mizuho china monthly

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MIZUHO CHINA MONTHLY
Industry Research
Japanese Companies’ Strategy in the Apparel Industry based on Chinese Economic
Trends
Industrial and Regional Policies
3
8
Strategic Vision and Outlook of “Made in China 2025” (Part 1)
News from the China Advisory Division
Entering the cold-chain market in China
Making the Right Moves
China’s urban future
19
25
July 2015 Edition
- Executive Summary C Industry Research
Economy
Japanese Companies’ Strategy in the Apparel Industry Based on Chinese
Economic Trends
China is proud of the size of the export value of its textiles and clothing, which stands out on a global basis.For
Japan, China was an important clothing production base for recent decades.
However, propelled by the
development of the Chinese economy, i.e., rising wages, China is reaching a turning point, and it is getting more
important to view China as a “market.” But at the same time, there are few successful cases in
Japanese apparel
companies’ expansion to China. Of foremost importance for Japanese apparel companies will be the construction
of a world-class “competitive brand” supported by a “vertically integrated business model” and “tenacious
initiatives that take lessons from failure.”
Industrial and Regional
Policies
Strategic Vision and Outlook of “Made in China 2025” (Part 1)
“Made in China 2025” was released recently, generating strong interest in China and other countries. This
planning document, which has also been called “Industrie 4.0 China Version,” is regarded as a roadmap for the
direction of sustainable development and upgrades in Chinese manufacturing industry over the next 10 years to 30
years and beyond. Thus, it has important significance and impact. This two-part article focuses on “Made in China
2025.” After introducing the gist of the strategy, we will survey the policy impact and economic effects both inside
and outside China, together with studying the policy measures for achieving the goals, and the possibilities of and
the challenges in “Made in China 2025” .
News from the China Advisory
Division
Entering the cold-chain market in China
While the size of the food market in China is one of the largest in the world, the development of the cold-chain
market has been a key issue for ensuring food safety and developing retail and logistics industries, etc. This article
reviews the opportunities for Japanese companies to develop business in the market, based on the current situation
and the outlook for the future of the cold-chain market in China.
China’s urban future
China has made urbanization efforts according to its National New-Type Urbanization Plan. Financing
urbanization is critically important for local governments. The central government has thus been seeking solutions
to diversify financing means for local governments by announcing various measures, such as the expansion of
China’s municipal bond market, expansion of revenue collection capabilities of local governments, and utilization
of PPPs. This article explains the future financing mechanisms to support a new era of urbanization in China.
Industry Research
Emiri Riho
Japanese Companies’ Strategy in the
Apparel Industry Based on Chinese
Economic Trends
Distribution, Retail & F&B Team
Industry Research Division
Mizuho Bank, Ltd.
([email protected])
China, the world’s textile supply factory, is proud of the size of the export value of its textiles and
clothing, which stands out on a global basis (Figs. 1 and 2). Its unassailable position owes much to the
fact that its neighboring country, Japan, has long been the second-largest apparel market in the world and
has been a buyer of Chinese textile and clothing exports. In addition, China enjoys a variety of favorable
conditions, including an abundant labor force, domestic availability of all types of material such as cotton,
wool, cashmere and silk, and a government export promotion policy such as tax exemption on exports of
textiles.
Fig. 1: World’s Top 15 Countries
Fig. 2: World’s Top 15 Countries
in Textile Export Value
in Clothing Export Value
(100 million USD)
(100 million USD)
2,000
2,000
1,800
1,800
1,600
1,600
1,400
1,400
1,200 1,066
1,200
1,000
1,000
800
800
600
600
400
68
62
54
5
U.K.
(Japan)
Belgium
Indonesia
Netherlands
France
Turkey
Spain
India
Germany
Vietnam
Bangladesh
0
237 235 219
184 172 168 154
115 110 86 86 77 75
Hong Kong
200
China
52
Italy
Belgium
France
Pakistan
Japan
Taiwan
Hong Kong
Turkey
South Korea
Italy
Germany
U.S.
India
China
0
400
Netherlands
189 149 139
135 122 120 107 102 93
200
1,774
Source: Figures 1 and 2 were prepared by Mizuho Bank’s Industry Research Division using WTO data.
Note: Figures 1 and 2 are 2013 data. Japan ranks 59th in clothing export value.
Looking at trends in Japan’s textile import value, the value of imports from China was only 25.8% in
1990 but reached a peak of 78.4% in 2009, showing that China’s presence as a producer country
dramatically increased during those 20 years (Fig. 3). In the process of shifting the production base from
Japan to South Korea and then to China in search of cheaper production costs amidst a deflationary
environment, the technological capabilities of Chinese factories, particularly those along the coast,
dramatically improved due to the unceasing technical guidance by Japanese apparel affiliates including
textile trading companies.
However, China, having been playing a big role as a garment factory in the world, is now facing a
turning point with rising wages (Fig. 4). The percentage of Japan’s textile imports from China is declining
(Fig. 3) as Japan’s textile industry follows a trend known as China+1, a movement to shift some
production base to ASEAN member countries where wages are cheaper. ASEAN countries’ production
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Industry Research
faces constrains or bottlenecks, such as (1) increased transportation costs, (2) prolonged planning and
production time, (3) restrictions on material procurement, (4) underdeveloped technological capabilities,
and (5) inability to carry out small-lot production. However, these countries’ shares of basic goods in
particular are in an uptrend because of the attractiveness of the manufacturing cost. For example, wages
are approximately one-third of China’s in Vietnam and approximately one-fifth in Bangladesh. Chinese
production retains its strength especially in the young ladies’ segments, where quick delivery and
technological capabilities are necessary to reflect the latest designs and trends, but its position as a
producer country is starting to change.
Fig. 3: Value of Japan’s Clothing Imports
Fig. 4: Average Wages in China
45,000
(%)
90.0
40,000
80.0
35,000
70.0
30,000
60.0
25,000
50.0
20,000
40.0
15,000
30.0
World
10,000
20.0
China
5,000
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
Chinese import ratio (right axis)
1988
0
10.0
(RMB)
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
(100 million JPY)
0.0
(Year)
Source: Prepared by Mizuho Bank’s Industry
Research Division from “Trade Statistics” of
Japan’s Ministry of Finance.
Source: Prepared by Mizuho Bank’s Industry
Research Division from data of the National
Bureau of Statistics of China.
Meanwhile, China’s retail apparel market in 2013 was approximately RMB 1.3 trillion, making it the
second largest in the world after the U.S. (Fig. 5). Deceleration in the speed of growth is apparent because
the macro economy is in an adjustment phase, but it is a promising market where sustained growth can be
expected. On the other hand, looking at Japan, the apparel specialty stores’ market dropped by over 20%
from 1991 to 2014, and the outlook is for it to decline even more in the medium to long term. There is
movement to avoid the Chinese market due to concerns about the so-called China risk and to aim at the
ASEAN market instead, but in view of the size and growth potential of the Chinese market, it cannot be
overlooked.
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(Year)
Industry Research
Fig. 5: Size of China’s Apparel Market
Childrenswear
Menswear
Womenswear
(Trillion RMB)
Year-on-year growth rate (right axis)
2.5
(%)
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2.0
1.5
1.0
0.5
0.0
(CY)
Source: Prepared by Mizuho Bank’s Industry Research Division from “Apparel in China,” Euro monitor International.
As China’s character as a producer country and a consuming region changes in this way, how should
Japanese apparel companies regard China and how should they respond?
Considering the potential of the market that is being formed, we should think not only about the risk
factor of rising production costs due to the development of this neighboring country but also about the
opportunity; it is important to find the best way to capture this market. The Hong Kong textile trading
company Li & Fung, which boasts one of the largest production systems in the world, is strengthening its
system for capturing sales channels in China and ASEAN. This is because it believes that “China is
approaching its largest structural change since the reforms and opening up policy of 30 years ago, and
China is changing from an export-led economy to a domestic demand-led economy.” The company
referred also to the annual minimum wage increase of 13% touted in the 12th Five-Year Plan, or in other
words, an 80% increase in wages over five years. Even if Japan accelerates its China+1 trend in response
to the rising production costs in China, the same phenomenon of rising wages is occurring in the ASEAN
countries to which Japan is shifting production. At the current pace, these countries are expected to be at
wage levels equivalent to China’s current level within 5 to 15 years. Under such circumstances, it is
unlikely that a fundamental resolution will be reached just by shifting the production area in search of
cheaper production costs. The development of emerging countries should be viewed not only in terms of
costs but rather it appears that it will also be necessary sooner or later to build a mechanism to reflect it in
sales.
There are, however, only a limited number of successful cases of overseas expansion by Japanese
apparel companies. Some of the reasons why it is difficult to succeed include lack of understanding of
local business customs and market characteristics, lack of brand power, and the gap between domestic
and foreign prices. On the other hand, the features exclusively shared by companies that have
successfully expanded into China, such as Fast Retailing, Ryohin Keikaku, and Honeys, seem to be a
“competitive brand” supported by a “vertically integrated business model” that is well received in the
Japanese market and “tenacity when entering overseas markets including China.”
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Industry Research
Lack of information on local markets can be offset by the accumulation of experience and a tie-up
with a local business partner who is familiar with local business. However, the issue then will be brand
strength and product competitiveness. The Chinese apparel market is composed of luxury brands that are
mainly foreign brands and low- to mid-priced brands sold by foreign SPA (Specialty store retailer of
Private label Apparel) companies and local companies. The latter, which is exclusively the province of
Japanese companies, is full of products suited to local tastes and trendy fashions from the U.S. and
Europe, and thus it is already a market where the competitive environment is tough. If the brand is not
well received and surviving in the Japanese market, then it will be difficult for it to succeed in foreign
markets where competitive conditions are less favorable.
Coincidentally, there is a movement spreading in the domestic Japanese market to improve/eliminate
or consolidate brands that have overly proliferated and to strengthen core brands by deepening
involvement in the planning and production processes.
Furthermore, many of the global apparel companies that are successful in the mass market are SPA
companies that have achieved flexible product development and inventory control along with competitive
prices while taking risks with a vertically integrated business model. Meanwhile, the SPA business model
that involves both product planning and sales has spread since the 1980s and 1990s at many Japanese
apparel companies. However, as there has been an increase in apparel companies’ degree of dependence
on external resources such as trading companies for know-how and risk that cannot be handled in-house,
currently their product development capabilities and ability to control the entire supply chain are
relatively weak, making their profitability low.
Considering this, priority will probably be placed on building a more competitive business model by
boosting the degree of vertical integration, rather than recklessly rushing to advance.
In the process of boosting the degree of vertical integration, it would be possible to consider utilizing
Chinese production sites that have evolved into outstanding “production bases” in terms of quality as well
as scale. In the coastal regions of China, there are agglomerations of factories that have continuously
received technical guidance from Japanese trading companies and apparel manufacturers for 20 years and
have accumulated technology, and it is easy to conduct business there even using the Japanese language.
Moreover, the coastal regions are in touch with global fashion trends by receiving orders from the U.S.
and Europe, and their ability to propose fashion is also improving. The rise in production costs in China is
a by-product of both improved technology and the ability to make proposals. One path would be to
explore the utilization of such production sites in the process of vertical integration.
To conclude, it should be borne in mind that no company achieves success in overseas expansion
without failure. For success in overseas expansion, it is necessary to buckle down and to work to some
extent for the medium to long term. Fast Retailing, which opened around 300 stores in China and
transformed its China operations into a cash cow, spent three years finding its way until it turned
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Industry Research
profitable. The success of Ryohin Keikaku’s overseas operations, which has opened around 130 stores in
China and has posted growth in revenue and profit for five consecutive periods, was earned at the cost of
11 years of operating in the red. There are cases in some areas where not only Japanese companies but
also global companies such as Inditex and H&M have been compelled to fight hard. In the early stage of
entry into the Chinese market, it is generally difficult to be profitable quickly due to relatively high cost
resulting from the initial investment cost and the small handling volume as well as due to the lack of
information on local business customs and market characteristics. However, there are numerous cases of
companies that have learned from failure and persevered to become successful later, and it would be great
to learn from such precedents.
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Yongyu Shao, Ph.D. and Economist
Strategic Vision and Outlook of
“Made in China 2025” (Part 1)
China Business Promotion Division
―Possibilities and Challenges for Industrie 4.0
China Version―
Mizuho Bank, Ltd.
([email protected])
1. Introduction（Background and Purpose of “Made in China 2025”）
“Made in China 2025,” a roadmap that aims at sustainable development and upgrades in Chinese
manufacturing industry, was released on May 19 in the form of a State Council Circular. Preparations for
the creation of this development strategy, also called “Industrie 4.0 China Version,” began two years ago,
and since then, interest has been expressed from many quarters. Now that the details and planned goals
have been made known, discussions are occurring in the domestic and foreign mass media and industrial
world.
China’s industrial development has supported the high growth of the Chinese economy for over 30
years since the reforms and opening up. Currently, as China heads toward the “new normal,” Chinese
industry has not lost its position as the stable growth driver and employment absorber of the Chinese
economy. China ranked highest among to the world’s major countries in terms of its manufacturing
industry’s contribution to GDP and the relative percentage of its working population employed in the
manufacturing industry (Table 1). Looking at the chronological data on the proportion of Chinese urban
employment in the manufacturing industry, more than 50 million persons were employed for the first time
in 2013, giving that industry a record-setting share of 29% of workers (Fig. 1).
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Table 1: Comparison of Major Countries’ Manufacturing Status and Technology-related Indicators
I. Comparison of Manufacturing Industry in Economies of Major Manufacturing Countries
Indicator/year
Manufacturing industry’s % of
% of persons employed in manufacturing
Country
GDP
industry
2003
2013
2005
2012
China
32.5%
29.9%
27.9%
28.0%
U.S.
13.3%
12.1%
10.1%
10.3%
U.K.
12.8%
9.7%
9.9%
9.8%
Germany
22.1%
22.2%
20.0%
19.8%
France
14.2%
11.3%
13.1%
12.8%
Japan
19.5%
18.8%
18.0%
16.9%
South Korea
26.7%
31.1%
16.9%
16.6%
II. Comparison of Manufacturing Technology-related Indicators of Major Manufacturing
Countries (2012)
Manufacturing industry’s
Indicator
Investment in
Country
Index of recall notices
energy consumption per unit
manufacturing R&D
for exported products
of GDP
China
1.60
0.26
0.285
U.S.
2.85
0.16
0.043
U.K.
1.84
0.09
0.072
Germany
2.87
0.11
0.038
France
2.24
0.13
0.052
Japan
3.48
0.11
0.023
South Korea
3.45
0.18
0.027
Source: Prepared based on the Ministry of Economy, Trade and Industry of Japan et al., 2015 White Paper on
Manufacturing Industries (Summary) (in Japanese) for Table 1-I and based on commentary on “Made in China
2025” published on the website of the Ministry of Industry and Information Technology of China for Table 1- II.
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Fig. 1: Percentage of Chinese Urban Employment in the Manufacturing Industry
20,000
14,000
12,000
10,000
8,000
6,000
Share of employees in the manufacturing industry
16,000
Total employees and manufacturing industry employees (10,000 persons)
18,000
30%
Total
Manufacturing industry
Manufacturing industry share
29%
29%
28%
28%
27%
4,000
27%
2,000
0
26%
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Prepared based on the China Statistical Yearbook (2014). Shares are calculated.
So far, China has adopted many industrial development plans, including the plans for adjustments and
promotion of 10 major industries (early 2009) and the development strategy for seven major strategic
emerging industries (October 2010).1 Behind the current release of “Made in China 2025” despite the
existence of the earlier plans is a sense of crisis and competition in light of the fact that recent initiatives
taken by Germany in its “Industrie 4.0” (Fig. 2)2 have spread to major manufacturing countries. Since
2011, “Industrie 4.0” has been promoted in Germany as a set of manufacturing industry promotion
measures that utilize the IoT (Internet of Things). It aims at optimization of the entire domestic
manufacturing industry by creating smart manufacturing plants that carry out production flexibly in
response to market needs by “connecting” of the inside of companies and plants, and moreover, by
connecting companies to overcome the walls between them. In the U.S., the Industrial Internet is being
promoted mainly by General Electric. Operational status data is received from sensors attached to
manufactured items such as aircraft engines, and in addition to using the data for increasing the efficiency
of the equipment operation and for predictive maintenance, they are also considering the possibility of
developing a more sophisticated business model by offering direct sales of data analysis applications
whereby companies can acquire data from equipment manufactured by other companies that have
introduced the Industrial Internet and collect data from around the world.3 Even in the U.K. and France,
Yongyu Shao, Research on China’s Urbanization and Industrialization: Historical and spatial development under resource
environmental restrictions (in Japanese), Taga Shuppan, 2012.
2
“Industrie 4.0” signifies the fourth industrial revolution. The first industrial revolution occurred with the introduction of mechanical
production facilities using the steam locomotive in the 18th century. The second industrial revolution was launched by the introduction of
mass production using electricity in the latter 19th century. Experts’ opinions diverge concerning the third and later industrial revolutions,
but the German government regards the third industrial revolution as the start of control of production by computers in the 1970s and
regards the current era as the start of the fourth industrial revolution. (Overseas Trends Unit, Center for Research and Development
Strategy, Japan Science and Technology Agency, Policy Trends Related to R&D of Next-Generation Manufacturing Technology in Major
Countries (in Japanese), March 2015)
3
Ministry of Economy, Trade and Industry, Ministry of Health, Labour and Welfare, and Ministry Education, Culture, Sports, Science and
Technology, 2015 White Paper on Manufacturing Industries (in Japanese), June 2015, etc.
1
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MIZUHOCHINAMONTHLY
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where the positions of manufacturing industry have declined relatively (see Table 1-I), a movement to
reinstate the manufacturing industry using IT (reindustrialization) is taking off, and countries such as
South Korea are issuing aggressive manufacturing promotion policies. Japan, capitalizing on its strength
as the world’s top country in robotics, has hammered out a plan to lead the world in robotics in the IoT
era and to bring about a robot revolution. In response to these movements, in order not to fall behind the
trends of the world, and also in order to resolve the three major issues of Chinese manufacturing industry
(i.e., (1) weakness in innovation, (2) weakness in core technology and lack of general-purpose technology,
and (3) resource depletion and a large amount of environmental pollution; see Table 1-II), “Made in
China 2025” was created as a roadmap for the development of Chinese manufacturing industry from here
forward. Participating in its creation over the past two years were 50 persons from the Chinese Academy
of Engineering and the Chinese Academy of Sciences as well as 100 specialists in various fields. “Made
in China 2025” was announced recently following approval by the State Council.
Fig. 2: What is “Industrie 4.0” (the fourth industrial revolution)?
1st
Industrial
Revolution
2nd
Industrial
Revolution
Mechanization
using steam
locomotives
Automation
using electricity
(Late 18th
century)
(Early 20th
century)
3rd
Industrial
Revolution
4th
Industrial
Revolution
Automation using
computers
Autonomation using
cyber-physical
systems (IoT)
(1980s onward)
(currently underway)
Source: Added to and quoted from the Ministry of Economy, Trade and Industry et al., FY2014 Measures to
Promote Manufacturing Technology (Summary) (June 2015) (in Japanese).
2. Rationale for Setting the Goals and Vision of “Made in China 2025”
“Made in China 2025” (also referred to as “China’s first 10-year action platform” for implementing a
strategy to make China a manufacturing power) has been created and promulgated as a government
document for achieving sustainable development and upgrading of the manufacturing industry. However,
the fact that it does not use the terms “plan” or “strategy” and uses extremely simple language makes it
appear that its creators were strongly aware of “Industrie 4.0.” In addition, it deserves special mention
that, in its setting of desired development goals and a vision for the future, its objective is to “catch up to
and surpass” the advanced industrialized countries of the world.
Table 2 shows the timetable presented in “Made in China 2025.” The values for 2013 are set as
established values, and with 2015 as the starting point, indicators are set up to 2025. In the text, China
spells out three steps for becoming a “manufacturing power.” The first step is to join the manufacturing
powers by 2025. The second step is to enable the entire Chinese manufacturing industry to reach the
mid-level among global manufacturing powers by 2035. The third step is to consolidate China’s position
as a manufacturing giant with comprehensive strength by the 100th anniversary of the People’s Republic
of China in 2049 and to stand among the top class of manufacturing powers in the world with its
comprehensive strength (Fig. 3). Thus, it can be said that this is a blueprint with fairly far-reaching vision.
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Table 2: Development Plan Indicators for Chinese Manufacturing in 2020 and 2025
201
Area
Level of fusion of
industrialization and IT
Quality and effects
capacity
Innovation
3
Green development
201
Indicator
R&D investment ratio as a percentage of sales
of manufacturing companies over a certain
scale (%)
Number of patent acquisitions for inventions
per RMB 100 million in sales by manufacturing
companies over a certain scale1 (cases)
Manufacturing industry quality competitiveness
index2
Growth rate of manufacturing industry’s added
value
2020
2025
5
0.88
0.95
1.26
1.68
0.36
0.44
0.7
1.1
83.1
83.5
84.5
85.5
-
-
Up 2 points
since 2015
Up 4 points
since 2015
Around
7.5
(average
annual growth
rate for period
ended
May
2013)
Around
6.5
(average
annual growth
rate for period
ended
May
2014)
Growth rate of total factor productivity (TFP)
(%)
-
-
Broadband coverage rate3 (%)
37
50
70
82
Coverage rate of R&D in digitalization, design
tools (CAD/CAM)4 (%)
52
58
72
84
Rate of numerical control (NC) introduction in
main processes5 (%)
27
33
50
64
-
-
-
-
-
-
62
65
Reduction in industrial value-added energy
consumption of manufacturing companies over
a certain scale
Reduction of industrial value-added carbon
dioxide emissions per unit
Reduction of industrial value-added water
usage per unit
Comprehensive utilization rate of industrial
solid waste (%)
Reduced 18%
from 2015
Reduced 34%
from 2015
Reduced 22%
from 2015
Reduced 23%
from 2015
Reduced 40%
from 2015
Reduced 41%
from 2015
73
79
Source: Prepared based on “Made in China 2025” released on the website of the State Council of China.
Notes:
1. Number of patent acquisitions for inventions per sales of RMB 100 million of manufacturing companies over a certain
scale.
2. The manufacturing industry quality competitiveness factor is an economic and technological index that reflects the
overall level of quality of Chinese manufacturing. It is calculated using indexes for 12 items related to quality level and
development capability.
3. The broadband coverage rate is a substitute for the household coverage rate of the fixed broadband network.
4. The CAD/CAM coverage rate refers to companies over a certain scale (using a sample of 30,000 companies; the same
applies hereinafter).
5. The rate of NC in main processes refers to the average NC rate in main processes at companies over a certain scale.
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Fig. 3: China’s Strategy for Joining the Manufacturing Powers in Three Stages
2045
2035
Consolidate position, raise
rank, and become a midlevel manufacturing power
2025
2015
Grow into a
manufacturing giant with
the world's largest scale
of manufacturing
Achieve breakthroughs
to lead innovation, join
the top group of
manufacturing powers
Join the manufacturing
powers by reducing the
gap and making
breakthroughs in
priority areas
Stage 1
Stage 2
Stage 3
2015-2025
2025-2035
2035-2045
By 2025, China's composite index
will be close to that of manufacturing
powers such as Germany and Japan
when they first achieved
industrialization, industrialization
will be basically achieved, and
Chinese manufacturing will join the
manufacturing powers, ranking with
the second group of the world's
manufacturing powers.
By 2035, China will raise its
composite index to the upper range
of the second group of
manufacturing powers to solidify its
position as one of the world's
manufacturing powers in both name
and fact.
By 2045 or the PRC's 100th
anniversary in 2049, the composite
index will be raised slightly above
that of the second group of
manufacturing powers, and China
will join the top group of the world's
manufacturing powers, becoming an
influential manufacturing power that
leads the world.
Source: Prepared based on commentary on the website of the Ministry of Industry and Information Technology of
China
Particularly eye-catching in “Made in China 2025” is the statement about becoming “a global
manufacturing power.” This is the long-cherished wish of China and a goal to reach for. If China can
realize this, then it may be possible to achieve a revival of the Chinese people who formerly contributed
greatly to world civilization and to move beyond being the “world’s factory” and a “manufacturing giant”
by transforming into a top-notch technological power, which is the goal set by the Chinese government.
As for the rationale and the method of developing the strategy indicators, a special indicator system
was designed for evaluating the strengths and weaknesses of the world’s major manufacturing countries in
the critical advisory project called “Strategic Research on Manufacturing Powers” by the Chinese
Academy of Engineering, according to Zhu Sendi, honorary chairman of an expert committee of the
China Machinery Industry Federation. The indicator system consists of four first-class indicators and 18
second-class indicators. The first-class indicators are large-scale development, quality and efficiency,
structural optimization, and sustainable development capability. The second-class indicator data was
gathered from the World Bank, etc., and the strengths of each country as a manufacturing country were
numerically calculated as a composite manufacturing index for evaluation purposes. According to that
index, the U.S. ranks first, followed by Japan. German is third and China fourth (Fig. 4). Of course China
is not content with its level of development in 2013 (when its composite manufacturing index rose into
the 80.0 mark from 74.76 in 2010). By implementing “Made in China 2025,” China strongly aims to raise
its composite manufacturing index to 94.86 in 2020 and then to increase it to over 100 level (Fig. 5) to
become the leading manufacturing power in the world.
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MIZUHOCHINAMONTHLY
July 2015
Fig. 4: Composite Index of Major Countries’ Manufacturing Industries (1946-2012)
U.S.
Japan
Germany
U.K.
China
India
France
South Korea
Brazil
Source: Quoted from commentary on “Made in China 2025” published on the website of the Ministry of
Industry and Information Technology of China.
Note: The calculation of the composite index is based on the index established for the unique manufacturing
evaluation system of the task group of the “Strategic Research on Manufacturing Powers” of the Chinese
Academy of Engineering (four first-class indicators and 18 second-class indicators).
Fig. 5: Composite Index of Chinese Manufacturing Industry (1970-2050) (including forecasts)
Early
industrialization
period
Middle
industrialization
period
2010, 74.76
2020, 94.86
Latemiddle
industria
lization
period
1990, 19.48
Late industrialization to
post-industrialization period
Source: Quoted from materials published on the website of the Ministry of Industry and Information Technology of China,
same as Fig. 4.
Note: Figures for 2014 and thereafter are forecasts. See the note in Fig. 4 concerning the composite index.
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MIZUHOCHINAMONTHLY
July 2015
3. Emphasis and Priority Industries for Promotion in “Made in China 2025”
As state above, “Made in China 2025” differs from the Chinese government’s previous industrial
plans and it was drawn up with a strong consciousness of international competition and advanced
manufacturing countries. At the outset, it indicates the importance of development of the manufacturing
industry and displays the meaning of enacting strategy, stating, “Manufacturing is the mainstay of
national economy, foundation for a country’s existence and approach for a country’s prosperity, and
cornerstone for developing a country.” It continues, “As proven repeatedly by the history of the rise and
fall of world powers and the struggles of the Chinese people since the start of the industrial civilization in
the mid-18th century, it is impossible for a nation and a people to be mighty if there is not a strong
manufacturing industry.”
“Made in China 2025” emphasizes a combination of industrialization and information technology, and
promotion of fusion of IT technology and the manufacturing industry in particular, as well as
strengthening of the industrial base capacity, strengthening of quality and brands, promotion of
manufacturing that is environmentally friendly, structural adjustment in the manufacturing industry,
development of service manufacturing and a productive service industry, and boosting of the international
level of the manufacturing industry. It proposes four principles for the development of the manufacturing
industry: i.e., 1) market-oriented and government-guided; 2) based on the present and having a long-term
perspective; 3) comprehensively pressing forward and making breakthroughs in key areas; and 4)
independent development and win-win cooperation. It lays out five guidelines: i.e., 1) innovation-driven;
2) giving priority to quality; 3) green development; 4) structural optimization; and 5) talent oriented. It is
highly aware of the main problems in Chinese manufacturing and stimulates improvements in them.
In addition, projects to be promoted in the future are divided into five areas: 1) construction of
manufacturing innovation centers; 2) intelligent manufacturing; 3) strengthening of industrial infrastructure; 4)
green manufacturing businesses; and 5) high-end equipment innovation. Details are shown in Table 3 and are
essentially consistent with the fields on which advanced countries focus.
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MIZUHOCHINAMONTHLY
July 2015
Table 3: Five Major Projects for Priority Implementation in “Made in China 2025”
1. Construction of manufacturing innovation centers


Construct a group of manufacturing innovation centers (industrial technology research bases) centered on shared demand for
innovative development in new areas in the fields of structural transformation, upgrade and the next generation IT for priority
industries, intelligent manufacturing, 3D printers, new materials, and biomedicine; implement R&D for basic and shared core
technology related to priority industries; and develop businesses by industrializing research results and fostering human resources.
Organize the standards for selection, evaluation, and management of manufacturing innovation centers and establishment of the
programs.
2. Intelligent manufacturing




Deploy the assembled innovations and business applications through fusion of next-generation IT and equipment manufacturing,
centered on the main sections of priority manufacturing areas.
Support breakthroughs in difficult issues through collaboration by industry, academia and government, and realize the development
and industrialization of intelligent products and intelligent equipment that can be independently operated.
Rely on outstanding companies to promote the making of critical processes more intelligent, introduction of robots in important
workplaces, intelligent control of the production processes, and optimization of the supply chain; create intelligent plants and
digital workplaces in priority areas.
In areas, industries, and companies where the basic conditions are good and demand is large, conduct process manufacturing and
decentralized manufacturing and utilize pilots in intelligent equipment and products, etc.
3. Strengthening industrial infrastructure


Deploy pilot applications, build encouragement and risk compensation systems, and support the core basic components and leading
basic methods as well as the initial basic methods for important basic materials and cross-disciplinary applications.
Skillfully utilize breakthroughs in priority businesses, promote R&D by outstanding companies through collaboration by industry,
academia and government in response to urgent demand for critical technology and products in priority work and priority
equipment, and overcome the bottlenecks in processing and applying core basic materials and core basic components.
4. Green manufacturing businesses


Promote improved efficiency and clean production, water conservation and eradication of pollution, and improvement of
recycling-related technologies in traditional manufacturing industries and start pilot businesses for industrialization of energy
saving, environmental protection, comprehensive utilization of resources, re-manufacturing, low-carbon-related technology.
Implement plans to raise the level of clean production in priority regions, watersheds and industries, and start specialty businesses
for prevention of pollution in the air, water and soil.
5. High-end equipment innovation


Start innovative, industrialized specialty businesses for large aircraft, aircraft engines, internal combustion turbines, intelligent
green trains, energy-saving and new energy vehicles, marine engineering equipment, high-tech ships, smart grid equipment,
high-end NC machine tools, and nuclear power generation and high-end medical equipment.
Promote development of priority production and critical equipment that are strongly symbolic and will have strong repercussions,
improve the level of autonomous design and system assembly capacity, overcome the challenges in general-purpose core
technology, processes and industrialization, develop applied pilot businesses, and improve the capacity for innovation and
international competitiveness.
Source: Abstracted from and prepared based on “Made in China 2025” promulgated by the State Council of China
(May 19, 2015)
In addition, as shown in Table 4 more specifically, it proposes the development of 10 key sectors: 1)
next-generation information technology (IT); 2) high-end numerical control tools and robotics; 3)
aerospace equipment; 4) ocean engineering equipment and high-tech ships; 5) advanced railway
equipment; 6) energy saving and new energy vehicles; 7) power equipment; 8) agricultural machinery; 9)
new materials; and 10) biomedicine and high-performance medical devices. Looking at the specifics of
the ten major industries, it goes beyond the “strategic emerging industries” set forth in 2010 (which
covered seven industries, not including agricultural machinery and ocean engineering, etc.) to include a
wide range that cover almost all types of modern advanced manufacturing industries. In addition to the
reflection of the focus on IT that places next-generation information technology (IT) in first place
(whereas it was in second place among the “strategic emerging industries” in 2010), it also places priority
on development of agricultural machinery. China is also confronted with the problem of a declining
working population due to an aging society and low birthrate, and the key to transformation into a
manufacturing power will be “Internet + X,” which is a fusion of the Internet with the manufacturing
industry. This is likely to be a keyword in the future for the promotion of industrial structural
transformation and economic restructuring as well and is also likely to serve as an important viewpoint
and direction in industrial competition and economic cooperation with advanced countries.
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MIZUHOCHINAMONTHLY
July 2015
Table 4: Ten Key Sectors for Priority Promotion in “Made in China 2025”
1. Next-generation information technology (IT)
[Integrated circuits (IC) and specialized equipment]
 Focus on raising the level of IC design; enhancement of the intellectual property (IP) core and design equipment; realization of
breakthroughs in core general-purpose chip technology; and raise of the level of domestic chip applications and compatibility
as well as high-density chip packages and 3D micro-package technology
[Telecommunications equipment]
 Full acquisition of core technology for new types of calculation, high-speed connections, up-to-date storage, and systematized
security as well as technology for 5G, etc.
[Operation systems and industrial software]
 Development of basic industrial software such as operating systems for security fields
2. High-end numerical control tools and robotics
[High-end NC tools]
 Development of sensor high-level mother machines, basic manufacturing equipment, and integrated manufacturing systems,
etc.
[Robots]
 Development of new robot products, standardization of robot production, promotion of modularization, and expansion of robot
uses, in response to demand for robots related to autos, machinery, electronics, hazardous materials manufacturing, military
demand for national defense, chemical engineering, and light industry and for robots related to healthcare, home services,
education, and leisure
3. Aerospace equipment
[Aviation equipment]
 Acceleration of R&D of large aircraft; timely launch of wide-body passenger aircraft R&D; development and encouragement
of heavy-duty helicopters through international tie-ups; and promotion of industrialization of trunk/local carriers, helicopters
and unmanned aircraft
[Space equipment]
 Development and promotion of next-generation transport rockets and heavyweight transporters as well as improvement of the
navigation capacity in outer space
4. Ocean engineering equipment and high-tech ships
 Promotion of deep-sea exploration and development and usage of marine resources as well as development and manufacturing
of security equipment, important systems and specialized equipment for marine work
 Promotion of development of and production processes for deep-sea space stations and large floating structures; formation of
comprehensive capabilities for ocean development facilities; improvement of marine resource development capabilities;
acquisition of construction technology for luxury cruise ships; and improvement of international competitiveness in high-tech
ships such as LNG steamers
5. Advanced railway equipment
 Acceleration of application of new materials, new technologies and new methods; emphasis of acquisition of technologies
related to system security, energy saving and environmental conservation as well as digitalized intelligent networks; and
development of advanced, safe, appropriate products and series of products that are lighter weight and modularized
 Development of the next generation of green, intelligent, high-speed, high-load capacity rail transport equipment systems;
provision of comprehensive solutions; and construction of globally advanced modern rail transport systems
6. Energy saving and new energy vehicles
 Continuous development and promotion of electric cars and fuel-cell vehicles; acquisition of core technology for low carbon,
computerization and intelligence; and improvement of processes and industrialization of core technologies for power batteries,
drive motors, high-performance internal combustion engines, advanced transmissions, lightweight materials, and intelligent
control, etc.
 Construction of a complete industrial system and development system from parts to finished vehicles; and reaching an
international level in energy-saving and new energy vehicles in independent brands
7. Power equipment
 Promotion of industrialization and applied pilot projects for large, advanced, clean coal-fired electric power units; and
improvement of manufacturing capabilities for ultra-large capacity hydroelectric power generation units, nuclear power
generation units, and heavy-duty internal combustion turbines
 Development and promotion of new energy and renewable energy equipment, advanced energy storage devices, substation
transmission equipment for smart grids, and electric power equipment for user terminals
 Manufacturing, securing of applied technology for, and construction of industrial capability for core equipment and materials
such as high output electronic components and high-temperature superconducting materials
8. Agricultural machinery
 Priority promotion of advanced agricultural machinery for major production processes such as selective breeding, tilling,
cultivation, management, harvesting and storing of large-lot foods and strategic economic crops such as staple foods, cotton, oil
and sugar
 Accelerated development of high-end agricultural equipment and critical components such as large tractors, multi-use
agricultural equipment, and large, high-performance combines
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MIZUHOCHINAMONTHLY
July 2015
9. New materials
 Priority promotion of special metal functional materials, high-performance structural materials, functional polymer materials,
special inorganic non-metallic materials, and advanced composite materials; acceleration of development of core technologies
and equipment for tip smelting, solid casting, chemical vapor deposition, 3D processing, and new high-performance synthetic
materials equipment; strengthening of basic research and system development; and overcoming of bottlenecks in
industrialization
 Promotion of development of, and assimilation and development of, special new materials for the military and civilians; and
development and promotion of frontier materials such as superconducting materials, nano materials, graphene and
bio-functional materials
10. Biomedicine and high-performance medical devices
 Development and promotion of chemicals, Chinese herbal medicines, and new biotech drugs to combat serious disease; priority
development of new mechanisms, new target chemicals, antibiotics, antibody drug conjugates, new vaccinations, good new
Chinese herbal medicines, and unique new therapeutic drugs
 Improvement of the development capabilities and industrialization level of medical equipment; and promotion and
development of advanced medical examination equipment such as video equipment and medical robots
Source: Abstracted from and prepared based on “Made in China 2025” promulgated by the State Council of China
(May 19, 2015)
(Continued in next issue)
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MIZUHOCHINAMONTHLY
July 2015
Entering the cold-chain market in China:
Opportunities for Japanese
develop business in the market
companies
to
Aya Mabashi and Jingmei Li
China Business Promotion Division
Mizuho Bank, Ltd.
1. Introduction
With 1.3 billion consumers, the size of the food market in China is one of the largest in the world. On
the other hand, cold chains in China are not as widespread as in some developed countries, and the food
loss rate is also still high, which has been acknowledged as a problem in China.
Under such a circumstance, the further development of the cold-chain market in China has been a key
issue toward supporting China’s urbanization effort, ensuring essential food safety, and developing the
retail and logistics industries, etc.
There have already been a number of Japanese companies that are developing the logistics business in
China. This article reviews the opportunities for Japanese companies to develop business in the market,
based on the trends in the cold-chain market in China, the current issues, and the outlook for the future
growth of the market.
2. Size of the cold-chain market in China
Fig. 1: Breakdown of the food cold chain in 2013
The size of the food market that requires a
(in monetary terms)
cold chain reached RMB 3.25 trillion as of
Imported food
products
3%
2013, maintaining a growth rate of over 10%
year-on-year. This market is expected to
Dairy
products
2%
Fruit and
processed
products
4%
continue steadily growing in the times ahead
to reach RMB 4.3 trillion in 2015. The
breakdown of the food cold chain in
Meat and
processed
products
13%
monetary terms as of 2013 is shown in Fig. 1.
Vegetables and marine products account for
more than 75%.
Marine
products
30%
Frozen food
products
2%
Refrigerated
beverages
1%
Vegetables
45%
The demand for the cold-chain market
Source: “Cold chain” in the China Logistics Development
was 92 million tons nationwide in 2013, and
Report (2013–2014)
the growth rate was 20%. The market is
expected to grow even further in the times ahead. However, the development of the cold-chain market in
China has been behind other countries, and the strengthening of rapid development is required.
3. Current situation of the cold chain in China
(1) Underdeveloped cold chain
In China, losses of agricultural products in the distribution process have been a serious problem for a
long time (Fig. 2). According to the statistics by the government, the utilization rate of cold-chain
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MIZUHOCHINAMONTHLY
July 2015
logistics in 2009 was 5% for fruit and vegetables, 15% for meat, and 23% for marine products,
respectively. The figures are much lower than those of developed countries, which are around 90%. Thus,
the government has been taking measures related to developing the market one after another. The most
important measure was the Agricultural Products Cold Chain Logistics Development Planning
(hereinafter referred to as the “Planning”), released in 2010 to promote the spread of cold-chain logistics.
Fig. 2: Improvement target for the loss rate in
Fig. 3: Target for the utilization rate of cold-chain
the distribution process set out in the “Planning”
logistics set out in the “Planning”
2009
2020
2009
2020
results
target
5%
20%
+15%
15%
30%
+15%
23%
36%
+13%
Gap
results
target
25%
15%
Gap
Fruit and
Fruit and
-10%
vegetables
Meat
vegetables
12%
8%
-4%
15%
10%
-5%
Meat
Marine
Marine
products
Source:
products
Agricultural
Products Cold
Chain Logistics
Development Planning
Source:
Agricultural
Products
Cold
Chain
Logistics
Development Planning
(2) Issues in infrastructure development
1) Vehicles
In China, the number of cold-chain companies that have sales of over RMB 100 million is only 10 or
so. Even major local cold-chain companies have a limited number of vehicles, and the majority of
business has currently been carried out using subcontracted vehicles (vehicles used for transportation by
temporarily renting them from other vendors).
In China, the number of vehicles with refrigeration and freezer capability was around 20,000
nationwide as of 2009. However, the net increase in the number of refrigerated vehicles was 40,000
nationwide in 2013. Thus, the target for 2015 set out in the “Planning,” which is 60,000, is expected to be
reached before 2015.
As vehicles with refrigeration and freezer capability have been improved on, the ratio of such vehicles
among all freight vehicles doubled from 0.24% in 2010 to 0.42% in 2013. However, there is still a large
gap between China and developed countries. Furthermore, domestic demand is expected to continue
growing in the times ahead. Thus, the total number of vehicles still remains insufficient.
2) Warehouses
The storage capacity of refrigerators was 24.11 million tons nationwide in 2013, with an increase ratio
of 13.6%, demonstrating the steady growth in the capacity of domestic freezers and refrigerators in China.
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MIZUHOCHINAMONTHLY
July 2015
However, the average storage capacity of refrigerators per capita is still at a level lower than that of other
countries, and further growth in this figure is thus expected. As of 2013, 60% of the refrigerators were
situated in the eastern part of the country, and the largest stored items were mainly fruit and vegetables. A
total of 75% of the freezers and refrigerators in the country belong to manufacturers and retail
warehouses, while the warehouses of logistics companies only account for around 25%.
It is thus considered that the warehouse sector in the cold chain in China has not yet fully responded to
the demand of logistics companies. The majority of cold-chain companies in China are mainly engaged in
urban distribution, and their main facilities include medium-sized and lightweight vehicles with
refrigeration and freezer capability.
Fig. 4: National average storage capacity of refrigerators per capita (square meters per person)
U.S.
0.23
Japan
0.22
France
0.16
U.K.
0.1
Italy
0.06
Brazil
0.03
India
0.02
China
0.02
0
0.05
0.1
0.15
0.2
0.25
Source: Industrial development analysis of cold-chain logistics and facilities in China in 2014 as compiled by the
China Industrial Information Network
3) Others: Worsening road congestion, longer distances for conveyance, traffic regulations, etc.
Currently, the number of vehicles in use is rapidly increasing in China. Urban construction,
particularly road construction, has not caught up with demand. As a result, road congestion is worsening
in many of the major cities in the country.
Furthermore, rising land prices have led to a situation in which refrigerated warehouses have to be
situated in relatively remote places in suburban areas. As a result, frozen and refrigerated items are now
transported over long distances in order to reach central cities with many restaurants and supermarkets,
etc.
Moreover, large cities such as Beijing and Shanghai have stipulated certain traffic regulations (such as
pass permits and restrictions on the time permitted for travel), targeting trucks that are mainly involved in
urban logistics distribution (including vehicles with refrigeration capability), and this has also been an
obstacle for the development of urban logistics and for such vehicles.
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MIZUHOCHINAMONTHLY
July 2015
Pass permits are required for trucks to travel into major cities, and the issuance of pass permits is also
restricted. Therefore, it is expected that demand will continue increasing for cold-chain companies that
are specialized in urban distribution.
In major cities, delivery is required within the time permitted for travel, such as late at night and at
dawn. In order to avoid the problem of exceeding the time permitted for travel as a result of the
concentration of delivery, a decentralized distribution system with micro vehicles with refrigeration
capability is considered to contribute to the improvement in distribution efficiency in the urban cold
chain.
4. Future orientation for the cold-chain market
(1) Factors for the growth of the industry
1) Growing consumer interest in food safety
In China, there have been a series of media reports on poor food management, such as the use of
out-of-date meat and cooking oil made from recycled water from sewage. In addition, as is shown in Fig.
5 below, there are also many problems in food quality related to logistics. As a result, consumer interest in
food safety has been further growing.
Fig. 5: Problems in food quality related to logistics as revealed in China
September
Acidified milk in a 220-ml bottle from Bright Dairy & Food Co., Ltd. was sold in some areas in Shanghai.
2012
This was due to the fact that the temperature of the distribution vehicles did not meet the standard.
July 2012
Colony numbers exceeding the standard were detected in pork buns from Goubuli.
July 2012
Staphylococcus aureus was detected in squid balls from Hai Pa Wang.
Enterobacter sakazakii exceeding the standard was detected in 7.26 tons of powdered milk for babies from
August 2007
Wei-Chuan Food Corporation (Taiwan).
Staphylococcus aureus was detected in wonton and boiled dumplings from Sinian and Loon Fung in
April 2007
Guanxi.
Source: Various media reports
2) Rise of the urbanization rate and the increase in the incomes of urban residents
Since the economic reform, the urbanization rate in China has been rising, and the population ratio in
urban areas reached 53.7% as of 2013. As is shown in Fig. 6 below, the total ratio of perishable food
products in the food consumption structure is 73% for urban residents, which is higher than that in the
rural areas. In addition, as the income level of urban residents is rising, their awareness of maintaining
fresh flavor is also growing. Therefore, the consumption of food that requires cold-chain distribution is
expected to continue increasing in the times ahead.
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MIZUHOCHINAMONTHLY
July 2015
Fig. 6: Food consumption structure for rural and urban residents in China
100%
90%
Grains
24%
Vegetables
80%
57%
70%
60%
Dairy products
36%
Meat products
50%
Marine products
40%
30%
18%
28%
20%
5%
10%
4%
6%
5%
10%
0%
Fruit
Eggs
1%
2%
1%
Rural areas
3%
Urban areas
Source: Industrial development analysis of cold-chain logistics and facilities in China in 2014 as compiled by the
China Industrial Information Network
3) Development of the logistics industry as led by expanding retail markets
In recent years, large supermarkets and convenience stores have been rapidly growing in China. The
store network, including in urban areas, has been expanding, and consumer lifestyles have been changing.
As a result, a wide range of products, including perishable food products, are sold at those stores, leading
to the further growth of cold-chain distribution.
(2) Demand and initiatives for cold chains by industry
Shown below is information on demand and the initiatives for cold chains by industry.
1) Food (manufacturers and wholesalers)
Major Chinese food manufacturers and companies dealing with food products have been establishing
their own cold chains and/or subsidiaries to strengthen investment in cold chains and internalize the
business.
In addition, the food wholesale market, which is the most important distribution channel for
agricultural products, has introduced cold-chain facilities in more than 80% of the newly established
agricultural product markets nationwide as a result of the growing awareness of food safety. Total capital
investment in this field has amounted to more than RMB 50 billion.
2) Food import & export
In China, there have been a large amount of food products dealt with for import & export. Thus,
efficiency and safety are key issues in distribution. Under such a circumstance, it has been said that there
are cold-chain business opportunities worth RMB 10 billion. In 2013, seaside cold-chain facilities were
developed near the harbor areas. In Tianjin, a Japanese company is building a logistics center, while a
Hong Kong company is investing in refrigerating facilities in Guangzhou, Shanghai, and Ningbo.
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MIZUHOCHINAMONTHLY
July 2015
3) Electronic commerce (EC) for perishable food products
In 2013, major EC websites in China started dealing with perishable food products, and demand for
cold-chain logistics, such as door-to-door delivery, has expanded in B to C business as well.
The market size of the EC market for perishable food products was RMB 13 billion nationwide in
2013, and the accompanying cold-chain door-to-door delivery market mounted to RMB 3.9 billion.
However, in three years, the EC market for perishable food products is expected to grow seven times
larger, while the cold-chain door-to-door delivery market is expected to grow six times larger.
4) Pharmaceutical products
In 2013, the revised Good Supply Practice for Pharmaceutical Products (GSP) certification was
issued for the purpose of controlling the quality of pharmaceutical products for companies dealing with
such products. Strict management systems are required for temperature control as well, and major
Chinese pharmaceutical corporate groups have already established cold-chain systems that meet the new
GSP stipulations.
The size of the cold-chain market for biotechnological/biological products was said to be RMB 500
million in 2013. With the introduction of the new GSP, however, the cold-chain facility market for
pharmaceutical products is predicted to reach RMB 7 billion.
5. Future strategies for Japanese companies based on the trends in the cold-chain market in China
There are quite a few Japanese business operators that show an interest in entering the cold-chain
market in China, seeing it as a business opportunity, as the market is expected to grow in the times ahead.
Meanwhile, major Chinese cold-chain logistics companies only account for a small part of the industry,
and there are some cases in which Chinese companies with room to develop seek Japanese partners for
further development.
Japanese companies are seeking storage functions, the capability to bring in customers, and a business
network from Chinese companies, while Chinese companies are seeking technology and know-how in
cold chains from Japanese companies. In order to ensure a response to the demand in the Chinese market,
which has been growing as the “world’s market area,” alliances between the two countries are expected to
create synergy effects and revitalize the market in the times ahead.


References: “Cold chain” in the China Logistics Development Report (2013–2014), officially released materials such as the
websites of the Beijing Municipal Public Security Bureau and the Shanghai Department of Public Safety,
China Statistical Yearbook (2013), and China Logistics Yearbook
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MIZUHOCHINAMONTHLY
July 2015
China’s urban future: Financing a new era
of urbanization
“China needs to learn more about the world,
and the world also needs to know more
about China.”
Teiichi Atsuya, Director,
KPMG Advisory (China)
Limited
www.kpmg.com.cn
http://www.kpmg.or.jp/jp/china
- Xi Jinping, President of China, speech at the Chinese and foreign reporters’ conference of the new Central
Politburo Standing Committee of the Communist Party of China, November, 15, 2012
According to China’s National New-Type Urbanization Plan (2014-2020), released in March 2014,
approximately RMB42 trillion (USD6.75 trillion) will be required to finance China’s urbanization efforts over
the next seven years2. China’s Premier, Li Keqiang, acknowledged that “the scale of China’s urbanization is
unprecedented throughout human history”, and this New-Type Urbanization would unleash enormous
consumption demand to restructure the economy and increase national development 3.
The methods China employs to finance urbanization in a potentially transformative era will be critically
important for central government policymakers to ensure sustainable growth and economic stability. Through a
recent series of reforms, China’s policy planners have demonstrated that they are facing tough issues by
adopting critical measures in forward thinking ways. As a result, dramatic opportunities now exist to
transform the methods by which China allocates and deploys capital to increase economic efficiency.
This article focuses and expands on the diverse elements underlying future financing mechanisms to support a
new era of urbanization in China, including:
•The expansion of China’s municipal bond market
•Central government granting local governments more revenue collection capabilities (such as commercial and
residential property taxes)
•The promotion of more sophisticated frameworks offering local governments and private funds an incentive
to cooperate and mitigate risks
•Expanding skill sets, training, and capacity building efforts to support China’s local government officials, who
will be asked to take on new and important treasury and finance management responsibilities
The backdrop – China’s municipal finance situation
In China, local governments – not the central government – take primary responsibility for funding their
respective urban development plans. Simply put, “local governments receive half the nation’s fiscal revenue,
but are responsible for 80 percent of the spending.” 4
2
China’s National New-Type Urbanization Plan (2014-2020);http://cir.ca/news/china-urbanization-plan
3
http://www.scmp.com/comment/insight-opinion/article/1248418/what-does-chinese-premier-li-keqiang-think-urbanisation
http://news.xinhuanet.com/english/china/2013-03/17/c_132240264.htm;
http://english.peopledaily.com.cn/90883/8182231.html
4
The Economist, Special Report, Emerging from the Shadows, April 19-25th, 2014
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MIZUHOCHINAMONTHLY
July 2015
To address this imbalance in the past, local governments relied on a balanced approach between bank loans
and land sales to fund urban projects. In 2002, bank loans represented nearly the entire source of local
government debt5. Between 2008 and 2010, in an effort to bolster its own economy during a period of
unprecedented global volatility, China’s central government strongly encouraged local governments to increase
spending for the purpose of sustaining economic growth. However, since local governments lacked significant
means by which they could raise capital, they increasingly turned to alternative finance markets – in particular
trust lending – as an immediate source of capital6.
As a result, local government debt–to-GDP rose quickly over five years: from 10 percent in 2008, to over 33
percent in 20137. The recent and rapid rise in local governments’ debt has resulted in the central government
providing a higher degree of scrutiny and oversight to ensure local government financial stability. Today, the
current leadership is decidedly determined to address the local government debt situation by introducing
measures to diversify funding sources, while also increasing the alignment of infrastructure project income
streams and debt sources, resulting in significant improvements in the use of capital.
In one of the first efforts to understand the true depth of the present local debt situation, China’s state auditor
– the National Audit Office (NAO) -- was called on to audit the growth of local government debt in mid-2013.
Following the December 2013 issuance of the NAO report, the central government has increased its support,
offering more policy options intended to diversify urban funding sources for local governments. During the
Third Plenum in November 2013, and the National People’s Conference and Chinese People’s Political
Consultative Conference (the Lianghui or ‘two meetings’) in March 2014, additional funding sources were
outlined8.
5
China’s viewpoint: China’s debt, risk of debt crisis, and deleveraging. Bank of America Merrill Lynch. 08 October 2013
These loans are issued to local governments through indirect local platforms called ‘urban development investment
corporations’ (also referred to as ‘local government financing vehicles’).
7
8
The Third Plenum of the Chinese Communist Party (CCP): A “plenum” is a meeting of the CCP leadership. This meeting, to
be held in November, is the third plenary session in the five-year cycle of party leadership. Lianghui: Both Chinese People’s
Political Consultative Conference and the National People’s Conference plenary sessions are often called the National
“Lianghui” (‘Two Meetings’ or ‘Two Sessions’), responsible for making important national-level political decisions.
6
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MIZUHOCHINAMONTHLY
July 2015
Municipal bond market expansion
Prior to 2008, “the vast majority of lending was done by the normal banking sector in the form of loans.” 9
Over the past five years, the increased role of non-bank institutions, such as trust companies, changed the
complexion of China’s financial markets. Trust companies typically offer short duration loans (two years or
less), with relatively higher interest rates (over 10 percent in many instances).
As of the mid-2013 audit, regulated bank loans accounted for only 63 percent of total local government debt,
down from 99 percent in 2002, while total assets under trust sector management represented RMB8.9 trillion, a
69 percent increase from the previous year 10. To monitor this expanding liability, in January 2014 the PBOC
pledged to comprehensively monitor local debt risks, thoroughly cleanup local government-backed financing
vehicles that are of poor credit quality or risky, and actively push forward preparation for municipal bonds 11.
Previously, as part of the central government’s municipal bond pilot program, the provinces of Jiangsu,
Shandong, Zhejiang, Guangdong, as well as the Shanghai and Shenzhen city governments were granted the
ability to issue municipal bonds to fund their respective urbanization agendas. These pilots were limited in
scope given the central government’s backing of the programs, therefore providing implicit guarantees to the
underlying bonds. Having gone through the experiences above, the policy approved by National Prople’s
Congress in FY2015 budget which is to allow RMB 600,000M of newly published local bond and the existing
debt of local government to publish a partial refund bond of RMB1,000,000M, was revealed by the financial
department. After that, on May 8th the first refund bond of FY2015 was published in Jiangsu province.
Moreover, on June 10th by the financial department announced that the limitation of publishing refund bond
was increased to RMB1,000,000M.
Given recent government policy pronouncements, it is clear that more local governments will be encouraged
to undertake preparations to issue local bonds, drawing on lessons from the initial pilots and increased
understandings of efficient bond markets. Broader municipal bond issuance across a range of cities will offer
greater flexibility for local governments to (re)finance high interest, short duration trust loans, and will be a
critical debt management tool for China’s local governments in the future.
Municipal bonds are not only debt diversification instruments for local governments, they also improve the
alignment between the project life of local government assets (such as bridges, roads, subways, or schools), to
the duration of debt instrument liability. For example, long duration assets such as highways may require a
decade to produce positive cash flow, thus a 7 or 10 year municipal bond would lessen the duration mismatch,
and significantly lower the interest expense obligation. Current market sentiment has been positive toward the
emergence of a regulated municipal bond market, as yields-to-maturity on some municipal bonds are nearly as
low as that of Chinese treasury yields, and in sharp contrast to trust loan yields 12
9
http://thediplomat.com/2012/10/the-rise-of-shadow-banking-in-china/
11
https://mninews.marketnews.com/index.php/china-pboc-says-clean-risky-local-government-debt-firms?q=content/china-pboc
-says-clean-risky-local-government-debt-firms
10
12
http://www.reuters.com/article/2013/10/20/us-china-debt-bonds-idUSBRE99J0AD20131020;
http://news.xinhuanet.com/fortune/2012-07/26/c_123472494.htm
27
MIZUHOCHINAMONTHLY
July 2015
To capture the bond market efficiency of more mature markets, the central government must promote greater
openness, transparency, and accountability. One of the ways to do this is with a proper rating system. Currently,
the vast majority of Chinese bonds are issued within China’s interbank market. To attract and encourage
diversified sources of investment, more must be done to ensure that the municipal bonds (as well as the issuing
government) are rated appropriately and according to their inherent risk characteristics.
In 2013, The ‘China Academy of Social Sciences’ (CASS) aligned with a major Chinese credit ratings
agency 中债资信 (zhōng zhài zīxìn)13 to issue financial stability ratings of local governments. A rating
agency that stresses an open and transparent framework of measuring economic health will provide the initial
foundation required for diversified funding sources that demand transparency and accountability.
Sustainable funding for local governments
A significant hurdle for local governments funding urbanization is that they are unable to rely on steady,
sustainable fiscal revenues to underpin investment efforts. In the present fiscal structure, the governments
retain only a portion of taxes collected locally, and have few options – other than land sales – to generate
revenues.
To enhance reform at the local level, the central government could grant local governments more autonomy
and discretion toward the collection of certain taxes, such as: licensing fees and vehicle taxes, personal income
taxes, corporate taxes, and property taxes. On January 28, 2011, the central government instituted a pilot
program in Shanghai and Chongqing, allowing these local governments to collect property tax revenue. This
pilot has yet to be expanded, but the central government appears to be leaning toward stronger support for such
alternative revenue creating methodologies
13
http://www.chinascopefinancial.com/news/article/28459-china-to-introduce-credit-rating-system-for-local-government-debts?l
ang=en
28
MIZUHOCHINAMONTHLY
July 2015
According to the Urban China report jointly issued by the World Bank and the Development Research
Center of the State Council, The Chinese government should introduce property taxes as a major revenue
source for local governments. Specifically, “a property tax on housing would provide a stable source of local
government revenue,…and impose greater financial discipline on local governments.” 14 Allowing local
governments the ability to tax commercial and residential property is one of the most significant options under
consideration, and would allow local governments to effectively match revenue against urban project expenses,
ensuring fiscal responsibility without relying on less sustainable financial avenues.
In addition to tax collections, budget mechanisms are also in line for central government reform. During the
2014 ’Lianghui’, Premier Li Keqiang mentioned that “We will institute a comprehensive, well-regulated, open
and transparent budget system, and will work hard to incorporate all government revenue into the budget.” 15
This budget is designed for the central government to provide more allocations to local governments (via
transfer payments) based on the ability of local governments to attract and retain migrant workers. To retain
migrant workers, the local government would need to support citizens’ basic necessities by offering civil
services and public infrastructure, such as specialized training programs and healthcare facilities. This model
properly aligns the citizens’ developmental interests to the local government’s interest of receiving diversified
revenue streams, while satisfying the central government’s goal of “ensuring that the benefits of China’s new
urbanization are focused on the people.”16
14
http://www.worldbank.org/content/dam/Worldbank/document/EAP/China/WEB-Urban-China.pdf Page 56
http://news.xinhuanet.com/english/bilingual/2014-03/15/c_133188534_3.htm; copy of the central government’s economic
work report
16
China’s National New-Type Urbanization Plan (2014-2020);
http://www.shanghaidaily.com/national/Urbanization-plan-focused-on-people/shdaily.shtml
15
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MIZUHOCHINAMONTHLY
July 2015
Alternative framework – accelerating use of public-private partnerships
The public-private partnership (PPP) model is a form of collaboration between the public and private sectors
for the purpose of providing services that have traditionally only been provided by the public sector.
Public-private partnerships are not new to China; they have been operating in various sectors since the
mid-1990s. The primary benefits of PPPs include risk-sharing between the public and private sector, as well as
other incentives for the efficient delivery of a project or service.
The central government is recently showing much greater support for PPPs, especially in the areas of public
infrastructure construction and urban public services. Infrastructure projects may include railroad projects,
public hospitals and vocational schools or universities, while urban public services may include urban road
transportation, waste water treatment facilities, and energy infrastructure. Market-driven practices such as
franchising, competitive pricing, financial subsidies and other such transparent methods will be utilized to
attract private capital to urban infrastructure development 17.
Historically, PPPs have been exposed to certain market risk factors in China. Since PPPs are long-term in
nature, they must not only gain current local government support, but also continue to receive support for the
duration of the project or service. However, China’s mayors typically rotate positions every five years; if an
incoming mayor does not support a PPP in progress, the PPP may encounter significant political risk. For PPPs
to succeed and gain investment from international enterprises in China - an ultimate objective - this political
support must be more transparent and codified in the eyes of international investors.
The central government has identified this need, and according to China’s National New-Type Urbanization
Plan (2014-2020), the government is now taking steps to align the performance evaluations of the mayors to
the long-term success of such projects. In addition, legal frameworks may be introduced to include regulatory
oversight and dispute resolution at the national level, which would better protect the interest of the private
investor, and ensure a more transparent legal landscape.
Greater local government autonomy will help properly fund urbanization
In April, 2014, the central government held a State Council meeting that pledged to open 80 new
infrastructure projects to private investment, a significant move that promotes and encourages more
competitive markets18. Furthermore, in May 25th 2015, National Development and Reform Commission of R.P
China, announced that the new PPP infrastructural investment project which is composed by total 1,043
projects and total investment amount 1,970,000M, on the website. This move shows the central government is
aware of the increase in local government debt, and is increasingly seeking solutions to diversify funding
sources. The goal is to move away from high interest, short-term borrowing and a reliance on land sales, and
move toward a market model that not only provides more options for the local governments, but also provides
sustainable and diversified access to capital.
17
18
China’s Ministry of Finance. China’s National 2014-2020 Urbanization Plan
State Council meeting with Li Keqiang; http://www.chinadaily.com.cn/china/2014-04/24/content_17458823.htm
http://www.sdpc.gov.cn/xwzx/xwfb/201505/t20150525_693168.html
30
MIZUHOCHINAMONTHLY
July 2015
The progressive creation of a sustainable, open and transparent local debt market, an increased ability to
fund urbanization with revenue collection and budget capabilities, and additional measures to protect a private
party’s interest in a PPP will provide local governments with greater autonomy to manage and fund their urban
development. The key for sustainable future market development is to ensure the right balance of government
direction and support with the fundamental requirement to mobilize higher levels of private sector participation
in financing, delivering, and operating public infrastructure.
An integrated framework for sustainable New Urbanization
China’s recent reforms present a clear indication of the central government’s desire to enhance local
governments’ ability to finance the roads, schools, hospitals, power plants and water facilities that will be
necessary to support and sustain an increasingly urban China. Doing so in environmentally sustainable ways
takes on added importance in today’s China.
The integrated series of recent reforms creates new financing measures and project governance methods,
while placing new and significant demands on local public officials in China. Programs and measures that
enhance local officials’ ability to manage in increasingly sophisticated, multi-dimensional environments
become paramount. The human side of China’s New Urbanization path must not only take into account
improving Chinese cities’ ability to house and serve inhabitants, but also ensure capacity building and skill
enhancement for local government officials.
Premier Li and other central and provincial government leaders have continued to demonstrate a determined
focus that emphasizes the human benefits targeted in China’s New Urbanization programs. These are important
and far-reaching objectives that will require investments in enhancing local government official capabilities as
well, a crucial task given that China has the potential to someday become the world’s largest market for
municipal bonds. Accomplishing the lofty goal of more efficient use of capital within municipal balance sheets
will also require more sophisticated financial management skills at all levels of government, if China’s rapid
and historic economic transformation is to continue.
31
MIZUHOCHINAMONTHLY
July 2015
32
MIZUHOCHINAMONTHLY
July 2015
Teiichi Atsuya, Director, KPMG Advisory (China)

Graduated from: Tokyo Institute of Technology (Faculty of Science); Tokyo
Institute of Technology Graduate School (Department of Information
Science); The Wharton School of the University of Pennsylvania (MBA
Finance)

Over the past 20 years, Teiichi has worked at global consulting and
accounting companies in Japan, the US, Canada, the UK and Korea, where
he has provided advisory services such as strategies for M&A including due
diligence support. In 2003, Teiichi started working at KPMG in the US in
New York, where he dealt mainly with Japanese companies, providing
M&A support focusing on due diligence. From 2008 to the present, he has
been working at KPMG China in the Shanghai office, providing similar
services for Japanese companies. With specialisations in market
evaluation, investigations of business programmes, company evaluations,
legal checks and support for restructuring support, Teiichi provides project
management services for clients’ general M&A support.
Tel: +86 (10) 8508 7111 / Email: [email protected]
※This article is reproduced from MNCs in China – Making the Right Moves published by KPMG
China.
Reproduction without permission is forbidden.
Caution
1. Legal or accounting advice: The information included in this material does not contain any advice on
respective professional advisors.
2. Confidentiality: The information included in this material is disclosed to you on the premise of your
confidentiality obligation, and should be used for internal purposes only. Disclosure of the contents
herein to a third party is prohibited.
3. Copyright: Copyright of the information included in this material belongs to the bank, in principle.
You are prohibited to make a copy of, make a reproduction of, quote, reprint, translate, loan, or in any
way exploit the content of this material in part or in whole, by any means, for any purpose, without our
permission.
4. Indemnity: The information included in this material is obtained from various sources that the bank
believes are reliable. However, the bank shall not guarantee its correctness, trustworthiness, or
integrity. The bank shall also not be liable for any damage, whatsoever, arising from this information.
5. This publication is not deemed to constitute advice, solicitation or recommendation to sell financial
assets.
6. This document is a translation of the Japanese original, and the original will take precedence in the
event of any difference between the two versions.

mizuho china monthly

Transcription

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