Sep 22, 2014, 3:13 PM ETPanel, Conference Presentation

Asia Summit 2014 - Lunch Program: China Today and Tomorrow - English

Data Context: August 2014 indicators (industrial production, fixed asset investment, power generation) were at their lowest levels since 2008, raising concerns about achieving a 7.5% GDP growth target.
GDP Growth Target: Panelists anticipate a transition to sustainable medium-speed growth of 6% to 7%, projected to be viable for 10 to 15 years pending structural restructuring.
PPP vs. Nominal GDP: While China's purchasing power parity (PPP) GDP is projected to become the world's largest by end of 2014, per capita revenue remains in the middle tier globally.
Trade vs. Currency: China holds the status of the world's largest exporter and second-largest importer, yet the Renminbi (RMB) is not fully liberalized.
- RMB has surpassed the Euro to become the second-largest currency for settlement.
- RMB accounts for only 1.47% of global payment volumes.
Interest Rate Environment: The risk-free interest rate is currently too high (approx. 12% to 20% for private enterprise funding), forcing many private firms to endure high costs while maintaining profitability.
- State-owned enterprises (SOEs) face an estimated interest rate of only 1.83% due to state strategic support.

Central Bank Liquidity Tools:
- PSL (Pledged Supplementary Lending): A medium-term credit tool used to suppress interest rates; estimated ammunition of $2 trillion in reserves supports this.
- SLF (Stand-By Lending Facility): A short-term liquidity tool recently released at a rate of 3.7%, significantly lower than the market risk-free rate.
Debt Composition:
- Total debt (central + local + corporate) is estimated at 200% of GDP, which is high compared to emerging economies but manageable compared to developed nations.
- Corporate sector debt specifically accounts for approximately 160% of GDP.
- Local government debt is viewed as migrating toward central government debt.
Solvency Mechanisms:
- The Chinese government possesses unique assets to cover liabilities, including state-owned land (sold twice) and approximately $340 billion in state-owned assets.
- Panelists conclude the central government will not go bankrupt due to these asset bases.

Consumption: China is projected to become the largest or second-largest consumption country within six years.
- Middle-class families are expected to peak globally, driving consumption that will rank 11th or 12th in the world.
- The mobile internet economy in China is projected to be 3–4 times larger than the US and 10 times larger than the PC internet economy.
Property Market: The sector is expected to reach a supply-demand balance in the coming years, requiring developers to adjust operations from previous growth models.
- Inventory digestion will take several years post-balance.
Manufacturing and Innovation:
- Manufacturing remains the primary engine, with technological advancements seen in high-speed rail (1,500 km in Turkey, 500 km in Nigeria, 10,000 km in China) and mobile phones (Xiaomi surpassing Samsung).
- China has secured the #1 and #2 spots in supercomputing and 78 of the 500 fastest PCs.
- Commercial aircraft manufacturing (ABC) aims to compete directly with Airbus and Boeing.
Private vs. Public Enterprises: Private enterprises are viewed as optimistic and capable of high profitability, whereas SOEs require restructuring to improve competitiveness and profitability.

Anti-Corruption Campaign:
- Defined as a 30-year political strategy to transition from "economic monopolies" to a "political ecosystem" rather than just a short-term economic fix.
- Expected to last at least five more years, targeting political monopolies that hinder economic productivity.
- The campaign is restructuring the political system, with a shift from targeting individual officials to institutional reform.
Antitrust Investigations:
- Investigations against domestic Chinese enterprises outnumber those against multinational corporations (MNCs) by a ratio of roughly 9:1.
- Fines for MNCs can reach billions of RMB; however, MNCs rarely appeal these fines, viewing them as a cost of doing business.
- Lack of transparency is cited as a major concern; panelists advocate for clearer communication of reasons behind investigations and better consultation with affected firms.
Luxury Market: The decline in luxury consumption is attributed to the anti-corruption campaign's suppression of government and public fund spending, with a recovery to ~18% growth expected within 1.5 years.

US-China Relations: China seeks a "cooperative" role rather than unilateral leadership, aiming to collaborate with the US on global security issues (e.g., ISIS, training forces in Iraq/Afghanistan).
- China acknowledges the US presence in Asia as having an "active role" in containing North Korean expansionism.
Border Disputes:
- India: Disputes over the Sino-Indian border require negotiation and clear communication, as historical lines (e.g., McMahon Line) remain contested interpretations.
- South China Sea: China's "nine-dash line" remains legally and historically vague in the eyes of neighbors; panelists suggest China must adopt clearer legal documentation and communication to resolve disputes with the Philippines and Vietnam.
- Philippines/Vietnam: Conflicts are described as resource-driven rather than existential international conflicts, with low probability of severely impacting economic development.
Arms Exports: Chinese weaponry (e.g., anti-air missiles) is being purchased by allies like Turkey, potentially exceeding US Patriot systems in specific contexts, signaling a shift in global defense trade.

Economic Scale: The goal is to achieve the #1 nominal GDP in the world by 2020, not just PPP.
Consumption Dominance: The Chinese consumer market, driven by the middle class, is targeted to become the world's largest in terms of consumption power.
Demographics: A specific target is to expand the middle class to 70% of the total population by 2020 to ensure social stability and legal development.
Global Resource Allocation: Chinese companies are expected to increase resource allocation and market share in overseas markets, not just domestically.

US Acquisitions: Fosun's purchase of the J.P. Morgan building in New York ($3,500/sq ft) was driven by ROI (net 6.7%) and the need to invest $20 billion in insurance assets, rather than nationalistic motives.
Capital Allocation: The strategy involves investing in US, Japanese, and Southeast Asian companies to leverage their growth within China's rising middle class, effectively "expanding inward" to capture global resources.