan

-5%

0%

5%

10%

15%

20%

25%

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Economic growth in Japan消费占比

50.0%

52.0%

54.0%

56.0%

58.0%

60.0%

62.0%

64.0%

66.0%

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

Consumption ratio in Japan


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申万研究 77


2. The aspiration of Central and Western region


Agenda

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申万研究 88

2.1 Expanding domestic demand rests with exploiting central and western regions The model ‘developed country – processing country – resource-rich country’ asks for a change.

The break-off of the Golden Ring is hard to recover in a long time

China needs rely more on domestic consumption, which springs from economic development in central and western regions

pro

duce

r

pro

duct

ion

Resource countries

Resource export

Developed

countries

consumputio

n

source： SWS research

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申万研究 99

2.2 Pick up in central region: infrastructures expansion speeded up

Chinese government gives priority to infrastructures expansion in central and western regions

A large portion of the CNY 4 trillion stimulus package will go to central and western regions

highway density

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Bei

jing

Tia

njin

Heb

ei S

hanx

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ner

Lia

onon

g Jilin

Hei

long

jiang

Sha

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u Z

hejia

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nhui

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ibet

Sha

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Gan

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ingh

ai N

ingx

ia X

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ng

railway density

0

100

200

300

400

500

600

700

800

Bei

jing

Tia

njin

Heb

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Sha

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an

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Gua

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Sic

huan

Gui

zhou

Yun

nan

Tib

et

Sha

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Gan

su

Qin

ghai

Nin

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Xin

jiang

Central government investment alloction in Q4 2008

0

10

20

30

40

50

60

70

江苏浙江广东山东湖南江西福建四川重庆河南广西安徽湖北河北辽宁

黑龙江吉林陕西山西云南贵州甘肃青海宁夏

内蒙古北京天津新疆西藏上海


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申万研究 1010

2.3 Pick up in central region: comparative advantages emerge gradually

Policy preference: eastern region saw advantages forfeited; more favorable policies are provided to central and west regions

Infrastructures in central and western regions have been improved significantly; distribution costs fell as a consequence

Central and West region: less land cost, cheaper human cost

The more Chinese economy relies on domestic demand, the more advantages central region, as a bridge, would have

Case of Hefei

market cover 0.5 billion population in 500km diagram

airline more airports

highway 2 country level highway，5 express ways

railway 4 railway，3 more under construction

water way Changjiang

labor cost 47％ lower than Shanghai

policy tax reduction etc.


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申万研究 1111

2.4 Pick up in central region: industrial relocation accelerates

Industrial relocation has opened the curtain. Many industries relocated their capacity into central region and many western areas. Our grassroots-level investigation shows Anhui, Jiangxi and Hunan are more appealing than ever to industries that plan to conduct production transfer

What makes the Central region the most attractive target?

Lower cost, better policy support and larger market size

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申万研究 1212

2.5 Central and western regions’aspiration: re-jump start urbanization process Urbanization is one of main engines of China’s economic growth

Urbanization in coming years could only rely on central and west regions

Follow development path of eastern region: exports + industrial relocation (from overseas)→ economic development → improved income + infrastructures → urbanization (driven by local rural people) → all-round development in the region

Industrial relocation is the key to industrialization, which paves the road for urbanization

export

Production transfer

Economic development

Income growth

Infrastructure constrution

Urbanization resume……

The development Path of eastern area


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申万研究 1313

2.6 Central and western regions’aspiration: new locomotive of economic growth• Infrastructure investments in and industrial relocation to central and western

regions will make the regions a new economic locomotive • Aspirations include but not limited to infrastructure construction and industrial

relocation. The progression in central and western regions will re-jump start China’s urbanization process

• China will carry forward previous development model, if urbanization process is resumed. Real estate will continue to be the key driver of domestic demands

FAI growth rate in central area has been the highest since 2005

0.15

0.2

0.25

0.3

0.35

0.4

0.45

Jan

-05

Ap

r-0

5

Jul-

05

Oct

-05

Jan

-06

Ap

r-0

6

Jul-

06

Oct

-06

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

eastern area central area western area


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申万研究 1414


2. The aspiration of Central and Western region


Agenda

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申万研究 1515

3.1 Determinants of industrial relocation

Determinants of industry relocate include:

1、Natural conditions: geographic location and resources

2、Distribution costs: transport infrastructure and geographic location

3、Policy

4、Market size: population and income

5、Labor cost: quality and quantity

6、 Industry foundation: historical industry layouts

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申万研究 1616

3.2.1 Geographic location & distribution cost

The most advantageous provinces in terms of geographic location and distribution cost include: Anhui, Hunan, Jiangxi and Guangxi

The area happens to encircle major processing provinces, such as Jiangsu, Shanghai, Fujian and Guangdong


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申万研究 1717

3.2.2 Policy support

The most advantageous areas in terms of policy support

The first echelon formation: Tianjin: New Coastal District (Binhai New Area); Sichuan and Chongqin: Urban-rural integration pilot zone

The first echelon formation: Guangxi: Beibu Bay economic zone; Hunan and Hubei: comprehensive reform pilot zone; Fujian: West Straits economic zone

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申万研究 1818

3.2.3 Market

The most advantageous areas in terms of market size

Large population: Henan, Anhui and Jiangxi

High income: Jiangxi, Anhui and Hunan

0

5000

10000

15000

20000

25000

Jiangxi Hunan Anhui Henan Hubei

urban population rural popultion

best in terms of income per capital ，2007

1

6

11

16

21

26

Hun

an

Liao

ning

Inne

r mon

g

Cho

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n

Toal

Sha

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n

Tian

jin

Jian

gsu

Gua

ngdo

ng

Zhjia

ng

Bei

jing

Sha

ngha

i


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申万研究 1919

3.2.4 Natural resources

Resource rich areas include: Shanxi,Innner Mongolia, Anhui, Henan, Shaanxi, Sichuan, Hunan, Guizhou, Liaoning, Heilongjiang and Xijiang


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申万研究 2020

3.2.5 Human resources

From absolute quantity perspective, Henan, Sichuan, Hebei, Hunan, Anhui and Hubei have the largest population

From labor quality perspective, Hunan, Sichuan (Chongqin), Anhui, Henan, Jiangsu (northern part), jiangxi and Hubei have massive skilled labors

From cost perspective, Hunan (ordinary labor) : $1000 per year; Chendu (undergraduate): CNY12904 per year; Jiangxi: skilled labor: CNY900-1200 per month; Anhui: CNY800 per month

county labor quantity

0

1000

2000

3000

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5000

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7000

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an

g

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n


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申万研究 2121

3.2.6 Original industrial layouts

Industrial layouts during the Third-Front Construction period: areas resided in east of Wuqiao peak, Gansu, west of Beijing-Guangzhou railway, south of Shanxi Yanmen Pass and north of Guangdong Shao Pass. (northwest region: Gansu, Ningxia, Shaanxi; southwest region: Sichuan, Chongqin, Guizhou; south central China: Hunan, Hubei)

Industries mainly concentrated on steel, metallurgy, equipment manufacturing, building material and petrochemical


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申万研究 2222

3.2.7 Geographic targeting of industrial relocation: Our judgment

Comprehensively considering geographic location, distribution cost, market and resource layouts, we believe Central region has the largest development potential; Anhui, Hunan and Jiangxi can be the optimal options

We suggest to pay attention to areas that entertain policy preference: Tianjin, Chendu and Chongqin

Industrial relocation into these above-mention areas will help boost economic growth and speed up urbanization process

0.18

0.2

0.22

0.24

0.26

0.28

0.3

0.32

0.34

19

52

19

55

19

58

19

61

19

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19

67

19

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19

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19

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19

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19

82

19

85

19

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19

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19

94

19

97

20

00

20

03

20

06

Ratio of central to total ratio of central(plus Sichuan and Chongqin)to total


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申万研究 2323

3.3.1 Time path of industrial relocation

Relocation of industry takes time

Spearhead could be infrastructures industry and logistics industry(2010)


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申万研究 2424


Thereafter, the order should be cost-sensitive labor-intensive industry, capital-intensive industry and technology-intensive industry in turn

Previous industrial relocations occurred in eastern regions:1980－ 1992: labor intensive industry; 1992－ 2005: capital intensive industry

ratio of machinery export

0

0.05

0.1

0.15

0.2

0.25

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

ration of labor intensive export

0

0.05

0.1

0.15

0.2

0.25

1980

1982

1984

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1990

1992

1994

1996

1998

2000

2002

2004

2006

2008


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申万研究 2525


Let’s set the Pearl River Delta as an example:

The first round of relocation in the Pearl River Delta started from the inception of China’s Reform and Opening-up. At that time, HK manufacturing sectors, such as apparel, textile, plastics, electronic components, metal and non-metal, relocated their capacity into the Pearl River Delta. Most of industries fell in the category of labor-intensive industry.

The second round of industrial relocation began from 1990’s. After 20 years’ development, the Pearl River Delta gained substantial headway. Meanwhile, production costs escalated, leaving labor-intensive enterprises narrower space for future development. Under this circumstance, the Pearl River Delta made various efforts to attract new- and high-tech industries including computer, information technology and bioengineering.

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申万研究 26


2009 2010 2015 2020 2030

Central

East

Infrastructure Investment

Industrial Relocation :Labor Intensive

Industrial Relocation ： Capital Intensive

Urbanization In Central Areas: Real Estate, Industrial Engineering

Service+Finance+R&D

Consumptions In Central Areas

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申万研究 2727

3.3.2 Already occurred industrial relocation

• Anhui: Household appliance; Hunan: Textile, Apparel, Toys• Hubei: Electron, Petrochemical; Henan: Food processing, • Jiangxi: Processing manufacturing; Sichuan: Petrochemical, Electron• Chongqing: Automobile, shoes


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申万研究 28

Undertakings of the AnalystHe ZhenhuaI am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China or have equivalent professional competence. I issue this report independently and objectively with due diligence. This report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein.

Information Disclosure with respect to the CompanyThe Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials.

Information Disclosure：

This report is to be used solely by the clients of Shenyin & Wanguo Securities Research Institute Co, Ltd. (hereinafter referred to as the “Company”). The Company will not deem any other person as its client notwithstanding his receipt of this report.

This report is based on published information which the Company believes to be reliable, however, the authenticity, accuracy or completeness of such information is not warranted by the Company. The materials, tools, opinions and speculations contained herein are for the clients’ reference only, and are not to be regarded or deemed as an invitation for the sale or purchase of any security or other investment instruments.

The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of the research opinions, which are subject to the complete report released on the Company’s website (http://www.sw108.com). The clients may ask for follow-up explanations if they so wish.

The materials, opinions and estimates contained herein only reflect the judgment of the Company on the day this report is released. The prices, values and investment returns of the securities or investment instruments referred to herein may fluctuate. At different periods, the Company may release reports which are inconsistent with the materials, opinions and estimates contained herein.

The clients shall consider the Company’s possible conflict of interests which may affect the objectivity of this report, and shall not base their investment decisions solely on this report. The investment and services referred to herein may not be suitable for certain clients and shall not constitute personal advice for individual clients. The Company does not ensure that this report fully takes into consideration of the particular investment objectives, financial situations or needs of individual clients. The Company strongly suggests the clients to consider themselves whether the opinions or suggestions herein are suitable for the clients’ particular situations; and to consult an independent investment consultant if necessary.

Under no circumstances shall the information contained herein or the opinions expressed herein forms an investment recommendation to anyone. Under no circumstances shall the Company be held responsible for any loss caused by the use of any contents herein by anyone.

Independent investment consultant should be consulted before any investment decision is rendered based on this report or at any request of explanation for this report where the receiver of this report is not a client of the Company.

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申万研究 29

Shanghai SWS Research & Consulting Co., Ltd.He zhenhua [email protected]

申万研究 • 拓展您的价值SYWG Research • CHINA Value Revealed

Jack He May. 25 th, 2009 Dream with Central region.

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