Will the World economy be rewritten by China

1
Will the World economy be rewritten by
China?

• Kekule cyclus 2005

Dr Martin Casey, VP Strategic Planning, Huntsman
Corporation
2
Huntsman A key participant in chemical industry
restructuring
Dow Ethyleneamines AW Surfactants
Huntsman purchase ICI Polyurethanes and acquire
Martin Casey
Vantico
PackagingSpinoff
( in billions)
Compounded Annual Growth Rate 21
Nova Styrenics Sale
Rexene
Texaco PO/MTBE
ICI
Texaco Chemical
American Hoechst
Monsanto MAn/LAB
Shell PP
Huntsman has grown through organic growth as well
as selective acquisitions Now has revenues of
10 billion, employing 14000 people
3
Global Presence
4
Will the World economy be rewritten by China?

• ? Yes
• ? No
• ?? Maybe

5
The Central Kingdom ??

• Population 2003
• 1.290bn (mainland) 1/3 urban, 2/3 rural
• 6.8m (Hong Kong)
• 22.6m (Taiwan)
• GDP
• 1.4bn (mainland)
• 159m (Hong Kong)
• 286m (Taiwan)

6
Year zero 1978 Deng Xiaoping
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Deng Xiaoping and the beginnings of Chinas
modern economy

• 1974Spoke for China at UN
• Stopover in Paris on return
• Deng was senior apparatchik at this time,
  responsible for central planning.
• 1976 Death of Mao Tsedung, Zhou Enlai
• 1978/9 Big projects and a balance of payments
  crisis. Deng becomes President
• Deng stops big projects, refocus on light
  industry
• Deng official visit to US
• Reversal of agricultural communes, relics of
  cultural revolution, but replacement had to be
  socialist
• Outlawed family farming but allowed smaller
  collectives (which ended up as families). 98 of
  farming is families by 1983. Food output rose
  rapidly.
• 1980 Gang of four tried (Mao legacy)
• 1981 Gets credit for very rapid rise in standard
  of living and GDP.
• Demand rockets for fertiliser, mini tractors,
  washing powder, electricity, refrigerators

8
Refrigerators ICIs entry point

• 1980s ICI starts to supply polyurethane systems
  for refrigerator production, via traders in Hong
  Kong.
• Helps to set up national standards for insulation.

9
Shop in front, factory behind

• 1978-1984 Local extension of small co-op concept
  to non-farming family enterprises
• Entirely outside original government concept but
  tolerated.
• Wenzhou used its isolation to make the most of
  the blind eye policy
• By 1984 30,000 new family businesses had been
  registered. But were strictly forbidden to
  exploit (employ) non- family members.
• 1984 Local officials persuaded to register a new
  form of enterprise, the stockholding
  cooperative
• Presented as a derivative of Maos collectives.
  However, these were stockholdings (which gave
  workers a share of dividends)
• 20000 such enterprises in Wenzhou alone by 1990
• 1980s Copycat process grew all over China.

10
Early birds the foreign JV

• Hong Kong private investors
• Exploit cheap labour to expand their HK business
• Mr Pang hard disks, Mr Lo lingerie
• VW moved Santana plant to Shanghai
• Procter Gamble, Philips, Rolls Royce,
  Carrefour, Coca Cola
• But by 1988 rapid economic growth was causing
  massive inflation, corruption

11
The Tiananmen square incident

• Remember 1989, Before the fall of the Berlin
  wall.
• Followed by economic belt-tightening

12
Negotiating a way in

• 1985-1989 ICI negotiated a possible joint
  polyurethanes venture in China. Two typical
  scenarios
• Chinese partner wanted control (gt51 share) and
  total rights to technology
• Chinese partner wanted high share (30-40) but
  had no money.
• 1989 My first visit
• 1991-2 ICI builds technical service centre.
  Alone.
• 1991 ICI finds new partner in Shanghai for MDI
  plant

13
Dengs southern tour

• Dengs new kickstart for reform
• 1992 at age of 88
• It is glorious to get rich
• speed up the pace of reform
• socialist market economy
• a cat can be white or black, as long as it kills
  mice
• Investment zone fever starts
• Stocks, property, finger-in-pie
• Shanghai municipality allowed to spend own
  budget, massive infrastructure development
• Reformist cadres everywhere, dealmaking
• Economic situation in West was miserable
• Many Western companies burnt (GM)

14
Confucius and social order

• Prince - Subject Obedience
• Father - Son Love
• Older brother-Younger brother Respect
• Husband - Wife Harmony
• Friend - Friend Affection (Guangxi)

15
Guangxi?

• Shanghai government had authorisation for
  projects up to 10m
• Huangpu bridge at MinHang, opened 1995, clearly
  exceeded this.
• Explanation Municipality sharing the load. (no
  government official comment)
• In 1996 ICI obtained permission for 100 foreign
  owned manufacturing plant
• (not strictly permitted by state rules)
• Polyols blending (20m)

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Celebration
17
Brake and accelerator

• Inflation grew in 1994 to 16-20 in cities
• 16-point austerity plan
• Freeze on large project approval
• VAT, capital gains tax introduced
• Credit freeze
• Domestic demand shrinks
• 1997 Asia crisis
• Chinese government stimulates consumer demand
• Introduces new infrastructure projects
• 2001 WTO accession
• What is the appropriate speed of market opening?
• The single most important uncertainty in the
  world (Davos 2001)
• 1999 Huntsman buys ICI Polyurethanes

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Drivers Of MDI Growth

• Food preservation
• Domestic and commercial refrigerators
• Cold storage

1997
2005
19
Drivers Of MDI Growth

• Transport
• Motorcycles
• Cars
• Commercial vehicles
• Food preservation
• Domestic and commercial refrigerators
• Cold storage

42
1997
2005
20
Drivers Of MDI Growth

• Construction
• Energy conservation
• Modular and efficient construction
• Sustainable resources
• Transport
• Motorcycles
• Cars
• Commercial vehicles
• Food preservation
• Domestic and commercial refrigerators
• Cold storage

190
1997
2005
21
Drivers Of MDI Growth

• Lifestyle
• Branded footwear
• Fashion accessories
• Designer furniture
• Leisure
• Construction
• Energy conservation
• Modular and efficient construction
• Sustainable resources
• Transport
• Motorcycles
• Cars
• Commercial vehicles
• Food preservation
• Domestic and commercial refrigerators
• Cold storage

240
115
2005
1997
22
Drivers Of MDI Growth

• Lifestyle
• Branded footwear
• Fashion accessories
• Designer furniture
• Leisure
• Construction
• Energy conservation
• Modular and efficient construction
• Sustainable resources
• Transport
• Motorcycles
• Cars
• Commercial vehicles
• Food preservation
• Domestic and commercial refrigerators
• Cold storage

240
115
Actual sales in 2005 430 kt
2005
1997
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How far can Chinas economy go?
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Chinas rapid GDP growth
Chinas GDP grew at about 9 p.a. for the last 26
yrs (global average 3) Exports grew 17 p.a. to
6 of world total today The worlds sixth largest
economy (biggest in 2050-Goldman Sachs) The
worlds second largest exporter and
importer Holds the worlds largest foreign
currency reserves (gt700bn)
Asia financial crisis
GDP personal expenditure business investment
government expenditure trade surplus
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Chinas GDP (2003) is loaded towards manufacturing
19
20
31
53
26
China Manufacturing Output
US billion, 2000 figures
Growth Rate Y-O-Y
(BNP Paribas Peregrine)
(HSBC)
27

• Limits to GDP/Capita Growth

Growth flattens out when GDP/Capita reach levels
in developed countries. In the case of China this
can continue for decades. Hence forecasts China
will be the worlds biggest economy in 2050
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Environmental sustainability

• Massive increase in food production since famine
  in 1960
• Growing desertification
• Low per capita water resource
• Large coal user
• Heavy contributor to poor air quality
• 2nd biggest greenhouse gas emitter
• Big risk of pandemic
• Bird flu
• High population density
• However, Government very aware of issues
• Green GDP indicator

29
Risks The world trade balance how do we change
to accommodate China?
30
China is growing significantly in Global Trade

• Dramatic shifts have occurred since 2001
• Chinas overall trade is nearly balanced
• But it has a large surplus of exports with US
• And of imports from Asia
• China is acting as a growth engine for the SE
  Asia region

Chinas import/export balance
31
Globalisation
Oil cracked in Gulf to make ethylene, converted
to polyethylene granules
PE bags exported to USA
PE transported to China for conversion into
plastic bags
32
US Trade balance

• CONSEQUENCE
• US current account deficit remains high (700bn)
• Foreign debt burden will increase with GDP and
  with interest rates
• This is unsustainable
• Correction could be painful (higher US
  inflation/exrates)
• Or benign (increased demand for US exports)
• This is the biggest uncertainty in global outlook

33
Chinas currency

• SHOULD RMB DEVALUE?
• Chinas CA surplus around 3 of GDP (normally
  1-3 deficit for fast growing emerging economy
• This would be corrected by 20 revaluation
• WOULD IT MAKE A DIFFERENCE TO U.S. BALANCE OF
  PAYMENTS?
• Not much (Chinese pay is 5 of US pay levels)
• Main effect would be to devalue Chinese
  investments in US Govt bonds
• China and Japan currently main lenders to US

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How to accommodate to China

• Chinas main relative competitive advantage is
  low labour cost
• Will grow share of labour intensive light
  industry
• The biggest (short term) losers are other low
  labour cost countries
• Bangladesh, Latin America
• Do what China doesnt do best
• Raw materials, capital goods (heavy industry),
  food, services

35
Risks social
36
Prosperity and Fairness

• Emerging middle class whose real purchasing power
  has risen with economic growth
• GDP/capita 1000 (5600 at ppp)
• Real per capita household incomes have grown 9.1
  since 2001 but just 5.1 in rural areas. Rural
  incomes less than 1/3 urban incomes. 2/3 of
  population
• Social insurance now available in urban areas,
  linked to employment and portable. But still
  limited and not available in rural areas.
• Political (and military) cadres still often
  corrupt. Too much central control.
• Growing pressure for democracy at township level.
  Increasing examples of people power

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Income distribution
In most countries, changes are normally fairly
slow No consistent relationship between growth
and income distribution China however is showing
a rapid divergence of income distribution
(Estimate 1995)
38

• PPP GDP figures are higher than market based
  figures. It follows that PPP GDP growth figures
  will be lower
• China 5-6 rather than 9

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The employment problem

• Jobs in textile industry
• Four times as many jobs were lost in China over
  the last decade as in US
• State owned Enterprises
• How to make them more competitive?
• Most loss making
• Pension burden on old collectives
• Unemployment rate
• Official 5
• Off-record 7
• Unofficial 12
• Skills and education
• Education system badly damaged in Cultural
  Revolution
• Many Chinese went to US to study
• In 2004, 50000 researchers persuaded to return

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Risks political and structural
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Structural problems

• Regulation
• Incomplete legal system, particularly with
  respect to enforcement
• Local/regional/state responsibilites overlap
  (e.g. licence for a moving van)
• Banks
• Role in transition from govt department to
  commercial bank
• No risk assessment (Standard-Poors). Interest
  rates carry no risk premium
• Infrastructure
• Brownouts in most provinces
• Roads East-West
• Arbitrary reform process
• Military ambition
• Taiwan (but no-one wants trouble)

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What to do with the cash?
43
What to do with the cash?
The Governments money Chinas foreign currency
reserves are mostly dollars China and Japan are
the largest holders of US govt bonds in the
world.

• The peoples money
• Chinese citizens are among the worlds greatest
  savers The savings ratio is 40 and since 2002
  Chinese banks have been awash with money. The
  banks appetite for investment has been enormous.
  
• Permitted to invest dollars and RMB in foreign
  ventures from 2002. Permitted to invest outside
  China from 2004.
• The BASF/Huntsman joint venture borrowed over
  650m for their project, all from Chinese banks

44
Chinese buying of US bonds has long overshadowed
its direct investment . In billions of dollars
Source US Treasury Dept, Thompson Financial
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but US resistance strengthening
Source Dealogic
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Chinese governments biggest headaches

• Property ownership
• Leftover from red cloak days
• White paper circulating
• Unprofitable SOEs
• Cash drain
• Hold unemployment down
• Bad loans at banks
• Inheritance from days of raw communism
• Some debt repaid by Government
• Bleeding continues (SOEs)
• Corruption
• Not so visible now to Westerners
• Mostly local officials investing in industry

solution PRIVATISATION
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An economic superpower?

• Hugely important economy
• Reforms have broadened since WTO membership
• Many risks, social and economic
• With GDP/head at 1000 and 1.4bn people, enormous
  growth headroom
• But NOT an economic superpower (Yet)

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And our project?

• Health and Safety 2 LTA only over 15 m.
  man-hours World class performance
• ???????? 1?5?????2??????? ????????
• Quality All facilities up to Huntsman global
  standards
• ?? ???????????????
• Cost Within estimation made in the Feasibility
  Study
• ?? ???????????
• Staffing Recruitment and training on schedule
• ??????? ???????
• 3rd Party Suppliers Will supply on time as
  required by the contracts
• ????? ?????????????????
• Time Becomes operational on 1 July 2006
• ???? 2006?7?1???

Download of this talk and Huntsman Corporate
Brochure from http//www.huntsman.com/index.cfm?
PageID5940
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A Chongqing Story...
Date 17.10.2004 (Monday) Place Wanzhou,
Chongqing Time Afternoon / after work

• Trio Kungfu fighting Ms. Zeng, Mr. Hu
• Huge crowd of thousands
• Police involved, gt triggered violence from the
  crowd
• Riot was not reported in Mainland newspaper BUT
  only Peoples Daily websites China News Service.
  However, coverage mentioned 100 people involved
  in the riot.
• Wanzhou govt tried to play down the seriousness,
  on 20.10.04 a spokesman said Media has the duty
  NOT to report the incident, which he said had
  been manipulated by few instigators.

• Chongqing
• Biggest City in China of 30 m people
• Starting point of the 3 Gorges