euromoney: 2017 chinese economy & investment ......says ethan harris, head of global economics...

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Euromoney: 2017 Chinese economy & investment

environment outlookCHINA E-BOOK CHRIS WRIGHT

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CHINA E-BOOK CHRIS WRIGHT

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ContentsIntroduction: Tough to interpret in a political year 3

Specifics: Property and infrastructure 6

Specifics: Financial services 7

Longer-term trends and opportunities 10

Trumped by external threats 11

All about the currency 13

2017 China International Finance and Investment Summits 15

The China (Shenyang) International Finance and Investment Summit 16

Find out more about Shenyang

WhatistheShenyangeconomiczone 18

NewindustryinShenyang 19

TheGreeningofShenyang 22

Shenyang&Germany 24

Shenyangasaplacetolive 26

HistoryofShenyang 27

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INTRODUCTION:

Tough to interpret in a political year

Few countries are so complex to read as China. How can one assess the outlook for 2017, the economic performance and the opportunities for

investors? Will growth slow? Will concerns about capital outflows lead to changes in policy? How bad is the health of the financial sector? How will the country react to a Trump presidency in the US and the trade policies that come with it?

The tea leaves are harder to read than ever because 2017 is a vital year politically, and any economic plans should be seen in that light. “2017 is a critical year for political leadership transition,” says Thomas Deng, regional CIO, Greater China, and Chief China strategist at UBS Wealth Management. The 19th National People’s Congress of the Communist Party will be held in November, and the jostling for position ahead of it – and in its aftermath – will have far-reaching impacts on policy and the economy. “The direction of future economic reforms and social development depends crucially on who will be elevated to the powerful political bureau and its standing committee as older incumbents retire,” Deng says.

In the short term, that might mean inertia. “The 2017 baseline scenario is muddling through, to pave the way for the Communist Party Congress election,” says Ethan Harris, head of global economics at Bank of America Merrill Lynch. China chief economist at Citi Li-Gang Liu says: “We believe China’s policy priority will be economic stability over structural reform in 2017.” Leading into the Congress, he adds, “a ‘steady boat’ economic policy is likely to be adopted to minimize economic uncertainty and ensure a smooth political transition”.

ETHAN HARRISHead of global

economics at Bank of America Merrill Lynch

“We believe China’s policy priority will be economic stability over structural reform in 2017.”

CHINA E-BOOK CHRIS WRIGHT INDEX



Nevertheless, even if not much is happening on the policy or reform fronts, one thing economists agree on is that both in the run-up to the Congress and thereafter, high but sustainable economic growth will be a priority. Beijing is targeting 6.5%, sustained, and most economists predict a rate of growth that, even if slower than in previous years, is still extremely high compared with other countries. Nomura and Citi both predict 6.5% GDP growth in 2017, Bank of America Merrill Lynch 6.6%, and UBS Wealth Management 6.3%, down from 6.7% in 2016. “Beijing will likely adopt a proactive fiscal policy and an accommodative monetary policy to pre-empt any sharp deceleration in economic growth,” says UBS’s Deng, who expects a fiscal deficit above 3% in 2017. Priorities, he thinks, will include fee cuts and tax reliefs to boost small and medium-sized companies, growth and job creation in new sectors in the economy and considerable attention paid to social security. China’s commitments to tackle overcapacity in underperforming state-run sectors, such as mining and heavy industry, will mean increased unemployment; social security will be needed both to provide for the unemployed and to re-train them for other sectors. The backdrop to all of this will be continued reform, dating from a programme first announced in 2013, the heart of which is a commitment to allow market forces to play a bigger role in the allocation of resources. “To be sure, significant progress has been made on many fronts,” says Deng, and he has quite a list to illustrate it: the abolition of the one-child policy, the expansion of free-trade zones into more provinces and regions, free enterprising through fewer registration requirements, the reform of value-added taxes to reduce the overall tax burden for corporates, lower entry barriers for private enterprises,

Source: NBS, UBS, as of November 2016

GDP (LHS)

Forecast

Contribution to GDP from Services industry (RHS)

2005 2007 2009 2100 2013 2015 2017 2019

In %

52

50

48

46

44

42

40

38

36

In % y/y

16

14

12

10

8

6

4

2

0

Forecast

2016-2020China’s 13th

Five Year Period

China’s GDP growth to decelerate further as it shifts to a service-driven economy

“Beijing will likely adopt a

pro-active fiscal policy and an

accommodative monetary policy

to pre-empt any sharp

deceleration in economic growth”

THOMAS DENG

full domestic interest rate liberalization, increased integration of domestic and international capital markets through such programmes as Stock Connect (whose latest instance, linking the Hong Kong and Shenzhen exchanges, opened in December 2016), and the recent reaffirmation of better protection for private entrepreneurs and their properties. “We expect such reform initiatives to continue to be implemented and enhanced next year [2017],” Deng says.

But even with plenty achieved there are big challenges. The biggest relate to reforms of state-owned enterprises (SOEs) and, related to that, the decommissioning of overcapacity. Deng says he is watching three “critical issues” in China: credit defaults, China’s total debt burden, and the property market. All are discussed in more detail below. And Liu at Citi notes: “Risks abound.”

However, China is seen as increasingly able to react decisively to unpredictable events. “It was able to learn and improve from its major mishaps from recent years,” says Wendy Liu, analyst at Nomura, citing examples such as stimulus packages, the 2013 domestic credit crunch, A-share turmoil in 2015 and 2016, and the challenges of managing capital account and FX volatility since August 2015. China’s rulers will need to be sharp, though. “In 2017, it appears to us that the stakes are higher,” she says. “We are cautiously confident that Beijing will stay alert and fine-tune its actions to keep things on track.”

Investors in the country will need to be able to spot opportunities amid this challenging macro backdrop.



“We are cautiously

confident that Beijing will stay alert and fine-

tune its actions to keep things

on track.” LI-GANG LIU


SPECIFICS: PROPERTY AND INFRASTRUCTURE

The biggest influence on volatility in China’s economy has long been its property market, which is at least settling into something of a pattern. “China’s physical property market seems to move in three-year mini boom-and-bust cycles,” says Liu at Nomura. In 2006, 2009, 2012 and 2015, the market was at cyclical lows, generally followed by one year of upswing and two of downswing. If the pattern continues, Chinese physical property has reached another three-year peak. Consequently, Nomura is expecting sales volumes to decline in the first quarter of 2017, with policies becoming looser in the year as the government reacts in order to keep to its 6.5% GDP growth target.

Francis Cheung, head of China and Hong Kong strategy at CLSA, agrees, noting that this is already the third property down cycle since the global financial crisis. He expects the property price to correct by 3.7% over the three quarters to the end of the first half of 2017. By then, he expects state policies on property to have loosened again, prompting another cycle. “We are actually overweight on property,” he says. “In each cycle, the government is allowing prices to rise more and more. The reason is simple: they need it for the economy.”

UBS sees things slightly differently, arguing that the property market is still overheating in such key cities as Shenzhen, Beijing and Shanghai, where these days property costs amount to a larger multiple of household disposable income than even in Hong Kong or London.

With property cooling in all but the biggest cities, China is likely to increase infrastructure spending – something it has in common with likely Trump policy in the US – in order to keep GDP growth high. Nomura predicts that Beijing will leverage itself in order to finance new infrastructure investments, leading

“In each cycle, the government

is allowing prices to rise more and

more. The reason is simple: they need it for the

economy.”FRANCIS CHEUNG




to a fiscal deficit of 4% of GDP in fiscal 2017. UBS expects a deficit of over 3%, but supports the basic premise: that local governments will build more infrastructure in support of key strategic industries.

This is going to be an interesting development for foreigners to watch. It is expected that public-private partnership (PPP) projects will grow as the preferred method of infrastructure development, between local governments and the private sector. PPPs accounted for less than 10% of infrastructure investment in the first 10 months of 2016, but the model is likely to gain in popularity. That doesn’t automatically imply business for the foreign private sector, but any renewed activity in infrastructure development and willingness to work with private capital does suggest greater scope for international benefit, perhaps in advisory roles.

SPECIFICS: FINANCIAL SERVICES

Another vital theme for the year ahead will be financial services – a huge engine of China growth, but one that prompts a lot of concerns. The financial sector’s contribution to national GDP hit 8.8% in the first nine months of 2016, a record, according to Nomura; only such financial hubs as Singapore and Hong Kong have typically higher rates.

Quite apart from the question of whether or not that reliance on financial services is desirable, the sector in China faces considerable challenges. First, there’s credit quality. Credit defaults have jumped from Rmb1 billion ($145 million) in 2014 to almost Rmb20 billion in 2016. “This trend will likely continue in 2017 as some industries still face downward pressure and the government is selectively breaking the implicit credit guarantee,” says UBS’s Deng. “Any mishandling of isolated credit incidence could have a butterfly effect not only on the domestic market, but also have a global implication.”

China is trying a number of measures to deleverage its companies and get ahead of credit problems. One example is a programme of debt-equity swaps, which several banks, notably China Construction Bank, have set about implementing through the second half of the year, although there is some concern that these simply avoid a fundamental problem of risk assessment by pushing troubled assets onto the bank’s books as equity instead of fixing them.

On October 10 the State Council published guidelines on measures to promote corporate deleveraging. Credit rating agency Moody’s says these measures “are broadly credit positive for the country’s corporates. However, the credit implications will be mixed for the sovereign, banks and among individual companies.” Moody’s senior vice-president Kai Hu says the measures will help strong companies, but “fundamentally unviable companies will be cut off from credit supply and be forced to shut down, resulting in a spike in offshore defaults in the short term”. This will increase non-performing loans and brings a further problem if the banks had already swapped debt for equity in those companies, since they will then lose seniority in any claim. But China is nothing if not patient, and in the long run a less leveraged and more profitable corporate sector is good for the banks and the country as a whole.

“Any mishandling of isolated credit

incidence could have a butterfly

effect not only on the domestic market, but also

have a global implication.”

THOMAS DENG


8

China’s overall debt burden is a large part of the problem. By mid-2016, overall debt stood at about 269% of GDP, compared with 136% in 2009, and most of it is corporate debt. “The surge is clearly unsustainable and must be reined in,” UBS’s Deng says. It might not be, though; Cheung at CLSA points out that if debts continue in their existing patterns – which might well happen, given projected spending in infrastructure – it will hit 321% of GDP by 2020. But it’s not as bad as it looks, nor is it entirely the banking sector’s problem, because China’s overall wealth at a sovereign level is extraordinary: its foreign-currency reserves stand at $3.1 trillion. Also, most of the debts are related to infrastructure, which will at least make a long-term contribution to economic growth. With reserves like that, there is always the possibility – even the expectation – that banks, corporates and SOEs can be bailed out should the situation arise. UBS’s Deng says the People’s Bank of China will target low-teen credit growth, and notes that the reserve requirement ratio today, at 17%, is extremely high and could be reduced without penalizing the sector.

At the heart of bank health is another vast structural issue: SOE reform. For a closer look, Euromoney magazine covered this issue in detail in December [LINK]. In summary, it is a stated ambition of China to reduce the number of SOEs, merging several to gain efficiencies of scale, to make them more profit-oriented than policy-oriented, to retreat from areas with overcapacity, and generally to transform them into more corporate beasts. Most observers are disappointed with the pace of development to date, though, and this year’s politics might delay things further. “SOE ownership reform – the more decisive part of the reform – may have to wait until 2018 pending stronger political will,” says Liu at Citi.

Source: Deutsche Bank, UBS as of 17 October 2016

SOEs

Values in % GDP, as of 1H16

2000 2002 2004 2006 2008 2010 2012 2014 IQ16

100

150

200

250

300

50

0

124811 11

17 1615

1259

13711

11 12 14

14713

14714

16 17

14115

13916

13917

13518

17 17 19 18

16 14 18 16

41 4352 5447 48 46 43 39

16626

18226

18027

1716 15

19530

21332

22838

2331 32

3338

39

25344

26247

27051

4142 44

53 49 49 49 46 45 44 42 45 5058 58 63 70 73

83 86 90

1516

1718 18 18

5050 48

5357 62

67 69 66

HouseholdsPrivate enterprises Central government

Local government

Breakdown of China’s debt to GDP ration by debtors

LI-GANG LIU Citi

“SOE ownership reform – the

more decisive part of the

reform – may have to wait til

2018 pending stronger

political will,”


9

There are other problems. One is the mighty emergence of shadow banking. This exists in parallel with mainstream banking and dates from a 2007 decision by the China Banking Regulatory Commission to allow banks to launch wealth management products investing in trust companies. This became a method of channelling money into higher-risk sectors such as property and mining that were restricted by the government. Then, the China Securities Regulatory Commission, another regulator, allowed securities companies and mutual funds to expand the asset classes they invested in, and they started to develop asset management plans that invested in the same way the trusts had been doing. Seeing this, and fearful of losing ground, the banks themselves developed various ways of getting around regulations, such as entrusted loans.

The result today is that shadow financing hit Rmb54 trillion in 2015, 79% of GDP, according to calculations by CLSA’s head of China and Hong Kong strategy Francis Cheung, whose conclusions are heavily at odds with a figure of 26% cited by the G20’s Financial Stability Board. That suggests the banking sector is running up substantial debt that doesn’t appear on its balance sheets or in reported numbers, or in official non-performing loan figures – and it is likely to be riskier lending than what they do report. For reasons like this, Cheung reckons the bad debt ratio in China is really 16.3%, when it is officially reported as being about one tenth of that level.

But, again, the state stands ready to offer support, which is why Cheung says: “I’m not calling any systemic risk because of it.” China has deep pockets, although it will probably need them in the years ahead as the sector is cleaned up.

In insurance, too, there are concerns about the behaviour of some companies, which are putting out wealth management products with a life insurance element attached to them and using them to fund aggressive stake accumulation in both domestic and foreign companies. This has started to alarm regulators, who are now taking action and speaking in increasingly strident terms about the need for prudent management.

Issues such as these will become easier to manage if China’s many regulators are merged into one, as has been talked about for some time.

“The banking sector is

running up considerable

debt that doesn’t appear on its balance

sheets or in reported

numbers, nor in official NPL

figures – and it is likely riskier

lending than what they do

report.”




10

LONGER-TERM TRENDS AND OPPORTUNITIES

Although China’s economy and banking system clearly face challenges, investors would be advised to look forward and to align themselves with the bigger picture.

Longer-term trends will play out over a period of years, even decades, but will gather momentum in 2017. One is urbanization, a clearly stated ambition of the government. A document called “Plan for 100 Million Migrants’ Settlement in Cities” was published by the State Council in October, putting meat on the bones of the broader urbanization plan: for example, it seeks to limit population growth in the three big metropolitan zones (the Bohai Rim, which includes Beijing; the Yangtze River Delta zone, which includes Shanghai; and the Pearl River Delta zone, which includes Guangzhou) and to use a point-based household registration system, while favouring the growth of satellite cities. And it wants to develop mid-sized to large cities in the inland regions, a priority that can be clearly seen in the efforts to develop Chengdu and Chongqing over the past decade.

Other long-term trends identified by analysts include a continuing growth in research and development. China’s R&D investment stood at less than 1% of GDP in the 1990s, but by 2015 was over 2%, roughly on course with a stated target of 2.5% by 2020. “We believe that R&D will be the new driver of productivity growth,” says Nomura. Such a driver is needed: productivity growth has been moderating in recent years despite steady increases in labour productivity.

A third long-term trend is the spread of the internet to rural areas and the increasing migration to non-bank smartphones of many areas of mainstream retail financial services. In the first three quarters of 2016, e-commerce turnover was up by more than 20% year on year to Rmb17 trillion, according to the National Bureau of Statistics, while the online retail sale of goods and services increased by 26.1%. Companies such as Alibaba and Tencent are considered among the world leaders in their field; so too financial offshoots such as Ant Financial (the financial arm of Alibaba, which runs the Alipay payment model) and WeChat (a social network owned by Tencent, which includes an integrated wallet system).

Source: National Bureau of Statistics. CEIC data, Nomura research

2.1%2.2%

2.5%

China missed the R&D-to-GDP targets set by the 11th and 12th Five Year Plan

China’s R&D to GDP2010 target set by 11th Five Year Plan2015 target set by 11th Five Year Plan2020 target set by 11th Five Year Plan

3%

2%

1%

0%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2.0%

China boosts commitments to R&D

“A third long-term trend is the spread of

the internet to rural areas, and

the increasing migration

to non-bank smartphones

of many areas of mainstream retail financial

services.”



11

TRUMPED BY EXTERNAL THREATS

“The uncertainty facing China may arise more from external sources than internal during 2017,” says Nomura’s Wendy Liu.

There’s no question what she means. A huge amount depends on the attitude of Donald Trump to China and to international trade in general. Tricky to read at the best of times, Trump’s varied Twitter utterances are giving mixed signals. “Initial cheers over president-elect Donald Trump in China appear to have dissipated with recent events suggesting that the president-elect seems to have singled out the country in his recent Twitter messages,” says Liu. “Such a stance is dissuading offshore investors from allocating money towards equities in Hong Kong and China.”

Timing is not ideal. “This is one of the worst times in the world to have any kind of trade war,” says Cheung at CLSA. He says 2016 was the first time in 15 years when global trade was below GDP growth. This strongly affects China, as its market share of global trade has risen to 13.7%.

Deutsche Bank chief China economist Zhiwei Zhang is sufficiently concerned about the idea to have written a research note asking about the possibility of a trade war. “We do not take an outbreak of a US-China trade war as our baseline case,” he says. “But the Brexit vote and the US election clearly show how the conventional wisdom in economics may backfire these days.”

Headline data indicate that China accounts for 50% of the US trade deficit, although Zhang says that’s misleading since 37% of China’s exports to the US consist of things that it imported in the first place. Allowing for global supply chains, the figure is actually about 16% – still important.

Cheung says that if Trump actually carried out a threat to lump a 45% tariff on Chinese exports to the US, Chinese GDP growth would be slowed to 1.3%. “It’s an extremely unlikely scenario,” Cheung says, noting that, for example, a tariff hit on phone exports would actually adversely affect US companies such as Apple, whose phones are designed in the US but often manufactured or assembled and exported again from China.

ZHIWEI ZHANG Deutsche Bank chief

China economist

“We do not take an outbreak

of a US-China trade war as our

baseline case but the Brexit

vote, and the US election clearly show how the conventional

wisdom in economics

may backfire these days.”



12

If the US does take serious measures to reduce its trade deficit and bring jobs back to the US, Zhang reckons these will mainly be directed at electronics, electrical equipment, textiles, apparel, furniture and automobiles. “This shows the difficulty to target China in a trade war,” Deutsche’s Zhang says. “Higher tariffs on furniture, textiles and apparel will likely drive the deficit to other developing countries; China doesn’t export that many cars; and electric and electronic products are often made by multinational companies using imported parts.” Zhang reckons that if it does happen and China retaliates, that will likely be in the industries of aerospace, seeds and fruits, pulp, and some agricultural products.

But it likely won’t come to that. “The rhetoric of a trade war might well be a threat that intends to bring China to the negotiation table,” Zhang says. “The two countries could find other ways to reduce the bilateral trade imbalance, including, for instance, China importing more goods from the US, or China removing restrictions and expanding services trade with the US.”

Liu at Citi adds: “The political and economic stakes are simply too high for the largest and second-largest economies in the world to engage in a trade war.”

Whatever Trump thinks about China directly, his policies will have other consequences for China. The market clearly believes that interest rate increases in the US – and, by association, the rest of the world – will come more quickly under Trump than they would have done under Clinton; that, in turn, has so far manifested itself in a flight to US assets and away from emerging markets. Also, Trump’s election promises on US infrastructure, and an apparent willingness to embrace Reagan-style policies of US growth at all costs, will have ramifications for other markets, including China. A strong US economy is generally considered to be good for Asia, but a strong protectionist US is not.

Decomposition of US goods trade deficit(%)Value-added basis 2015

Decomposition of China’s exports to the US

CHN 16.4

JPN 12.7

DEU 10.9

KOR 9.4MEX 8.1TWN 6.6

VNM 4.6

MYS 4.4

IRL 4.2

ITA 4.0

CHN 16.4

Source: Deutsche Bank, China Customs, IMF, WIND


2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Foreign value added in processing exports to USDomestic value added in Chin’s procesing exports to USNon-processing exports to US

Billion USD500

400

300

200

100

0

Decomposition of US goods trade deficit(%)Value-added basis 2015

Decomposition of China’s exports to the US

CHN 16.4

JPN 12.7

DEU 10.9

KOR 9.4MEX 8.1TWN 6.6

VNM 4.6

MYS 4.4

IRL 4.2

ITA 4.0

CHN 16.4



2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Foreign value added in processing exports to USDomestic value added in Chin’s procesing exports to USNon-processing exports to US

Billion USD500

400

300

200

100

0

“The political and economic

stakes are simply too

high for the largest and

second-largest economies in the world to engage in a trade war.”

LI-GANG LIU


13

ALL ABOUT THE CURRENCY

The backdrop to all of this is the internationalization of the Chinese currency, which has been steadily taking shape over the past 40 years, but always at a pace China chooses. The most recent important step was the inclusion in September 2016 of the renminbi in the Special Drawing Rights currency, an international reserve asset created by the IMF which is a basket of five of the world’s most important currencies. Since then, though, China has become alarmed at the amount of money leaving the country through outbound M&A. Consequently, its key institutions – including the National Development and Reform Commission, Ministry of Finance, People’s Bank of China and State Administration of Foreign Exchange – have published new guidelines on oversight of outbound financial flows, suggesting a step back from freer movement of capital. As always, China carefully regulates its own progress towards free markets.

Still, the overall direction is clear. “The probability of a free-floating renminbi will rise steeply over the course of the next three years and become almost a near-certainty by the end of 2019,” says SG. The bank sees a 20% probability of a free float in 2017, “but 50% if the US took major trade actions against China”. It sees an 80% probability by 2019.

That’s not a very common view, though. “We believe the authorities prefer a relatively stable exchange rate to ensure financial stability,” says Liu at Citi. “China’s capital controls and ill-developed FX derivatives market suggest both a free-floating exchange rate and large one-off devaluation are out of the question.” Still, the trend is to gradual devaluation, and Cheung at CLSA expects a further 5% fall against the dollar through 2017. One of his key investment themes is companies that are positioned to benefit from a weakening Chinese currency. In China, that means infrastructure, insurance, resources and upstream oil companies (while airlines, gaming, travel, machinery and refiners suffer).

“The probability of a free

floating RMB will rise steeply over the course

of the next three years and become almost

a near-certainty by the end of

2019”




14

The pace of this change has broad implications. “China has more reserves than anyone else, but does it have enough?” asks SG analyst Jason Daw. “The answer depends on our judgements about what FX regime the government will adopt, how effective the checks to domestic capital outflows will be, and how the economy evolves.”

Clearly, all of this is a big consideration for foreign investors and for businesses seeking to set up in the country. The opening of the currency, and the ability to move money out of the country, is clearly important to foreign companies that wish to repatriate profits made in China – for that, they are at the mercy of the mood of the State Administration of Foreign Exchange. The direction of the currency, too, and its ability to change in value (it has always been roughly pegged to the US dollar, with a trading band within which it can move) also affects the profitability of doing business in China, particularly if goods must be imported from elsewhere, or exported to other markets.

The stock market is even harder to read than the currency. In 2016 there was a crash (“a mad bull followed by a dead bull,” as Nomura puts it) followed by a gradual recovery, but there are lasting concerns about how stock markets are handled by regulators. “In 2017, the waters are likely to be rougher,” says Liu at Nomura. “Since October 2016, Beijing has put in concerted measures to curb excesses in property and financial markets, as well as capital outflows. As long as this continues, the risk appetite for Chinese equities may be dampened for a sizable part of the first half of 2017.” Thereafter, she expects an easier time.

To keep abreast of the latest developments in China visit www.euromoney.com/China and sign up for our newsletter

“Beijing has put in concerted measures to

curb excesses in property and

financial markets, as well as capital outflows. As long as this continues, the risk appetite

for Chinese equities may be dampened for a

sizable part of the first half of 2017.”

WENDY LIU


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Conducted simultaneously in English and Chinese, this Euromoney-produced event caters to both international and domestic executives, bankers, investors, agencies and intermediaries from all industries.

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Attendees will have access to our 1x1 meeting service and offsite tours to visit leading companies including the state-of-the-art BMW Brilliance assembly plant.

中国 (沈陽) 国際金融峰会The China (Shenyang) International Finance and Investment Summit10-11 May 2017, Shenyang | 2017年5月10-11日，沈阳

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Topics:• China’s economic outlook• Revitalization of the Northeast China economy and SOE reform• Overview of Shenyang industries and the financial sector • FDI, ODI and M&A trends• Innovation, sustainability and Made in China 2025• Unleashing growth and innovation through private equity and venture capital financing• The development of green finance• Financing renewable energy and cleantech

Euromoney is delighted to announce the return of the China (Shenyang) International Finance and Investment Conference.

Conducted simultaneously in English and Chinese, this Euromoney-produced event caters to both international and domestic executives, bankers, investors, agencies and intermediaries from all industries.

Held in one of China’s traditional industrial bases, attendees will gain first-hand knowledge of the economic reality in a leading Chinese tier-two city.For companies looking to do business in Northeast China this event offers a unique opportunity to network with the region’s government and business leaders.

Attendees will have access to our 1x1 meeting service and offsite tours to visit leading companies including the state-of-the-art BMW Brilliance assembly plant.



Keynote:PAN Liguo, Mayor, Shenyang Municipal People's Government

Topics:• China’s economic outlook• Revitalization of the Northeast China economy and SOE reform• Overview of Shenyang industries and the financial sector• FDI, ODI and M&A trends• Innovation, sustainability and Made in China 2025• Unleashing growth and innovation through private equity and venture

capital financing• The development of green finance• Financing renewable energy and cleantech

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WHAT IS THE SHENYANG ECONOMIC ZONE

The Shenyang Economic Zone is an exercise in the theory that the whole can be greater than the sum of its parts.

In 2010, Communist Party of China chiefs announced an idea to help with Shenyang’s revitalization. It created a combination of eight cities including Shenyang and its environs, brought together as the Shenyang Economic Zone. The central government announced that this would become a national-level pilot reform zone for emerging industries: an important accolade. Shenyang, by far the biggest component, is at the heart of the zone. Impressive in its own right, the city has a population of 8.3 million and has been a centre of industry for more than a century. The SEZ makes it the centrepiece of a far grander area of 75,000 square kilometres, with a population of 24 million, embracing the smaller cities of Anshan, Fushun, Benxi, Yingkou, Fuxin, Liaoyang and Tieling.

The idea is that the greater scale elevates the whole region and that cooperation over a broader area lifts all eight cities and their hinterlands. The city of Shenyang becomes the main hub for finance and trade, while other areas of specialization fan out more broadly within the zone, such as advanced manufacturing, modern architecture, aviation products and heavy agriculture.

Shenyang has been, as its Urban Planning Museum says, “the cradle of numerous miracles in Chinese industry” and the theory is that the economic zone brings together the right industries and resources for it to continue to have such a role in a new era of advanced engineering and production.



Central to this vision is the transport infrastructure linking the cities. From the outset, the central government has called for a network of subways, expressways and intercity light rail systems to enable people in Shenyang to travel to any partner city in an hour. That work continues, and a major arterial road can be seen under construction in Shenyang city today.

Shenyang Economic Zone is a different entity to the Shenyang Economic and Technological Development Zone (the Shenyang ETDZ), which was approved as a state-level development zone in April 1993, according to the Chinese Ministry of Commerce. Southwest of downtown Shenyang, it focuses on equipment manufacturing, chemicals and auto parts.

NEW INDUSTRY IN SHENYANG

Shenyang is considered the cradle of industry in China, where so many innovations took place as the modern country took shape.

“The city has witnessed the fundamental change of China’s heavy industry in a century,” says the information office of Shenyang People’s Government. “Since the birth of the first modern machine-manufacturing enterprise in 1095, Shenyang has made the first national emblem of the PRC, the first hydraulic press, and several hundred firsts in China’s industrial history.”

In other articles, we have looked at how Shenyang and the province of Liaoning has suffered from the decline of such industries as steel and coal, where overcapacity has combined with slowing global demand. But there is another side to this: the city’s attempts to innovate without losing sight of its industrial roots.

Shenyang is designated one of China’s 10 most innovative cities and is a national pilot area for the integration of information technology and industry.



It is considered a national base for advanced equipment manufacturing. This will continue to be a key economic driver, not just locally but nationally. Everything from ethylene equipment to tunnel-boring machines is made here, to the highest international standards. “Enterprises in Shenyang have broken up foreign companies’ long-time monopoly on many technological fields in the domestic market,” says the Shenyang People’s Government, “and made great contributions to the localization of national key technical equipment manufacturing and the development of the national economy.”

Examples abound. Shenyang is a hub for machine tools in China; it is, among other things, the largest manufacturing base of comprehensive lathes in China. Ethylene equipment manufacturing, using propylene refrigeration compressors, is at an advanced level internationally. And, at the heavy-machinery end of the market, there is the QMJ4620 full-face coal-tunnel-boring machine, a mighty and frightening-looking armour-clad warrior of a piece of equipment. That machine, the government says, “signifies that Shenyang is capable of researching and manufacturing world-leading coal-mining equipment with fully self-possessed intellectual property rights, obtaining the approval of all counterparts in China’s coal industry.”

Shenyang has long been a hub for the automotive industry. This, too, has come under threat in difficult economic conditions, but here too there is innovation and success. The BMW plant in Shenyang is the subject of another article, but it is only one part of the burgeoning advanced equipment manufacturing capability for the automotive industry in the western part of Shenyang. Increasingly, the area is becoming a centre for the manufacture of clean-energy cars.

Shenyang also attracts hi-tech industrialization, tapping into both the strong scientific research base locally and the city’s role as a regional economic centre. Neusoft Group and Siasun Robot & Automation are examples of thriving hi-tech businesses set up in and around Shenyang.

Another vital element of Shenyang’s rebirth will be its combination of internet and industrial fields. The government talks about Shenyang becoming the first “internet plus” industrial base, with a major emphasis on developing cloud data and other new-generation measures in IT. The government encourages internet companies to set up in the city and offers tax concessions, initial free rent and support on company registration.

On Shenyang’s Sanhao Street, the city has its own Silicon Valley. Numerous computer, technology and internet businesses are based there. The government hopes the street will ensure that young entrepreneurial talent doesn’t leave Shenyang. In one building, the government has taken several



floors, where entrepreneurs with good ideas can get access to a desk and even a bed. An incubator has developed here to help new tech businesses. One building, Tongfang Times Square, targets high-tech entrepreneurs and seeks to centralize all the various windows a young company needs – from tax to approvals – so that new businesses can get started seamlessly.

An example of Shenyang’s ambitions in this area came with the October 2015 news that Shenyang Municipal Government had tied up with Alibaba on a cooperative deal through which Alibaba will help to build big data and cloud development in Shenyang. The deal followed the foundation in July that year of the Shenyang Big Data Operation, a joint venture between Shenyang Venture Capital Management Group, the municipal government and East Network Technology. This company, says Chen Dawei, head of Shenyang Big Data Operation Bureau, “will help the government build a city-level database, promote innovation and help data resources for government industries and enterprise.”

Shenyang hosts the China International Equipment Manufacturing Exposition (CIEME), co-hosted with several key national state institutions including the Ministry of Commerce, National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Science and Technology and the Liaoning Provincial Government. “Through careful design, construction and refinement, the expo has formed a combined exhibition layout of CNC lathes, industrial automation, engineering machinery, energy equipment, and other kinds of equipment,” the city government says. CIEME has been called one of the 10-best brand expositions in China.

Shenyang’s classic older industries are still impressive too. Shenyang’s total GDP was equivalent to €106.9 billion in 2014, a 6% year-on-year increase. Machinery and equipment, automotive parts, aerospace, electronic information and product manufacturing industries are all considered competitive for the long term. Shenyang remains China’s most important heavy-industry base for the manufacturing of equipment.

The key to success for Shenyang will be building new avenues of growth, particularly in the digital sphere, while continuing to embrace the century-old expertise that has been built in heavy industry.



THE GREENING OF SHENYANG

For an industrial city, Shenyang has substantial environmental ambitions. It is, the city government says, a National Civilized City, a National Environmental

Protection Model City, a National Forest City and a National Garden City.

These are easy things to say domestically, but Shenyang has international recognition too and has been highlighted by agencies of the UN for its work to become greener. The city government now says Shenyang is “becoming a green paradise filled with harmony between humans and nature”. This seems a big claim, but progress is undeniably being made. “Ecology, low carbon and environmental protection have become new urban labels for Shenyang, and a brand-new ecological and livable city has come into view.”

These ambitions are older than one might expect. According to UN Habitat, it set up the Sustainable Shenyang Project in May 1997 in collaboration with the UN Development Programme, Shenyang’s municipal government and the China International Centre for Economic and Technical Exchanges. This made Shenyang one of the first global SCP (Sustainable Cities Programme) demonstration cities. The project was implemented locally by the Shenyang Environmental Protection Bureau. During this time the then mayor, Mu Suixin, was awarded the UN Habitat Scroll of Honour, intended to recognize institutions that have made great contributions to the development of housing.

That original project concluded in 2000, following a detailed analysis of the city’s environmental profile, consultation with 337 participants ranging from city representatives to international organizations, a range of demonstration projects such as the introduction of unleaded petrol and the construction of a new wastewater treatment plant, and a series of initiatives for the years ahead. The city’s industrial parks date from this time and, in a sign of things to come, the city’s copper-smelting plant was closed.

Environmental issues have remained a priority ever since. Shenyang was given the title National Forest City in 2005 by the National Forestry Bureau. In practice, this meant large-scale planting operations and the creation of an ecological circle surrounding the city, made up of three forest belts and four plant oases. The idea has been to bring water and forest resources into harmony with the city.



Shenyang’s plans for urban development can be seen in the impressive Shenyang Urban Planning Exhibition Hall and environmental harmony is clearly a key part of the plan. An example is in Hunnan District, in the south of Shenyang, which like many Chinese cities uses a vertical-horizontal axis for development but makes landscape, greenery and ecology central to development. It uses clean energies including solar power, wind power and geothermal energy, and has reduced pollutant emissions.

Elsewhere, the city has set about ecological protection work on some of its most cherished sites, such as Qipan Mountain and Wolong Lake. Sewage treatment plants in the north and the south of the city have assisted greatly in the improvement of water quality in the Liaohe, Hunhe and Puhe rivers. The Qipan Mountain International Scenic Tourist Zone, in the northeastern part of Shenyang, now uses ecological forest tourism as a key part of its appeal.

Another landmark was reached in 2012 when an area of land was designated the Huanzidong National Wetland Park; the county of Faku is now considered home to China’s white crane population, with more than 2,000 of the birds arriving every day at certain points of the year. It is thought that this accounts for 70% of the entire white crane population worldwide.

There is another element to the greening of Shenyang. Despite the efforts that have been made in recent years, Liaoning, being linked to heavy industries, has long-standing air-pollution challenges to overcome.

But it is argued that this could be an opportunity. Not only is there great potential for reduction of air pollution, with the steady removal of coal-fired boilers, but also the idea that Shenyang should be made a centre for clean energy technology. How about energy efficiency as a new industry cluster for research and development in Shenyang?

It would take a special kind of opportunism to turn its own pollution into a new line of business, but Shenyang has a chance here. Since the city planners have set great store by ecologically sound practices over the past 20 years, it stands to reason that clean energy can be a source of innovation, investment and growth.



SHENYANG & GERMANY

Shenyang and Germany have a close, long-standing and mutually rewarding association. The headline example of this is the highly

successful three-plant BMW Brilliance operation in the city, but in fact the connections are deep and widespread.

Shenyang and Düsseldorf, in Germany’s industrial heartland, became sister cities in 1985, and they are natural fellows: Shenyang is often known as The Oriental Ruhr, or some variation on that term. It has the same industrial foundation, as well as a similar latitude and climate. About 1,000 Germans live and work in Shenyang, which is one of the Chinese cities with the largest number of German residents. Germany’s Consulate General has been open in Shenyang since 2012 – unusual for a provincial city.

Why is this? It’s all about trade. According to the Shenyang Municipal People’s Government, there are 60 German-funded enterprises in Shenyang. In 2014, the government says, total foreign trade volume between Shenyang and Germany amounted to $5.02 billion, the highest of any country with economic ties to the city.

The list of partners and investors is a roll call of some of the greatest names in German industry: not just BMW, but also BASF, Siemens, Boysen, Fuchs and Beitteler. They have been arriving steadily since the late 1990s and continue to do so, with more recent arrivals including Voestalpine, IBS, Schiess, Schiller Gruppe and Sigma 3D.

BMW is the most famous success story, and for good reason. Since setting up in Shenyang in 2003, BMW Brilliance – the Shenyang-headquartered joint venture between BMW and Brilliance Auto – has produced more than a million vehicles through its Shenyang plants, having invested more than €3 billion. It is the only BMW automobile production base in China, covering two production plants to create finished vehicles – Dadong and Tiexi – and, in 2016, a new engine plant. Shenyang is the only place outside Germany where BMW has an R&D centre.



Germany-Shenyang is not a one-way street, however, and there are many examples of enterprises from Shenyang heading in the other direction. As of July 2015, according to the Shenyang municipal government, 12 projects from Shenyang were invested in Germany, with agreed investment volumes of $113 million.

This is partly a function of outbound M&A from China, a widespread trend through which Chinese businesses seek to acquire technology in the west and integrate it into their own practices at home. So, for example, Neusoft acquired the Automobile Navigation System Project from Johanna Otto; China Shenyang Machine Tool Co acquired Schiess and founded its design centre in Berlin; and Northern Heavy Industry acquired MFW, part of the German Wirth Group. Others are mandates, such as Shenyang Yuanda Aluminium Industry Engineering undertaking an engineering project at Frankfurt airport.

It has also been helped by connectivity. The three weekly non-stop flights between Shenyang and Frankfurt have been halted for now, but perhaps more important is the Central European railway that can get cargo to Germany from Shenyang in just 12 days.

“Sino-German cooperation is closer and closer, more and more successful, more and more wonderful,” says Jens-Peter Voss, consul ceneral of the German Consulate General in Beijing.



SHENYANG AS A PLACE TO LIVE

Shenyang’s economic performance over the past 50 years is well known. But what is it like as a place in which to live?

According to the city government, when a poll was conducted of 269 cities in China to find the 10 happiest, Shenyang ranked second.

The city enjoys a useful collection of attributes. It is obviously busy, but it does not suffer any of the traffic congestion of, say, Beijing or Shanghai. It does not have monuments as world famous as Beijing’s Forbidden City or Xi’an’s Terracotta Warriors, but it was the fount of the Qing dynasty and has three separate World Cultural Heritage sites. The people of the northeast are generally said to be among the friendliest in China. And the city has an increasing focus on its ecology, and aims to be one of the greenest in the country.

“Real life here is better than people think, and certainly better than foreigners anticipate,” says a long-standing foreign resident of the city.

Shenyang embraces many of the essentials of city living: well-planned transportation networks, cultural attractions such as theatres and sporting arenas, major educational establishments, greenery, vibrant shopping districts and of course the promise of interesting employment in new and specialist industries. The urban layout, functional and well planned, also helps. There are numerous city squares that provide leisure space among the workplaces.

The municipal government says that the city is served by 52 medical institutions that accept global medical accident insurance. There are 11 five-star hotels, including the Grand Hyatt and the Kempinski. There are 70 large supermarkets and 85 schools and universities that accept international students.

Foreigners with children in many cases have international schools reflecting their nationality and curriculum: Germans are well catered for (in a school whose pupils are mainly from families who work for BMW), although it is hoped that the French school – which closed after Michelin ended its



construction phase – will be reopened. Shenyang International School, to give one example, was founded in 1998 and offers a North American education programme from K3 through to the 12th grade. The government has promised that more new schools will be developed.

Fitness is a priority in Shenyang. It hosted football events for the 2008 Beijing Olympics and in 2013 hosted the 12th National Games of the PRC. Mass fitness activities can be seen all over the city.

Additionally, there are fine locations on the edge of the city for winter sports enthusiasts. Each year the Shenyang Snow Festival creates a winter carnival of skating, skiing, and hot-spring bathing. Residents say Shenyang is very much a city of four seasons: winter is long and cold, summer very hot.

Cuisine in Shenyang is enlivened by the proximity of North Korea; there are districts of Shenyang where Korean is more widely publicly spoken than Chinese, and Korean restaurants abound.

In terms of international perception, Shenyang is somewhat under the radar. “There is a great theatre, but people don’t know about it,” says a resident. “Great orchestras play. It just needs to be better marketed.” The same could be said of the city in general: expatriates tend to be positively surprised when they move to it.

HISTORY OF SHENYANG

Shenyang has a rich cultural history. It is the birthplace of one of China’s greatest imperial dynasties and was the imperial capital during the

reign of two emperors. It is considered one of the most important historical and cultural cities in China.

The city of Shenyang dates back to 300BC, when Qin Kai, a general of the State of Yan, established the city of Houcheng. It took its modern name – or something close to it, Shengjing – in 1625, when it became the capital for the Qing Dynasty.

The Qing dynasty, also known as the Manchu, would go on to rule China as a whole from 1644 to 1912 – an extraordinary span of almost three centuries that formed the map of the modern Chinese state. The area around Shenyang is where it all began, and the Qing era of cultural effervescence is reflected in many historic places and artefacts today. Shenyang boasts three World Cultural Heritage sites.

The most famous is the Imperial Palance of Shenyang, also known as the Mukden Palace. It was built in 1625 and the first three Qing emperors lived there from then until 1644. Today, it is an impressive museum. The architecture of the palace is reminiscent of the Forbidden City in Beijing – indeed, its presence on the Unesco World Heritage list is as an extension of the Imperial Palace of the Ming and Qing Dynasties, which is the Beijing Forbidden City’s formal name – but combined with Manchu and Tibetan styles.



Another World Cultural Heritage site is the Fuling Tomb, or East tomb, where the first emperor of the Qing Dynasty, Nurhaci, and his wife, Empress Xiaocigao, were interred. The mausoleum, an elaborate complex of gates, archways, pillars and rooms, is also open to public visits.

The third World Cultural Heritage site is the Zhaoling Tomb, or North Tomb, within Beijing Park in the city’s north. Built between 1643 and 1651, it is noted for its ornate gates, a row of animal statues leading to the tomb, scenic gardens and an impressive temple complex.

Beyond the World Cultural Heritage lists, there are several other impressive historical monuments in Shenyang, such as the beautiful and imposing Fujin Gate – one of nine gates built for Shenyang city in the Qing dynasty; the Xinle Archaeological Site, which chronicles a primitive society dating back 7,200 years; the Xibe Family Temple; the Four Pagodas and Seven Temples of the Ming and Qing Dynasties; Marshal Zhang Xueliang’s Mansion; and the Nanguan Catholic church.

Shenyang has many museums. One fascinating institution is the Shenyang Urban Planning Exhibition Hall, in a German-designed building opened in October 2010. This museum covers many subects, from the earliest settlement of the city to the plans for its future; its centrepiece is a 1,500 square metre demonstration model of the city behind which a film, “A Blessed and Thriving Shenyang”, is projected.

Another is the China Industry Museum, in the Tiexi district of Shenyang, at the heart of the city’s industrial history.

A third is Shenyang’s Financial Museum, a fascinating place covering the history of money in China – from China’s earliest dynasties to the present day – with rare artefacts and comprehensive commentary. It traces the history of the currency and the very idea of money and exchange from prehistory to the present day, covering everything from counterfeiting to internet finance along the way. Many of the presentations have explanations in English.

Increasingly, football is part of Chinese culture too; President Xi Jinping is known to be a fan and to have made a priority of progress in the sport. In that context, the Shenyang Olympic Stadium – one of the main venues for football matches during the 2008 Beijing Olympics – should be seen as another part of Shenyang’s rich cultural heritage.



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