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THE CHINESE CENTURY

INSIGHTS INTO THE ASIAN GROWTH STORY

MAY 2005

THE CHINESE CENTURY INSIGHTS INTO THE ASIAN GROWTH STORY May 2005

CONTENTS

1. INTRODUCTION PAGE 3

2. THE ASIAN ECONOMIES PAGE 3

3. CHINA AND COMMODITIES PAGE 4

4. THE RISE OF THE CONSUMER PAGE 5

5. INVESTMENT IMPLICATIONS PAGE 7

This report was prepared by:

Neville Giles & Michael Skeggs Fund Distributors Ltd

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This report is for information purposes only and is not intended as personal investment advice or as a recommendation to invest. The information contained in this report is a collection of information compiled from various research reports Opinions are reasonably held at this point in time. The writers have made every effort to check the accuracy of the information in this article, however, no responsibility can be taken for any error or omission, now or due to subsequent changes occurring

THE CHINESE CENTURY INSIGHT INTO A BOOMING ECONOMY May 2005

1. INTRODUCTION

This research report is a synthesis of GDP Percentage Growth 2004 a number of research articles on 9.50% Asia, and in particular China. It aims 10.00% to outline some of the key 9.00% 8.00% 6.50% 6.30% 6.60% developments in the region and 7.00% 5.70% 6.00% gives some insight into potential 5.00% 4.00% 2.70% outcomes. 3.00% 2.00% 1.00% 2. THE ASIAN ECONOMIES 0.00% 1 Asia has become one of the fastest China India Korea Singapore Taiwan Japan growing regions in the World. China, in particular, has become one of the Asian Populations 2004 hottest growth stories since the leadership of Deng Xiaoping in 1978. China 1.3 billion He initiated reforms to move towards India 1.0 billion a market based economy within a Indonesia 223.8 million communist Government. Now, Japan 127.0 million China’s economy is growing at Philippines 86.2 million almost double-digit rates creating a Thailand 64.6 million growing middle class. Also, the Korea 48.0 million removal of corruption, one of the Malaysia 25.5 million drawbacks of the Chinese economy Taiwan 22.0 million in the past, is a key focus of the Singapore 4.2 million

Chinese Government. Similarly, many other Asian economies are Goldman Sachs have published a becoming more sophisticated. The report with growth projections for the Asian crisis lessons of 1998 have BRIC (Brazil, Russia, India & China) been learnt and many economists economies until 2050. The key and analysts are predicting solid and assumption underlying their sustainable growth going forward. projections is that governments of From a size perspective, 60% of the the BRIC countries continue to world’s people live in Asia and 37% support economic growth. Some of of the world lives in China and India the key projections from their report alone. As a result, companies in were: these markets have huge home markets to tap into. As these By 2025, Goldman Sachs predicts companies grow, so will their the BRIC economies to account for influence and importance in the half the size of the G6 (US, UK, global economy. Germany, Japan, Italy and France)

THE CHINESE CENTURY INSIGHT INTO A BOOMING ECONOMY May 2005 economies. They also predict that in The increase in commodity prices is less than forty years, the BRIC often called ‘the China effect’. A economies together will likely be Merrill Lynch report said "Chinese larger than the G6 economies. demand for commodities is revolutionising global commodity They predict China’s economy to markets" and "China has already overtake Germany’s economy in four overtaken the USA as the largest years, Japan’s economy by 2015 consumer of iron ore, steel and and the US economy by 2039. copper."

Furthermore, they believe India has In the same report, Merrill Lynch said the potential to show the fastest “China, the world's sixth largest growth in the next thirty to fifty years. economy, now accounts for between In fact, they predict India to grow in a fifth and a third of the world's excess of 5% per annum over that consumption of alumina, iron ore, period. zinc, copper and stainless steel.”

3. CHINA AND COMMODITIES The report also said some of the materials imported are manufactured Oil is a good example of the demand into finished goods for export. China pressures building up in China for exports much of the iron ore it raw commodities. Ten years ago, imports once it has processed it into China imported no oil at all as steel, for example. Similarly, China's consumption was fully met by their alumina imports are turned into own production. However in 2003, aluminum for export. following massive increases in demand, it overtook Japan to China's exports are exceeded only become the world’s second biggest by those from the US, Germany and importer of oil behind the US. Japan. If current growth rates are sustained they will exceed those of Petroleum Consumption China the US in less than a decade, said 30000 the Merrill Lynch report. 25000

20000 To support continued economic

15000 growth, China is searching for new (10 000 tons) oil reserves. Chinese officials have 10000 been visiting major producers of 5000 energy in order to secure long term

0 1990 1995 2000 2001 2002 supply contracts. For example, Year Petrochina Company Ltd has recently executed a memorandum of The graph above shows the rapid understanding with Enbridge from increase in oil consumption in China. Canada to build a pipeline between the two countries which could result

THE CHINESE CENTURY INSIGHT INTO A BOOMING ECONOMY May 2005 in 200,000 barrels of crude being than two million private cars. Many imported per day by 2009. are small hatchbacks, but there are a growing number of sports utility 4. THE RISE OF THE CONSUMER vehicles.

In China, incomes are rising resulting "Already Volkswagen sell more in a growing middle class. The vehicles in China than in Germany, economy is trying to meet the while China consumes the same expanding needs of a new amount of global commodities as the generation of consumers. Chinese US," according to a JP Morgan consumers now have a shopping list Fleming report. The report also said: including fridges, televisions, "By value, demand in 2003 for non- phones, cars and entertainment. oil commodity imports will be up to The process of “urbanisation” is approximately $7bn compared with unprecedented in human history. less than $2bn in 1996. The growth Twenty million Chinese people are is phenomenal and the impact on the moving each year from the world should not be underestimated." countryside to the cities. This is equivalent to a city the size of

Auckland being built every month! Number of Private Owned Vehicles

To build the necessary infrastructure 900 (houses, factories, roads, cars etc), 800 huge quantities of raw materials and 700 services are needed. India is also 600

500

following a similar process with the units)

400 urbanisation and industrialisation of (10,000 over a billion people. 300

200

The increasing “consumerism” also 100 shows in growing demand for 0 1985 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Western consumer items, such as Year cars. Rupert Wingfield-Hayes, a BBC correspondent in Beijing Chinese have also taken rapidly to recently said: the mobile phone. The Ministry of Information released information that “Ten years ago, the [six lane ring] China had 114 million new phone road was devoid of traffic, the odd subscribers in 2004 of which 64.8 bus, a few taxis, and lots and lots of million (or 56%) were mobile phone bicycles, today it is gridlock. At five subscribers. China now has 647 in the afternoon it is more like a six million phone users. lane parking lot. Another insight into the rise of the In the last few years the Chinese Chinese consumer is to look at have taken to cars. Beijing has more

THE CHINESE CENTURY INSIGHT INTO A BOOMING ECONOMY May 2005 franchises. A Chinese word has been developed for ‘franchise’ (jia Total Retail Sales of Consumer Goods China eng, roughly translating to “person 50000 joins group of other people”). The 45000 franchise concept has taken some 40000 time to catch on but China has 35000 recently adopted its first commercial 30000 Yuan) 25000

franchise laws and franchises are million 20000 growing, including international ones (100 such as McDonalds, Century 21, 15000 10000

Athlete’s Foot and Subway. 5000

0 1978 1980 1985 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 In its first Consumer Outlook Survey Year for China, KSA, a retail and consumer products consulting firm, gathered in-depth information from Survey respondents also showed a more than 600 male and female high level of brand awareness and respondents across all age groups, loyalty. Asked to identify products and from four cities - Beijing, made by a variety of brand names, Shanghai, Chengdu, and Shenyang - 83% of consumers on average were - representing a middle-class section able to do so. Seventy-eight percent of China's population. Responses said they buy toiletry brands they revealed emerging trends that will know and that they are unlikely to significantly affect the global retail switch if their brand isn't available. industry. According to the same survey, The Chinese consumer is becoming Chinese consumers' preference for more discerning, moving rapidly from foreign or local brands differs greatly finding the best price to seeking the depending on the type of product best quality. Survey respondents they are buying. In electronics and said the critical factors in choosing a home improvement, consumers have brand are trust in its quality (92%), a a strong preference for foreign positive impact on health (81%), and brands over local ones. In the food its care for customers (76%); having and personal care products a fair price ranked only fifth (73%). categories, they prefer local brands In choosing a shopping destination, 2:1 over foreign ones. In apparel quality (52%), service (39%), and and footwear, the mainstream variety (36%) were the top three consumer did not show a preference factors, with value placing fifth for foreign or local brands. However, (27%). higher income and younger consumers both indicated a strong preference for foreign branded apparel and footwear products. The report said this has huge implications

THE CHINESE CENTURY INSIGHT INTO A BOOMING ECONOMY May 2005 for both foreign companies wishing market exhibits a number of unique to profit from the consumer boom characteristics meaning that there and also Chinese companies as they will be winners and losers in the rush target their home markets. to quench the Chinese thirst for consumer goods. Survey findings also revealed consumer dissatisfaction runs high in 5. INVESTMENT IMPLICATIONS China. People shop once a month or less for items such as consumer From the research, it seems electronics and clothing, suggesting indisputable that China will have an shopping is not enjoyed by much of increasingly important role to play in the population. According to the the world. However, the gains and survey, 48% of women said they losses may not be equally shared. dislike shopping, outnumbering 30% Below is a summary of possible of US women who say the same. investment implications we have Sixty-three percent of men said they come across whilst preparing this dislike shopping, putting them report: roughly on par with their US counterparts. • Commodity prices are likely to continue to increase due to The survey also shows a fragmented ongoing Chinese demand retail sector. Consumers do their pressures and supply constraints. food shopping at supermarket chains However, prices may become almost twice as often as they do at more volatile. traditional open-air markets or hypermarkets. But hypermarkets are • Suppliers of commodities such as growing in popularity: about 40% of New Zealand, Australia and people are shopping more in these Canada may benefit from this large-scale stores this year trend. Over time this may lead to compared with last year. For higher exchange rates for these apparel and footwear, respondents countries. favored department stores. But they went to local specialty stores for • The growth of the Chinese consumer electronics, and economy may be positive for superstore chains for home suppliers of technology such as improvements. Japan, Korea and Taiwan who use China as a re-export In summary, the report said the platform, due to the lower labour growing awareness and costs in China. consumerism of the emerging Chinese middle class represents an • As Chinese consumers become opportunity for both Chinese and wealthier and more sophisticated overseas companies. However, the

THE CHINESE CENTURY INSIGHT INTO A BOOMING ECONOMY May 2005 there may be opportunities for SOURCES strong global brands to take advantage of the world’s largest Australian Government Department and fastest growing economy. of Foreign Affairs and Trade (www.dfat.gov.au) • Suppliers of services such as investment banking, accounting, China Daily and consulting may have huge (www.chinadaily.com.cn/en/doc/200 opportunities in China as the 3-08/30/content_259693.htm) sophistication of local businesses increases. Chinese Statistical Yearbook 2004

• Some industries worldwide may Energy Bulletin be negatively impacted by the (www.energybulletin.net/5411.html) growth of China. For example, high cost manufacturers making Financial Times low value products may be (www.financialtimes.com) undercut by Chinese production. Companies with weak brands or Fortune Magazine March 2005 inability to protect against imitation may see their sales and Goldman Sachs Economics Report profits drop. Paper No:99 (www.gs.com) – Dreaming with BRICs

Kurt Salmon –KSA Report (www.kurtsalmon.com)

Merrill Lynch Report

(www.ml.com/research)