China’s 12th Five Year Plan

& Economic Outlook

Prepared for US-China Cross-Border M&A

Forum

October 2011

Today’s agenda

Setting the Context - China’s political system

Overview of the 12th Five Year Plan

Plan importance

Plan Development

Key Themes

Impact on multinational corporations in China

Economic Outlook

Setting the Context - China’s political system

China’s Power Structure in Theory

Four government

organs with power and

responsibilities shared

between them

China’s Power Structure in Reality: Top-down from the Party

Communist Party of China

State Council

National People’s Congress

Chinese People’s Political Consultative Congress

The Central Committee of Chinese Communist Party (CCP) and its 9-person

Politburo Standing Committee is the ultimate authority

State Council follows CCP’s guidance to develop and implement policy

NPC is a ‘rubber stamp’ rendering policy into law

CPPCC is vehicle for outreach to non-CCP elements with

influential individuals but no executive or legislative authority

POLITICAL DEVELOPMENT

1949-1978

Focus on class struggle & ideology

Emphasis on state planning and industrial development

Personality cult - Mao as center of power

Class struggle deemphasized

Pragmatism trumps ideology (To get rich is glorious)

Deng as supreme leader, but without personality cult

“Three Represents” justifies market economy

Party legitimacy sustained by economic growth and increased prosperity

Enhanced individual freedoms, but limited political reform

“Harmonious Society” and “Scientific Development Outlook”

Focus on equitable growth

Growing confidence and nationalism

ECONOMIC DEVELOPMENT

Central-planned economy dominated by SOEs and collectives

Administrative orders, quotas and procurement drive China’s economy

Growth, modernization and reform prioritized

Many price controls and quotas removed and greater foreign investment permitted

Coastal areas benefited most from reform

Accession into World Trade Organization

Socialist market-economy principles promoted

State role reduced, SOE dismantling begins

Foreign investment and technology transfer encouraged

Increased globalization

Greater focus on sustainable development

Combating resource inefficiency & environmental degradation prioritized

CENTRAL PLANNING

1978-1994

1994-2003

2003-PRESENT

REFORM AND OPENING UP

CONTINUED REFORM

EQUITABLE DEVELOPMENT

1ST GENERATION—MAO ZEDONG

2ND GENERATION—DENG XIAOPING

3RD GENERATION—JIANG ZEMIN

4TH GENERATION—HU JINTAO

Two candidates, 54-year-old Xi Jinping and 52-year-old Li Keqiang have emerged as competing candidates to be China’s next

generation of leaders. In addition, another six members in their 50s were named to the Politburo and/or the Secretariat. These

eight rising stars collectively have formed a “succession team” set to take over as the 5th generation of leaders in 2012-2013.

5th GENERATION

China’s Economic Evolution: Reflecting leadership’s vision

Importance of the 12th Five Year Plan

Plan Development

Key Themes

Impact on multinational corporations in China

Five Year Plans Through the Ages

Key industrial planning tool

Important coordinating mechanism even with transition toward market economy

•Fewer numerical targets/quotas

•More sophisticated measurement systems

•More market-based approach

More qualitative than quantitative (计划 to 规划)

Includes environmental & social planning

Implementation remains difficult

Dangers of excess; pressure to meet goals

Does it matter?

China’s key document to achieve

medium-term economic and social policy objectives

A master policy blueprint…

Years 3-5 Revision

Years 4-5 Drafting of Next

FYP

Year 1 (March)

FYP Issued

Years 1-5 Plan

Carried Out

Year 3 Mid-Term Review

… that cyclically structures policy-making

The 12th National Five-Year Plan for Economic and

Social Development

Broad policy objectives for 2011-2015.

Largest policy-making event in China.

Scope includes wide range of social and economic

issues: GDP growth, industry restructuring,

healthcare, environmental protection, urbanization

and energy policy.

FYP Issuance followed by roll-out of detailed

implementing actions, including related laws,

pricing policies, financial incentives, and

investment support.

The Planning Process: Five-Year Plans

More Players Than Ever Before

Key players in central-level FYP development

Issue basic FYP guidelines

Role

Review and approve final draft

Draw up final draft

Organize intra-governmental

research & drafting; early drafts

Assist in research & drafting

within relevant mandate

Review and provide comment

Non-Government

Consultation process

includes domestic and

foreign experts from

academia and industry.

Consultation process

trending toward greater

transparency and

higher degrees of input

from different levels of

government, experts

and the public.

NDRC

State Council

Departments

National People’s

Congress

State Council

CPC Central Committee

CPPCC

Organization

Extensive consultations within government and with outside experts;

increasingly standardized process

National FYP Broad objectives

Local FYPs Match central-level

objectives

Special Plans State Environmental Protection

Standards for the 12th FYP (Draft for Comment) (Oct. 2010)

Regional Plans Yangtze River Delta Regional Plan

(May 2010)

Medium and Long-Term Plans Medium/Long-Term Renewable Energy Dev. Plan

(to 2020) (Aug. 2007)

Decisions, Programs, etc. State Council Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries (Oct. 2010)

Integrates Central & Local Plans

Coordinated Planning:

Matrix of Central/Local-Level FYPs

• National FYP governs policy

documents at all levels

• Approval from local levels of

government, but plans must conform

to National FYP

• Provincial-level FYPs must also

conform to any relevant Regional FYP

• Special Plans must conform to Special

Plans at higher levels of government

• Extensive vertical and horizontal intra-

governmental consultation in drafting

plans with drafts of subordinate FYPs

often completed before, and feeding

into, the National FYP

• Implementation also coordinated

Findings from local plan fed

into central plans

Local plans must

reflect central goals

Now Official: Ratified by NPC

12th FYP drafting process began in 2008, around 11th FYP mid-term review

Drafting process lasted more than two years

Review & Approval

Drafting

2008 2009 2011 2010

Research

Dec. 2008

11th FYP

mid-term review

Dec. 2009

2nd National

Economic

Census

provides

economic data

for coming FYP

Jan.-Oct. 2010

FYP draft

formulated by

NDRC and

reviewed by

special expert

committee

Oct. 2010

CPC Central

Committee

releases

FYP Guidelines

Nov.-Dec. 2010

NDRC launches

two-month

public comment

period

Nov.-Jan. 2011

State Council

completes

final version of

FYP

Mar. 2011

FYP Outline

Released after

NPC’s

endorsement

Beyond Mar.

Special,

Regional, MLT

plans

formulated and

implemented

across China

Key Themes & Targets

12th FYP (2011-2015)

Restructuring

the

Economy

Promoting

Social

Equality

Protecting

the

Environment

Main Tasks and Strategic Priorities

Key Themes

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Key Targets

12th FYP 11th FYP

Annual GDP Growth 7% 7.5%

Annual Service

Sector Increase 4% 3%

GDP Energy

Intensity Reduction 16% 20%

GDP Carbon

Intensity Reduction 17% --

Annual Affordable

Housing Units 36 million --

Annual Urbanization

Increase 4% 4%

Economic Restructuring

• Develop 7 SEIs as backbone of Chinese economy: next-generation information technology, high-end

equipment manufacturing, new materials, new energy cars, energy saving and environmental

protection, alternative energy and biotechnology

• Spend RMB 10-14 trillion to develop these industries; increase SEI’s contribution from 5% of GDP to

8% by 2015 and 15% by 2020

Focus I: Strategic Emerging Industries (SEI)

•Upgrade economy from export-oriented to consumption-oriented, innovative growth model

•Cancel favorable polices designed to encourage processing trade (eg. export VAT rebates), resulting in

shrinking profit margins for low-value-added manufacturers

Focus II: Consumption-led Growth

• Upgrade and consolidate certain industries (esp. highly-polluting industries)

• Promote industry M&As as well as investments in advanced manufacturing equipment and technology

Focus III: Industrial Upgrading

Promoting Social Equality “Inclusive growth” 包容性增长

•Reduce urban/rural income gap by:

• Increasing urbanization (47.5% to 51.5%)

• Increasing social safety net for rural population

• Improving basic health care coverage and rural land distribution

Focus I: Urban/Rural Divide

• Promote balanced regional development by attracting investments and industrial relocation to China’s

central and western provinces through preferential policies including:

• Industry-specific regional development plans

• Establishing Liangjiang New District in Chongqing which offers same incentives found in Shanghai’s

Pudong New District and Tianjin’s Binhai Development Zone, including 15% EIT

• Regional development incentives (reduced EIT)

Focus II: Regional Development

•Increase minimum wages and standards of living

• More public housing

• Beijing government has announced plans to increase minimum wages by 40% by 2015

• CPPCC Vice Chairman Huang Mengfu says should increase 20%/yr for next five years (Sept 2010)

Focus III: Income Disparity

Environmental Protection & Energy Efficiency Red to Black to Green?

•Support energy-efficiency technology

•Set a national mandatory energy emissions reduction target of 17%

Focus I: Energy Consumption

• Consider linking green indicators to accountability of local government officials to encourage green

development

• Consider introduction of new carbon tax and other environmental taxes and policies such as

increased fossil fuel prices and carbon-trading market

• Promote water conservation projects: improve efficiency of usage, limit scale of water exploitation,

curb water pollution

Focus II: Environmental Quality

•Comply with China’s pledge, namely, 15% of energy coming from non-fossil fuels by 2020

•Cap coal production and support development of wind, solar, biomass, hydro and nuclear energies

•Increase government funding: $700-800 billion from $181 billion in 11th FYP

Focus III: Renewable Energies

Sector Snapshot: Healthcare

Create a modern health care industry with expanded coverage

Health Care System Reform

• Continue broader basic health care coverage

• Expand infrastructure for grassroots medical networks

• Increase public awareness of disease prevention

• Create national health care standards

• Heavy investments in health care IT

Restructure Pharma Sector

• Establish large national pharma champions, with revenues reaching RMB 100 billion

• Consolidate small drug distribution companies

• Reduce drug prices and ensure drug quality

Promote Biotechnology

• Support development of innovative biotech products, high-end medical devices, and patented medicines

• Government funds for R&D of new drugs

• One of the 7 SEI’s

Sector Snapshot: Food & Consumer Products

Expect gains as China shifts to consumption-driven growth

Support Consumption:

Raise minimum wages

Develop logistical and administrative capacity for

movement of goods and services between eastern,

western, and central China

Continue providing subsidies for consumer durables

purchases in rural areas

Encourage urbanization, particularly development of

tier 2 and 3 cities

Promote a Modern Service Industry:

Financial services, including credit cards, leasing,

e-commerce

Wholesale and retail

Hospitality, including hotels and restaurants

Community services, including healthcare

Source: Economist Intelligence Unit

China hopes to increase

consumption by approx 3%

Sector Snapshot: Technology

Transition from “Made in China” to “Designed in China”

Indigenous Innovation

•Heavy investment in S&T

•Strengthen IPR use and protection

•Support commercializa-tion of technology

Informatization

•Upgrade technological capabilities of “triple play” services, e-commerce, e-government and statistics systems

Next-Gen IT

•Develop triple play services, e-commerce and e-government

• Invest in R&D of “Internet of things,” cloud computing, and develop digital and virtual technologies

Education

•Higher education reform

• Improve scientific achievement evaluations and rewards

•Encourage Chinese nationals to return home

Sector Snapshot: Energy and Environment

Continue consolidating coal mining

companies: 8 to 10 coal companies will

account for two-thirds of coal production by

2015.

Structure new energy policies around hydro

and nuclear power: an additional 14 nuclear

power plants and 50% increase in

hydropower capacity by 2015.

Three of seven SEIs devoted to energy and

environment sectors: “Energy Efficiency and

Environment,” “New Energy” and “New

Energy Vehicles.”

Further development of power grid and

smart grid: State Grid’s investments will

exceed RMB 17 billion during this period.

Maintain coal as dominant energy source, but increase proportion of renewable energy

Economic Outlook

Pessimistic view (e.g., Michael Pettis,

Carnegie)

China's growth based on large increases in government-directed

investment.

Chinese households consume only about 35% of GDP, far less than any

other country. Must rebalance away from investment and toward domestic

consumption

To raise consumption to 50% of GDP, household consumption would need

to grow four percentage points faster than GDP

In the past decade, Chinese household consumption has grown by 7% -

8% annually, while GDP has grown 10% - 11%.

If GDP grows by 6% - 7%, household consumption would have to surge by

10% - 11%

powerful structural factors working against this level of growth in

consumption

And, Chinese GDP numbers are overstated

Optimistic view (e.g., Yukon Huang,

Carnegie)

Many point to China’s low consumption-to-GDP ratio at 35%

and a high investment-to-GDP ratio that exceeds 45%.

Few pause to notice that these numbers, especially in

consumption, are inconsistent with market perceptions.

Domestic consumption is seriously understated

Estimates of the share of investment in GDP are too high

China's GDP—like consumption—is likely much higher than

reported.

Practical view (e.g., David Barboza, NYT)

Economic system favors state-run banks and companies over wage

earners. interest rates on savings accounts kept artificially low, cannot

keep pace with China’s rising inflation

Other factors— a weak social safety net, depressed wages and soaring

home prices — create a hoarding impulse that compels many people to

save anyway, against an uncertain future.

Decade of remarkable economic growth has been underwritten by the

household savings — not the spending — of the country’s 1.3 billion

people (transfer of wealth from Chinese households to state-run banks)

Middle-class families are unable to enjoy the full fruits of China’s

economic miracle.

Significance for Foreign Business

The Medium to Long-Term Plan for Science and Technology (2006-2020)

(State Council, February 2006) Increased overhead costs

Minimum wage hike and value-

added tax increases

Potential environmental taxes

(i.e. environmental insurance

plans and carbon tax)

More complex operating

environment

Development of SEIs, economic

restructuring plans, and income

level reforms will introduce new

regulations and new stakeholders

China’s economic power will

increase; national champions

Government procurement;

expanded service sector

Emerging business opportunities in

tier-two cities in central and western

provinces

Potential collaboration opportunities

with Chinese companies as

government increases investment in

R&D and technological innovation

for joint projects

Stricter government enforcement of

IPR as government seeks to improve

IP legal system and strengthen IPR

creation, application, protection and

management

Challenges Opportunities

Global consultancy started in 1984 in Washington, D.C.

Over 650 staff worldwide across 30 offices

Award-winning experience in public

affairs, strategic communication,

issue management and

organizational positioning and

reputation management

Deep knowledge of highly-regulated

sectors having worked with the

major MNCs and multi-national

organizations across a wide-range

of sectors

20+ years in China

Presence in 4 cities (Beijing,

Shanghai, Guangzhou, Hong Kong)

Over 100 staff members, including

former diplomats, PRC government

officials, business leaders,

journalists and NGO staff

In-depth knowledge of Chinese

government system processes and

politics

Extensive experience helping clients

navigate China’s complex and rapidly

evolving landscape

About APCO Our Presence in China

About APCO Worldwide

4

Key experts

Kenneth Jarrett, chairman of APCO in Greater

China, is based in Shanghai. He has more than

25 years of experience in U.S-Chinese affairs

and previously served as the U.S. consul general

in Shanghai and Deputy Consul General in Hong

Kong. Mr. Jarrett has held a range of

professional positions in the U.S. government in

Asia and the United States.

James McGregor, senior counselor for APCO in

China, is the author of One Billion Customers:

Lessons from the Front Lines of Doing Business

in China. While living in China for more than two

decades, McGregor has been The Wall Street

Journal bureau chief, CEO of Dow Jones China,

a venture capitalist, founder of several

companies and chairman of AmCham-China.

Dr. Ira Kasoff is the former deputy assistant

secretary for Asia at the U.S. Department of

Commerce’s International Trade Administration

(ITA). His extensive experience in Asia spans more

than three decades, having completed six

commercial service assignments in the region, in

addition to private sector and academic

experience.

Greg Gilligan is the managing director of APCO

Worldwide’s Beijing office. Mr. Gilligan joined

APCO after serving as general manager of

corporate affairs for McDonald’s (China) Co.,

Ltd., where he developed and executed

strategies to enhance McDonald's brand and

corporate image among China’s regulatory

bodies, consumers and other key stakeholders.

,

Gao Weijie is former chairman of China Ocean

Shipping Company (COSCO) America and serves

as chairman of the China operation of Lloyd’s

Register Asia. He has more than 42 years of

experience in the shipping, transportation and

logistics industry. With broad experience in

China, Europe and the United States, Mr. Gao

provides expert council to clients navigating

complex trade and regulatory issues in diverse

markets.

Reggie Lai is deputy managing director in APCO

Worldwide’s Shanghai office, is a key member

of the corporate advisory and government

affairs team in China. Mr. Lai carries out

investment consultancy, market research and

government affairs work.

WASHINGTON DC

Ira Kasoff, senior counselor

ikasoff@apcoworldwide.com

GREATER CHINA

Kenneth Jarrett, chairman

kjarrett@apcoworldwide.com