Sustaining quality growth
Contents
Introduction
12
thFive-Year Plan
Roads
Railways
Metro and light rail
Ports
Airports
Water and waste
Energy
KPMG’s Global
Infrastructure practice
4
6
10
14
18
20
24
28
34
42
Introduction
1 World Urbanization Prospects: The 2011 Revision (http://esa.un.org/unup/Wallcharts/urban-rural-areas.pdf), www.unpopulation.org
Both the world economy and the Chinese economic landscape have faced major challenges since 2009, in the aftermath of the global financial crisis. Gross domestic product (GDP) growth continued in 2009, 2010 and 2011, bolstered by support from the RMB 4 trillion government stimulus package announced in late 2008, but growth rates slowed from the double digit annual rates previously achieved. Moreover, the continuing weak recovery of many economies overseas and the impact of tighter domestic monetary policy and other administrative measures, implemented to tackle China’s hot property sector in particular, resulted in generally tougher business conditions in 2011, which continued into 2012. However, growing signs could be seen in the latter part of 2012 of a more stable Chinese economy emerging which resulted in fourth quarter GDP growth of 7.9 percent and which helped bring the annual GDP growth for 2012 to 7.8 percent.
In this publication we outline the key trends and developments in the Chinese mainland infrastructure sector since 2009, a period in which the sector benefited significantly from the acceleration of infrastructure projects as part of the above stimulus package. We also discuss the implications of the latest Five-Year Plan (2011–2015), which sees a shift in emphasis from the rapid economic growth of previous years to higher quality, sustainable growth for the future. The recently closed 18th Party Congress saw a new generation of leadership coming to the fore, who are set to steer China’s development for the next 10 years. Among many other important initiatives, the new leadership announced ‘building an ecological civilisation’ as an official policy initiative, together with economic, political, cultural and social developments. In addition, an ambitious goal was set that by 2020, both GDP and average individual income would double their current levels. These initiatives convey a message of creating a high-quality standard of living for the citizens. Demand for infrastructure, particularly those related to people’s livelihood and the environment, will be strong.
We are seeing greater opportunities for both domestic and foreign players to invest private sector capital in infrastructure projects. The fiscal constraints faced by local governments on the frontline of infrastructure construction and development are creating conditions that may encourage faster development of the alternative financing and procurement methods seen in mature Western economies. Central government support and policy initiatives in this area will be areas to watch in the medium term.
Over half of the population now live in urban areas (681 million people out of a total 1.34 billion at the end of 2011) and the United Nations forecasts that the proportion of urban dwellers will reach 75 percent by 2050 (another 300 million plus individuals).1 Whether the pace of urbanization will continue as expected over the next 30 to 40 years
is uncertain, but it is likely there will be continuing demand for more and better infrastructure as new urban areas develop and existing cities expand.
As China moves ever closer to being the largest economy in the world, its growth and development will remain at the top of the agenda for politicians, business leaders, economists and scholars, both inside and outside the country. Enhancing infrastructure such as water, power, transport, communications, education and healthcare, which are needed to support nearly all aspects of modern life, will be vital ingredients for achieving sustainable, high quality growth in the future.
Stephen Ip Peter Fung
Partner and
Head of Government & Infrastructure sectors, KPMG China
Global Chair,
12
th
On 14 March 2011, the National People’s Congress approved a new national development program for the five years to 2015. The plan marks a turning point in China’s economic development; no longer is the emphasis on headline growth. Rather China seeks ‘higher quality growth’. Having raised the living standards of hundreds of millions in the last 30 years, China is now seeking sustainable growth through overcoming challenges such as pollution, intensive energy use and resource depletion. To achieve this higher quality growth, the government intends to move China’s production capabilities up the value chain, reduce the disparity between differing social and geographic groups, and promote
domestic consumption, and, by doing so, make more efficient use of the country’s resources.2
The 12th Five-Year Plan identifies seven priority industries for
public and private sector investment, the aim of which is to move China up the value chain and promote better energy efficiency and sustainable use of resources:
• New energy
• Energy conservation and environmental protection
• Biotechnology
• New materials
• New IT
• High-end equipment manufacturing
• Clean energy vehicles.
Key infrastructure developments
The 12th Five-Year Plan targets a continuation of the shift in focus to domestic consumption seen over the last five years and production of higher value-added products. This should see changes in transport and logistics needs, as well as reduced emphasis on investment opportunities in export-oriented industries. However, it will also lead to more opportunities for improving technology levels and quality in the transport service industry. Sustainability and a lower carbon economy are also key focuses of the latest Five-Year Plan. This is likely to have further implications for the transport and logistics sectors, as they are both heavy
emitters of carbon dioxide. The corresponding challenges and opportunities involve embracing the greater demand for domestic logistics arising from the added focus on internal consumption-led growth. Coal-based power generation and other carbon-intensive industries will be the most affected
by sustainability targets, although more opportunities in the renewable and clean energy sectors should be evident. With the 12th Five-Year Plan’s seven percent annual GDP growth target for the period up to 2015 and the government starting to look more closely at alternative sources of finance, infrastructure investments are increasingly being opened to private capital. Relaxed rules on Qualified Foreign Institutional Investors and other forms of direct and indirect investment have improved the outlook. Foreign investments have traditionally been welcomed where technology or expertise are lacking in China. For example, renewable energy and nuclear power have seen substantial injections of local and foreign capital for that reason, with French firm Areva and on-shore wind power manufacturers such as Vestas and Suzlon all participating in the Chinese market.3
The 12th Five-Year Plan focuses on moving China up the value chain and to a more sustainable model of quality economic growth, and many opportunities are emerging in higher value-added technologies. Substantial investments in roads, railways, and other kinds of economic infrastructure have been integral to the Chinese growth story, and seem likely to continue to be so as China seeks to become less reliant on exports, and more reliant on the domestic market.
On 5 and 6 September 2012, the National Development and Reform Commission (NDRC) approved the launch of 55 major infrastructure projects (see table on page 8). Ten environmental protection projects have been approved, nine of them initiated in western China, while seven projects have been initiated for port construction and channel reconstruction, five in the east and two in central China. There are a total of 13 highway construction projects, evenly disbursed throughout the eastern, central and western regions of China. Finally, 25 rail transit and intercity railway projects have been approved, 16 in the east, six in the west and three in central China. The majority of NDRC-approved infrastructure projects (45 percent) are for rail transit and intercity railways. The eastern region still leads the central and western region in terms of infrastructure development and approved projects.
2 12th Five-Year Plan
Infrastructure projects announced by NDRC in September 2012
Region
Industry East Middle West Total
Environmental protection - 1 9 10
Port construction and channel reconstruction 5 2 - 7
Highway construction 4 3 6 13
Rail transit and intercity railway 16 3 6 25
Total 25 9 21 55
Source: National Development and Reform Commission (NDRC)
The following information is related specifically to each individual provincial plan. These plans have been approved but their funding has not been initiated.
In 2012, many provinces and cities also officially announced major construction plans in the infrastructure field. In July, Guangdong province announced 44 new projects with a total investment of RMB 235.3 billion. Traffic and urban construction account for close to 60 percent of these projects. In August, Guizhou approved development of its ecological culture tourism industry and close to RMB 100 billion will be used for transportation, hospitals and other infrastructure construction. One of the most ambitious investment plans has come from Sichuan province with an announcement on 25 September 2012 to spend as much as RMB 3.7 trillion by 2013. The plan specifies 2,242 key projects including around RMB 1.5 trillion for infrastructure construction with other industrial projects and projects for people’s well-being, and social welfare and environment accounting for the balance. Including Sichuan, the total announced expenditure by other regions and cities up to September 2012 is over RMB 10 trillion.4
The local government’s investment plans in the past several months can be attributed to the central government’s plans to focus on transportation infrastructure and construction. Nearly 20 percent of funds focus on environmental protection and new energy. Transportation infrastructure investment has a strong impact on improving domestic demand from traditional industries, such as steel and cement. Presently, these traditional industries face a serious over-capacity problem, but the stronger demand will help reduce the negative effects of production over-capacity. On the other hand, environmental protection and new energy have become major components of China’s 12th Five-Year Plan. Significant investment plans in these industries show the increasing attention from local governments on the
importance of stimulating domestic demand in the short term and sustainable growth in the long term.
To ensure high quality economic growth, upgrading
industries has gradually become a common approach of local governments. We can observe that most of the investment focuses on the key provinces and cities of the ‘Great Western
Development Strategy’ (西部大开发), and the development
of the western regions in China in the next five to ten years. Inner Mongolia, Shaanxi, and Gansu are provinces where most of China’s resources lie but at the same time are major provinces that face serious pollution problems. Investments in environmental protection and highway construction in these regions fit the local development characteristics, and also help local governments create more potential investment demand. On the other hand, transport construction within the eastern cities is concentrated on rail transit; the key purpose is to ease traffic congestion and shorten intercity travel time.
At the same time local governments are also paying more attention to the quality of economic growth, and trying to solve local problems encountered in the process of developments. Limited financing channels, fund shortage, low investment returns and recurring construction are key challenges that local governments are currently facing. In order to ease financing pressures, the Ministry of Housing and Urban-Rural Development (MOHURD) has issued a notice which lays out the implementing opinions (the ‘opinions’) on further encouraging private capital into
municipal public utilities. The opinions state that private investment in the construction of municipal public utilities will be eligible for the same treatment as other types of investment, and not subject to any additional conditions.
4 Shanghai Daily 25 September 2012 ‘Sichuan invests US$582b to lead local spending’ http://www.shanghaidaily.com/nsp/Business/2012/09/25/Sichuan%
MOHURD’s opinions state that direct investment of private capital is encouraged to be made, through wholly-owned companies, equity and cooperative joint ventures as well as asset acquisition, in the construction and operation of projects in urban gas supply, heat supply, sewage treatment and household garbage disposal. Private capital is encouraged to participate, through equity and cooperative joint ventures, in the construction of transport facilities like roads in cities, bridges, railways and public car parks. The opinions stress that based on the characteristics of different sectors and circumstances in different regions, the government can resort to methods such as shareholding or appointment of public-interest directors to retain the necessary control over these utilities. Furthermore, the opinions emphasize that the government should strengthen the monitoring of prices and costs of municipal public goods and services. A regular supervision system on the costs of goods and services should be instituted to collect updated information on enterprises’ operating costs. Such information will be used by the government as a basis for setting prices, with a view to putting in place a scientific, reasonable price setting mechanism to prevent unreasonable hikes in costs and prices.5
5 HKTDC, 1 August 2012, ‘Policies to encourage private investment in municipal public utilities’
http://economists-pick-research.hktdc.com/business-news/article/Business-Alert-China/Policies-to-encourage-private-investment-in-municipal-public-utilities/bacn/en/1/1X000000/1X07XN8V.htm
Years of continual growth in road construction have given China a vast network of highways and expressways, especially in the eastern regions of the country. Since 2000, China’s expressway network has grown annually by over 16 percent,6 now making it the second largest in the world at
over 75,000 km by 2012.7
The 11th Five-Year Plan outlined an increase in the National
Trunk Highway System (NTHS) to 65,000 km by 2010. However, helped by the 2008 government stimulus package, at the end of 2010 the NTHS network was over 74,000 km. The 12th Five-Year Plan has outlined further expansion, targeting an increase in the NTHS to 83,000 km by 2015,8
linking at least 90 percent of cities with populations of over 200,000. The proportion of Class 2 or above highways is expected to increase from 62 percent of the total highway network to 70 percent, comprising a total of 650,000 km by 2015,9 an increase of 45 percent from 2010 levels.10
With the slowdown seen in China’s GDP growth rate in 2012, there was a small decrease in the proportion of road investment in the first half of 2012 comprising 4.4 percent of total fixed asset investments in China for the period, down from 5.3 percent in H1 2011.11 Nonetheless, various factors
suggest more construction is still needed in the years ahead: • Increased focus on domestic consumption, driving
increased freight and logistics transport within China, and the need to reduce the costs of such transport.
• Forecast annual GDP growth of seven percent or more beyond 2012.
• Demand for vehicles is still substantial; China is already the world’s largest car market, but per capita ownership is significantly lower than more developed nations.
• Highway investment is an important factor in supporting the success of China’s ‘Go West’ policy.
On the supply side, the national highway plan is structured around a 34-trunk network; seven highways radiating from Beijing, nine north-south ‘vertical’ expressways and 18 ‘horizontal’ expressways.12 The system will connect more
than one billion people around China, as well as major ports 180 160 140 120 100 80 60 40 20 2002 Number of ne w v ehicle registrations
(in hundred thousands)
2003 2004 2005 2006 2007 2008 2009 2010
0
Passenger Truck Others
New vehicle registrations in China
Source: China Statistical Yearbook 2011, Vehicle Registrations
and railway infrastructure. There are also a number of smaller rural road constructions planned, with the 12th Five-Year Plan
stating that by 2015, all townships and 90 percent of villages will be accessible by road.
6 KPMG Analysis
7 Business Monitor International China Infrastructure Report; Q2 2012
8 12th Five-Year Plan
9 Transportation 12th Five-Year Development Plan 2012
10 KPMG Analysis
11 China Bureau of Statistics, Investment in Fixed Assets, July 2012
Private sector involvement
The majority of highway and expressway construction and maintenance are traditionally conducted by local city governments; but this poses significant pressures on their fiscal budgets.
Since the establishment of the first Build, Operate and Transfer (BOT) concession in the 1990s, the private sector
has been more actively courted to participate in the toll roads sector. However, while there are now more than 70 percent of the world’s toll roads within China,13 the private sector still
plays only a minor role in Greenfield construction, accounting for a mere seven percent of expressway financing in China.14
Nevertheless, there has been an increasingly active secondary market, as local authorities and domestic construction companies start to look to release capital from their assets. Previously this was facilitated through initial public offerings (IPOs); the Jiangsu, Zhejiang, Anhui, Shenzhen, Huayu and Sichuan Expressway companies are
all listed on the Hong Kong Stock exchange as H-shares. Much of the capital raised through an IPO is targeted for reinvestment into building more expressways. Infrastructure focused funds and other operators have also begun to invest in Brownfield assets, although deals have often been aborted due to valuations that needed to be supported by overly optimistic traffic forecasts. However, fundamentals appear strong, with a large recovery in traffic in 2010, and double digit growth in revenues for the Jiangsu Expressway, Zhejiang Expressway, Shenzhen Expressway and Sichuan Expressway.15
The July 2012 China Insurance Regulatory Commission (CIRC) decision to allow insurance companies to invest up to 10 percent of their balance sheets in both real estate and private equity,16 as well as expected growth in infrastructure
investments from other pension and equity funds, means pricing for good operating assets is becoming increasingly competitive. Nonetheless, with private sector investment in fixed road assets increasing 39.7 percent year-on-year for the first half 2012,17 solid growth in the roads sector looks likely to
continue. 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 0220 2003 2004 2005 0620 2007 2008 2009 2010 20 11 201 2 201 3 201 4 201 5 Tot al length of e xpressw ay s
(in ten thousand kilometers)
Growth of expressways in China
Source: China Statistical Yearbook 2011; 12th Five-Year Plan
13 Xinhua News Agency, 6 August 2007
14 Thomas White Global Investing: BRIC Spotlight Report: Toll Roads in China,
June 2011
15 Thomas White Global Investing: BRIC Spotlight Report: Toll Roads in China,
June 2011
16 Asian Venture Capital Journal; 26/7/2012 17 China Bureau of Statistics
0 1 2 3 4 5 6 7 8 9
The Ministry of Communications planning department said that present highway construction funding is sourced as follows: 6–7 percent from central financial investment, 20–30 percent from local governments, and the remainder from commercial banks and policy bank loans, as well as foreign capital and private capital investment. Introducing private capital played a very significant role in easing pressure from other sources and allowing the government to redirect funds elsewhere.
Guizhou is one example of maximizing the degree of private investment related to traffic construction. When deciding on the construction model, Guizhou adopted BOT combined with EPC (engineering, procurement, construction) as a means to assist the government. By Guizhou introducing private capital into the construction of highway infrastructure, the local operation increased the diversification of funds and helped solve the problem of fund shortage. It also helped break up any monopolistic competition and improved the industry’s management standards and efficiency.
The November 2008 government stimulus package and the 12th Five-Year Plan both place railways at the center of
China’s long-term infrastructure development strategy. In 2009, there were significant investments in high-speed rail, and a target of 120,000 km of total track by 202018 was
outlined during the stimulus program. The 12th Five-Year Plan
has continued on with this investment pipeline, with a total high-speed track of 40,000 km set to be completed by 2015 and the total track target of 120,000 km brought forward to 2015.19 To attain these ambitious targets, annual investments
of RMB 800 billion into railway infrastructure were previously announced.20
However, the July 2011 Wenzhou rail incident caused a substantial revision of planned expenditures. The fallout from the incident began to raise fears over the safety and reliability of the system, as well as the financial health of the Ministry of Railways (MoR). Total debts of RMB 1.9 trillion21 raised
concerns that the central government would have to step in and work at a large number of sites were either stopped or slowed down. Investment for the year was reduced to a planned RMB 400 billion,22 investments in fixed railway
assets shrank 36.9 percent in the first half of 2012, down from 1.9 percent of total investment expenditure to just one percent.23 The sector was reported to have recorded a RMB 7
billion loss in the first quarter of 2012.24
There have also been some positive developments with the central government supporting the MoR through actions like halving the rate of tax paid on interest earnings of bond holders.25 There has also been a rebound in planned
investment throughout the year, with an increase from RMB 400 billion to a planned RMB 516 billion,26 although much of
this has not been deployed yet.27 Of the worksites stopped
as a result of the Wenzhou incident, around 70 percent have resumed construction, and three successful bond issues throughout the year by the MoR have improved their fundraising outlook substantially. It is expected that they will use their allowance of RMB 150 billion in bond issues for 2012 to continue the recovery in construction.
Despite the MoR’s difficulties, in July 2012, the state council reiterated targets of 40,000 km of high-speed track by 2015, and a total of 120,000 km of track by 2015.
One of the goals of the high-speed rail program is to free track capacity for freight logistics. A vital aspect of the rail freight network is the transportation of coal and minerals. In 2010 coal accounted for 50.6 percent of total freight traffic, and metal ores another 12 percent.28 This is likely to
be adversely affected by the sustainability targets in the 12th Five-Year Plan and a reduction on China’s dependence on coal-fired power generation. However, this will be accompanied by increases in domestic consumption and its need for freight transport, as evidenced by the four percent year-on-year increase in the June freight traffic.29
Despite these medium-term difficulties, the longer term fundamentals of railway development appear strong. The 12th Five-Year Plan’s focus on sustainability and freight
rail’s nature as a relatively lower carbon emission mode of transport, and the success of the ‘Go West’ policy is dependent on building effective transport links and rising domestic consumption needing increased logistical capabilities all suggest that there is still significant room for continued rail investment.
18 KPMG Infrastructure in China: Foundation for Growth 2009
1912th Five-Year Plan
20 Business Monitor International China Infrastructure Report; Q2 2012
21 Ministry of Railways Bond prospectus July 2012
22 Business Monitor International China Infrastructure Report; Q2 2012
23 China Bureau of Statistics
24 Ministry of Railways Bond Prospectus
25 Xinhua News Agency; China’s railways ministry auctions CNY30bn Bonds 8/11/2011
26 Ministry of Railways, Bond Prospectus July 2012
27 Ministry of railways, China Bureau of Statistics 28 China Bureau of Statistics
29 China Bureau of Statistics
2006 400 500 600 700 800 2007 2008 2009 2010 2011 2012 2013
China’s railway fixed asset investment
Source: China Bureau of Statistics; China Daily ‘China to Cut Railway Investment in 2012’, 2011/12/24; Ministry of Railways Source: World Bank
R ailw ay in vestment e xpendit ure (in RMB billion)
Harbin Changchun Shenyang Qinhuangdao Dalian Yantai Qingdao Tianjin Beijing Hohhot Shijiazhuang Taiyuan Baotou Jinan Xuzhou Zhengzhou Lanzhou
Baoji Xi’an Lanzhou Hefei Wuhan Wenzhou Fuzhou Xiamen Shenzhen Hong Kong Zhanjiang Haikou Nanning Kunming Macau Guangzhou Liuzhou Guizhou Changsha Fujian Nanchang Anqing Jiujang Chongqing Chengdu Nanjing Shanghai Hangzhou Ningbo Bengbu
Private sector involvement
There have been limited methods to invest directly into railway for the private sector, as foreign companies are not permitted to have a controlling interest in the construction or operation of rail networks or passenger services. However, due to the MoR facing more financial challenges, there are an increasing number of opportunities for the private sector. The MoR announced in May 2012 that private capital will
be given equal market entry access in an effort to make its railways more market competitive. This is good news for local firms as there is substantial opportunity to invest in China’s railway infrastructure, by tendering contracts to build and operate segments of track, or through more indirect means. Qualified Foreign Institutional Investors (QFII) are now allowed to hold railway bonds and with a July 2012 China Securities Regulatory Commission (CSRC) announcement to reduce the level of assets under management to qualify for QFII status from USD 5 billion to USD 500 million, there are a significant number of new players entering the financing market and new methods to invest in the railway sector.
China’s high-speed railway network plan
Maximum speed of railway 350 km/h (220 mph) 200–250 km/h (125–155 mph) Source: Ministry of Railways and KPMG analysis
Some foreign firms have also begun tendering contracts from the government, such as GE, Bombardier and Kawasaki Heavy Industries. However, in many of these cases there has only been an opportunity to supply componentry, rather than into railways more directly.
For foreign or private investment to enter the market, the hope is that they can recapitalize their investment in three to five years. However, due to specific characteristics of railway construction, the return cycle is usually between 15 to 20 years. If the government wants to attract more funds from non-state capital into the infrastructure projects, they need to spend more time solving the dilemma of their monopoly over the railroads, and the unclear distinction between the function of government and enterprises. These problems can dampen foreign investors’ interest in entering this field. Under the current conditions, foreign enterprises are only able to capture limited opportunities in spare parts, control equipment, and other ancillary equipment manufacturing aspects.
Source of funds for railway investment
Others 11% State budget 12% Domestic loans 42% Self-raised funds* 34% Foreign investment 1%
* Self-raised funds refer to extra-budgetary funds for investment in fixed assets received during the reference period from central governments, enterprises and institutions Source: Weighted Average of Railways Investment Sources 2006–2010, China Statistical Yearbooks
Metro and
light rail
Metro and light railway are critical in alleviating urban traffic congestion which is becoming increasingly prominent in China’s large and emerging cities. In 2011 Shanghai and Beijing carried over two billion passengers in 2011, placing them alongside Guangzhou in the top six busiest metro systems in the world.30 Due to constantly increasing
demand for metro links, the 12th Five-Year Plan has outlined
extensions to the Shanghai, Guangzhou, Shenzhen and Beijing systems, along with new completions in Tianjin, Chongqing, Shenyang, Changchun, Wuhan, Xi’an, Hangzhou, Fuzhou, Nanchang and Kunming and plans for more systems in other cities.
By 2015, it is estimated that there will be over 2,100 km of metro and light rail track laid.31 However, opportunities to
participate for foreign firms are limited. Hong Kong’s MTR Corporation (MTRC) is the most active and highest profile foreign player in the market, and with the need for more financing arrangements there are likely to be newer methods of participation as well. To date however, foreign investors have been more successful supplying technical equipment and solutions to the sector.
Private sector involvement
Under the current government expanding plan, private investors will have more and more opportunities to participate in China’s metro and light rail construction than ever before.
On 28 February 2011, Alstom, the French multinational company, announced in Beijing that its two joint ventures in China secured a EUR 140 million contract to provide Beijing metro line 6 with the latest traction system and one of the world’s leading signal systems. On the same day, Air Train International Group held a press conference in Beijing to introduce the H-Bahn sky train, and announced the promotion of the H-Bahn sky train in China. According to Air Train International Group, the H-Bahn sky train can save on plant, property and equipment cost, and requires a short construction time.
30 China Bureau of Statistics 31 China Daily, 16 June 2009
Hitachi group has also gained access to China’s metro and light rail market. Their product contains a new generation of urban traffic system that covers high speed trains, commuter trains, monorail products, signal control support, operation management, Intergrated Chip (IC) card ticketing, user action support and other systems. The group has installed its solution in a Tianjin project, which was funded by the China and Singapore governments. The system is also being promoted in Guangdong province.
Excluding equipment manufacturing advantages, foreign enterprises have also participated in China’s metro design and construction. MTRC, in particular, is involved in the operations of Beijing metro line 4, Shenzhen Longhua line phase 2, and more recently the new Hangzhou metro line 1 (opened in November 2012) which MTRC operates under a joint venture concession for 25 years with Hangzhou Metro Group.
Given that the 12th Five-Year Plan aims to increase metro and light rail construction around many of the first- and second-tier cities in China, this industry presents significant opportunities for foreign and private capital. Although participation methods are still limited, these companies can find other scaled benefits that will allow them to participate in China’s metro and light rail industry, and advance the industry at a significant pace in the next five to ten years.
Shanghai is the world’s busiest container port by throughput. Two other Chinese cities are in the top five and nine in the top 20, with further expansion in the pipeline.32
32 Government of Hong Kong SAR Marine Department, access 27 August 2012,
http://www.mardep.gov.hk/en/publication/pdf/portstat_2_y_b5.pdf
33 China Daily, ‘Freight, Financial Ambitions take Flight’, 20/8/2012
http://www.chinadaily.com.cn/cndy/2012- 08/18/content_15685546.htm
34 12th Five-Year National Development Plan 35 China Bureau of Statistics
36 12th Five-Year Plan
Rank City (in million TEU)Container volume in 2011
1 Shanghai 31.74
2 Singapore 29.94
3 Hong Kong 24.38
4 Shenzhen 22.57
5 Busan 16.17
The major ports are located around China’s three key
manufacturing hubs: the Pearl River Delta around Guangdong, the Yangtze River Delta around Shanghai and the Bohai Rim around Beijing/Tianjin.
With the global economy still facing challenging headwinds, China’s ports have also seen a substantial slowdown in growth, with throughput in national ports (above a designated size: 10 million tons for inland, 15 million tons for coastal) up 7.2 percent, representing a 6.1 decline of percentage points from the growth rates seen a year ago. Total national container throughput fell in year-on-year growth terms by 4.3 percent, but perhaps more significantly, domestic throughput growth fell 11.3 percent year-on-year to 30 June 2012.33
Despite the weaker activity in 2012 and the volatile growth rates shown above, the longer-term outlook for this sector appears more robust. Ports and shipping feature prominently in the 12th Five-Year Plan. Though coal and other fossil fuels are significant throughputs, and are likely to be adversely affected by the sustainability focus, there are still plans to construct 440 deep-water berths equipped for vessels 10,000 tons or above.34
In the half year to 30 June 2012, despite the lower throughput numbers, fixed asset investment in the waterways sector grew 19.9 percent 35 indicating confidence in the long term
value of port infrastructure. For example, Zhanjiang Port in Guangdong is continuing to expand its berthing capacity in anticipation of a number of substantial projects from firms such as Baosteel and Sinopec.
The 12th Five-Year Plan has also highlighted China’s need for better inland transport systems, providing for a number of inland waterway expansions. Channel extensions in the Yangtze estuary, increasing the capacity of Xijiang River trunk and the Beijing-Hangzhou canal improvement project, are all intended to be completed by 2015.36
Breakdown of bulk throughput
Others 39% Coal 22% Ores 19% Building materials 19% Petrochemical 22%
Source: China Statistical Yearbook 2011
Top 10 Mainland China ports
City Container volume in 2011 (in million TEU) World ranking
Shanghai 31.74 1 Shenzhen 22.57 4 Ningbo-Zhoushan 14.72 6 Guangzhou 14.26 7 Qingdao 13.02 8 Tianjin 11.59 11 Xiamen 6.47 19 Dalian 6.40 20 Lianyungang 4.85 26 Suzhou 4.69 28
World’s busiest container ports
TEU = Twenty-foot equivalent unit Source: World Shipping Council
TEU = Twenty-foot equivalent unit Source: World Shipping Council
Private sector involvement
In the wake of the global financial crisis, Chinese foreign trade was seriously affected by weak overseas demand, but port investments have shown no sign of slowing down. According to data from the Ministry of Transport, coastal port investment increased to RMB 80 billion in 2011. Other than the active participation of state-owned and domestic privately owned enterprises, there is also a clear trend showing foreign investors’ interest in port construction in China. In June 2012, Maersk group and Ningbo port signed a USD 4.3 billion agreement to mutually invest and manage the No.3, 4 and 5 berths of Meilong pier at the Meishan bonded harbor area. Through August 2012, Maersk’s investment in the Ningbo port reached an annual growth rate of 8.5 percent, despite the weaker global economic climate and shrinking foreign trade in China.
Maersk is one example of a successful mutual partnership approach in China, but Chinese ports are not without some serious issues that need to be considered, for example, improving service quality, managing excessive competition, and tackling homogeneity. Furthermore, it is reasonable to expect that China’s port investment is likely to shift from high growth to a more moderate growth mode. Cooperation between ports also needs to be further expanded in order to achieve enhanced integration of regional ports. Thus, foreign investment in Chinese port construction not only needs to pay more attention to local government policies and the future trend of foreign trade, but also needs to consider the target port’s geographic location, management capability, as well as other issues regarding differentiation and integration. For merger and acquisition activities to continue, strategic alliances with surrounding small ports should be forged together with the development with and cooperation from larger ports. Special consideration should also be given to a port’s location and geographic or regional advantages
that the port possesses. Such mergers and acquisitions between ports may also be a future trend for the purpose of resource integration, demographically value-added, and/ or complementary functions associated with different sized ports.
Presently, domestic private capital is mainly concentrated on small and medium-sized coastal and inland ports in China. This is because domestic private enterprises do not have an abundance of capital or the ability to invest in larger ports. Therefore, for the large ports, private capital is more concentrated on warehousing, freight forwarding, truck transportation, customs clearance, and packing activities. Liaoning Jinzhou Port is the first domestic private capital-held coastal port. In Jinzhou Port Co., Ltd., the original state-owned port capital accounts for only 22 percent, domestic private capital accounts for 33 percent, and private capital shares including employees holding shares of more than 50 percent. As a result of the participation of domestic private capital, there has been a significant change in the Jinzhou port system and mechanism. The port construction and production operations developed rapidly, and achieved positive economic
benefits.37
However, if China cannot attract domestic private capital, the most likely way to privatize the ownership of ports is to actively attract more foreign capital. This will broaden financing channels for port construction and greatly reduce the proportion of state-owned capital.
Sino-foreign joint ventures for construction and management are still the main form of Chinese ports’ privatisation.
There are significant overseas investors in coastal ports, primarily through minority strategic stakes such as those by Hong Kong players and other worldwide port operators. According to NDRC’s 2012 Catalog of Foreign Investment Industries (effective 30 January 2012), foreign private sector involvement is encouraged with up to 100 percent foreign ownership permitted.
37 International Maritime Information 1 December 2007
38 IBISWorld: Airports in China, May 2012
39 “2011年全国机场吞吐量排名”. Civil Aviation Administration of China 2012-03-21. http://www.caac.gov.cn/
I1/K3/201203/
40 ”2011年全国机场吞吐量排名”. Civil Aviation Administration of China 2012-03-21. http://www.caac.gov.cn/I1/
K3/201203/P020120321570053265625.xls
41 Center for Aviation; Asian Airport Capex Report 2011
42 IBISWorld: Airports in China, May 2012
Increasing GDP over the past 10 years is helping fuel an increase in air travel. Passenger volume through China’s airports increased 12.4 percent in 2011, although that represents a slight slowdown in growth rates of 2010’s 16.1 percent growth. Despite this, airport revenues still rose 16.7 percent to nearly RMB 49 billion.38
Both domestic and international passenger traffic is growing quickly. In 2004, 242 million Chinese travelled domestically. By the start of 2011 this was up to 570 million.39 This has
benefited larger regional airports, which are starting to achieve more substantial traffic numbers.
In 2011, China had more than 180 airports, representing 22.5 percent overall growth since 2007, when 147 airports were in operation. However, to ensure availability of capacity as travellers near 700 million per annum, the government has announced plans to build 50 more by 2015.40 RMB 46 billion
in airport construction investment was incurred in 2011 alone, with another RMB 100 billion expected over the next five years.41
The five largest airports in China – Beijing, Guangzhou, Shanghai Pudong, Shanghai Hongqiao and Chengdu – make up around 36.6 percent of airport passenger traffic in 2011.42
However, as passenger numbers have increased, industry concentration has decreased. In 2007, there were just 10 airports with more than 10 million passengers. By 2011 there were 21 and the share of total traffic of the largest 10 has consistently declined.43 Beijing Capital Airport handled 78
million passengers in 2011, growing 6.3 percent, making it (by passenger traffic) the largest passenger airport in China and Asia, second only to Atlanta International in the world. Shanghai Pudong is the largest cargo airport, handling 3.1 million tons in 2011, one-third of China’s total.44
43 ”2011年全国机场吞吐量排名”. Civil Aviation Administration of China 2012-03-21.
http://www.caac.gov.cn/I1/K3/201203/P020120321570053265625.xls
44 ”2011年全国机场吞吐量排名”. Civil Aviation Administration of China 2012-03-21.
http://www.caac.gov.cn/I1/K3/201203/P020120321570053265625.xls
Passenger traffic of China’s top 10 airports
Source: Civil Aviation Administration of China, http://www.caac.gov.cn/I1/K3/201203/P020120321570053265625.xls
2006 2007 2008 2009 2010 2011
700
Tot
al number of passengers using
Chinese airports (in millions)
Percent age of passengers using China’ s top 1 0 airports 60% 59.3% 57.9% 56.9% 56% 55% 54% 332 387.6 405.8 486.1 564.3 620.5 59% 58% 57% 56% 55% 54% 53% 52% 51% 600 500 400 300 200 100 0
Passengers using top 10 airports
Source: Civil Aviation Administration of China, http://www.caac.gov.cn/I1/K3/201203/P020120321570053265625.xls Urumqi Harbin Dalian Shenyang Qingdao Zhengzhou Nanjing Chongqing Chengdu Wuhan Changsha Guiyang Kunming Passenger
through-put per annum > 25 million 15–25 million 5–15 million < 5 million Guilin Guangzhou Shenzhen Haikou Sanya Xiamen Fuzhou Wenzhou Ningbo Shanghai Hongqiao Shanghai Pudong Jinan Taiyuan Xi’an Tianjin Beijing
Source: CAAC Statistical Report 2008 Major airports in China
The government is continuing its Hub-and-Spoke network, much like the United States model to move rapidly growing tons of cargo and passenger numbers. Between 2011 and 2015, 50 new airports will be opened, taking the total to 230, in line with the long-term goal set in 2008 of having 244 operational airports in 2020 and it is estimated that by 2030, another 5,000 airplanes will be needed to service demand.45
A central piece to the aviation development plan is a new Beijing Airport to accommodate the rapid growth in both domestic and international passengers.46
In September 2012, NDRC approved the Gansu province Dunhuang airport expansion proposal. The main constructions are a new 6,000 sq m terminal, expansion of the parking lot by 5,500 sq m, as well as 46,700 sq m of related commercial facilities. NDRC also approved a new Holingol airport feasibility project in the Inner Mongolia autonomous region. The main constructions are a new 2.7 km long runway, a new 3,000 sq m terminal, ramp parking space for three aircrafts and other related commercial facilities. In addition, NDRC approved the Shanxi Linfen airport, western-imposed reconstruction project comprising construction of a new 2.6 km long runway, 4,200 sq m terminal, ramp parking space for four aircrafts and other related commercial facilities.
According to NDRC’s announcement, all are expected to be completed and operational by 2020 and meet or exceed additional passenger projections ranging from 150,000 (Holingol Airport) to 960,000 (Dunhuang Airport) additional passengers per year.
Private investors
According to the latest Catalog for Guidance of Foreign Investment Industries, foreign investors are allowed to take up to a 49 percent equity interest in the construction and operation of airport activities including terminals and runways. Private investors may own up to 100 percent of regional airports, but are limited to a 49 percent stake in major airports such as capital cities of provinces and autonomous regions, municipalities, and some selected large cities.
One of the key challenges for private investors in China’s airports has been the difficulty to create revenue from secondary activities, such as shop leases, car parking and advertising. Many airports have had difficulty generating the critical mass of traffic to drive strong non-aeronautical
revenue streams. Concessions such as rent and advertising currently make up 23 percent47 of Chinese airport revenue;
substantially lower than some international counterparts such as Germany where airports have seen as much as
33.2 percent48 or the USA, where non-aeronautical revenues
can account for over 50 percent of total revenue, leaving significant room for growth in their non-aeronautical platform. The relative lack of international travel from within China
limits duty-free shopping, and the Hub-and-Spoke network focuses passenger transit times in only a few airports. Thus commercial retail leases, especially in more regional
locations, and other non-aeronautical revenues have been weaker than in other airports of similar scale worldwide. Given the tightly regulated nature of airport fees charged, a lack of non-aeronautical revenue is a substantial problem. However as pure passenger numbers grow, so have the value of advertising leases etc, driving more revenue growth for airport operators.
Most of the private investments in China’s airports have come from operational investors, such as HNA Airport Group, Hong Kong Airport Authority, Fraport AG, Singapore Changi Airport and Aeroport de Paris. With air transit ridership at just 0.15 trips per capita, industry penetration is low, thus providing substantial expansion opportunities for the future. International financial investors have also shown interest in the sector due to the expectation of longer term passenger traffic growth (for example GIC is a significant minority shareholder in Beijing Capital International Airport). However, accepting structural features such as regulatory control over airport fees have proved challenging, and more attention has been given to auxiliary services such as catering and logistics. The other key issue for investors is the timing of investment
in relation to the capital expenditure cycle. Capital investment by airports is generally lockstep and large (for example the building of a new terminal, or expansion of runways) and there can be a lag for cash inflow for such an investment. Timing therefore has a significant impact on the risk profile of an investment.
45 American Chamber of Commerce in the People’s Republic of China (AmCham China)
46 NDRC 12th Five-Year Plan 47 IBISWorld Airports in China 2012
48 Zenglein, M & Muller, J; (2005) Non-Aviation Revenue in the Airport Business – Evaluating Performance
49 China Statistical Yearbook 2011
50 Ministry of Water Resources, www.mwr.gov.cn
51 Ministry of Water Resources, www.mwr.gov.cn
China’s water market
China has more than 100 cities with a population of 1 million or more and this sustained urban growth and the continued economic development have necessitated greater domestic
utilities infrastructure.49 To ensure the water quality and
sanitation of its municipalities, as well as to improve its water efficiency, the 12th Five-Year Plan has targeted substantial
investments into the water and the environmental protection sector, whilst encouraging the private sector to follow.
Due to geographic factors, China has limited and unevenly distributed water resources across the country. Rainfall and water resources are primarily located in southern China, while there have been significant shortfalls in the north of China. Out of the 662 cities in China, more than 400 are
Unified Water Charge - water scarcity charge + tap water charge + wastewater charge + infrastructure charge
WWTP payment WWTP charge Distribution payments WTP
payment Potable water
Raw water
Water Treatment Plant
(WTP) Distribution System toCustomer Waste Water TreatmentPlant (WWTP) Government (Bureau of Finance) Customer
Municipal Utility Company Structure of China’s water market
Growth of China’s water resources
River Flow of water
Flow of cash
Waste water Sludge
Discharge Potable water
Discharge
suffering from water shortages, with 110 classified as severe. Alongside these challenges there has been no substantive improvement in water resources, with water availability per capita of only 2,220 cubic meters, which is one quarter of the world average.51 Surface Ground 2000 3,500 3,000 2,500 2,000 1,500 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: China Statistical Yearbook 2011
Tot
al amount of w
ater resources
Recognizing the importance of water for sustainable growth, the government remains committed to tackling the challenges of managing national water resources. It has set a target of 30 percent reduction in water consumption per unit of GDP in the 12th Five-Year Plan compared with 2011
levels, and to combat problems of water quality, a number of pollution targets have been implemented – cuts to ammonia levels for the first time, alongside cuts in chemical levels of nitrous oxides, sulfur dioxides and chemical oxygen demand. With the new ammonia targets, new monitoring and compliance technologies will need to be implemented, representing an opportunity for private sector providers. The government is also targeting an investment of RMB 380
billion on wastewater treatment systems including reuse, over half of which is expected to be from the private sector,52
representing a 14 percent increase in allocated investment over the previous plan. In the first half of 2012, investment in fixed water assets was up 28.9 percent.53 There are moves
to a more market-oriented method of water allocation, suggesting an awareness of the current inefficiency and inefficacy of much of the existing infrastructure. Under the 11th Five-Year Plan, wastewater treatment coverage increased
from 52 percent in 2005 to 72 percent in 2010, but saw little sustained increase in water resources per person.
Private sector involvement
According to a January 2012 IBISWorld report ‘Water Supply in China’, the market is relatively fragmented at the moment, with the largest players in the water supply industry, Beijing Waterworks Group, Guangzhou Water Supply
Corporation and Shenzhen Water Group Corporation holding just 2.1 percent, 2 percent and 1.7 percent of the market respectively.54 In wastewater treatment, the market is more
consolidated, with French firm Veolia holding 13 percent of the market.55
Foreign investors are encouraged to invest in water treatment and wastewater treatment plants in urban areas through wholly owned foreign enterprises or joint ventures. With the current Five-Year Plan’s goal of 85 percent wastewater treatment coverage nationwide, and 90 percent in urban areas, there is significant scope for investment.56 Foreign
shareholders are also permitted to own a maximum of a 49 percent stake in distribution networks through joint ventures with municipal companies.
Due to the difficulties in ensuring the safety of groundwater, which is a major component of China’s water production, the government is restricting groundwater initiatives, and in lieu, is promoting the building and operation of desalination plants.57 The desalination market is expected to grow by
around 18 percent per annum over the next five years58
primarily in cities where water is particularly scarce. Capacity is expected to reach between 2.2 and 2.6 million cubic meters daily, thanks to RMB 20 billion of investment between now and 2015.59 Though desalination has traditionally
struggled to be price-competitive, water suppliers will be allowed to ‘seek a rational price formation mechanism’ to reflect the scarcity in some islands and coastal cities,60
helping make desalination a market-viable option. Key risks for concessionaires on water projects are often related to operations, such as the ability to reflect the quality of influents on the quality of treated water or wastewater, or the ability to pass on significant cost rises for key inputs such as chemicals or energy in a timely manner. With pollution targets now firmly in place there exists extra costs and risks for investors, who must not only be mindful of, but actively monitor their impact on the environment.
There are also opportunities in the application of specialist technologies, such as water-reuse and sludge treatment, as well as monitoring and compliance technologies for existing plants.
52 12th Five-Year Plan 53 China Bureau of Statistics
54 IBISWorld: Water Supply in China, January 2012
55 IBISWorld: Water Supply in China, January 2012
56 12th Five-Year Plan 57 12th Five-Year Plan
58 Business Wire: Research and Markets: China Water Desalination 6/7/2012
59 China Business News: China to Raise Seawater Desalination Capacity, 14/1/2012
61 China Dialogue: China Waste: the burning issue 2011/8/6
http://www.chinadialogue.net/article/show/single/en/4739/
62 Yongfeng Nie (2010): The technology and policy of urban solid waste disposal in China, International Journal of
Environmental Studies, 67:2, 183-193
63 Yongfeng Nie (2010): The technology and policy of urban solid waste disposal in China, International Journal of
Environmental Studies, 67:2, 183-193
64 Yongfeng Nie (2010): The technology and policy of urban solid waste disposal in
China, International Journal of Environmental Studies, 67:2, 183-193
65 China Environment.com, 12 September 2012, ‘$40 billion renewable resources industry is ready for
development’, http://www.carcu.org/html/guonawaixingyedongtai/20120912/9628.html
66 KPMG Infrastructure in China: Foundation for Growth
67 Yongfeng Nie (2010): The technology and policy of urban solid waste disposal in
China, International Journal of Environmental Studies, 67:2, 183-193
68 CHINANEWS, 24 September 2012, ‘the 12th FYP will spend 50 billion yuan on garbage disposal’,
http://huanbao.cnr.cn/focus/201209/t20120924_510979472.shtml
Solid waste
Sustained GDP growth and continuing urbanization beyond 50 percent of the population requires a vast number of waste disposal facilities to be created. With foreign investment encouraged and governments looking to attract private capital for Build, Operate and Transfer (BOT) concessions, there are a variety of opportunities available to target.
Treatment will depend on the specific manner of the waste, but is predominantly through reuse, landfill or incineration. China is the world’s largest producer of municipal waste, and to combat the waste management difficulties of an expanding economy and a rapidly urbanizing population, the government has green-lit RMB 140 billion of waste management investments, increasing capacity by 400,000 tons per day by 2015. Most of this will be spent on
incineration projects, as the most efficient and effective method of waste disposal. By the end of the 12th Five-Year Plan, China will have 300 incinerators, capable of handling around 30 percent of China’s waste disposal needs.61
There are difficulties with incineration such as protests outside proposed and existing plants, with people not wanting the potential pollution or other problems associated with their presence. However, due to the complex issues posed by urbanization, namely that landfill is not an effective option, there seems little choice to consider other means. Most incineration facilities are Waste to Energy (WtE) developments, with active encouragement for alternative energy sources from the central government providing tax incentives and concessions to private investors. However, the calorific quality of China’s waste is often very low, due to moisture content and the substantial organic matter presence. At as low as 4.3 MJ/kg it is often below the necessary 5 – 6 MJ/kg to burn without additional fuel.62 This
required fuel has numerous associated problems. Firstly, it adds more pollutants to the atmosphere, increasing the opposition from local residents and damaging the environmentally desirable nature of a WtE plant, part of the reason for government concessions. Secondly, it significantly increases operational risks due to carbon reduction targets and movements in coal/oil prices becoming central to the viability of the business.
Due to the high moisture content present in China’s waste, leachate management is extremely important. As many older
can cause water contamination issues, new efforts are being undertaken to mitigate such risks.63 All new landfills must
now use adequate leachate control systems; the central government discourages all initiatives that could damage groundwater resources, and has expanded investment to reduce the dependency of China’s waste disposal systems on landfills.64
Although the main process of solid waste treatment is incineration, there are some considerable environmental side effects. China is looking to expand on the way waste is disposed. One of these ways of maximizing total value is through recycling. Presently, China is operating inefficiently, neither taking advantage of renewable resources and nor recycling products efficiently. According to statistics, each year 35–40 billion of recyclable resources is wasted in incineration, which means that the renewable resource industry has plenty of growth potential. Furthermore, social benefits can be reaped from recycling. Recycling would not only greatly reduce the production and investment cost of incineration, but would also reduce the costs and hazards of pollution and save energy. The economic and environmental benefits would create competitive markets in this industry.65
Private sector involvement
China encourages both domestic and foreign investors to invest in the solid waste treatment sector, with local governments attracting both private and foreign capital for BOT and Build, Operate and Own (BOO) concessions. With substantial investment as well as government concessions to foreign players, there are a number of growth opportunities. WtE projects may also be eligible for generation of carbon
credits under the Clean Development Mechanism,66 which
provides additional sources of revenue. Opportunities are also available for those wanting to participate with less direct investment, such as the provision of Stoker-system technologies for incineration, better leachate management systems for China’s landfill, or more efficient incinerators less reliant on external fuel.67
As China’s solid waste treatment industry developed relatively late, it still needs the government’s strong support. BOT projects have been common to introduce domestic and foreign investment as a means to construct, operate and manage. After the expiration of concession rights, the power plants will return to government ownership.
In order to alleviate the shortage of municipal waste disposal capacity, NDRC will focus on the disposal of household waste for the 12th Five-Year Plan period. State and local
governments will provide RMB 6 billion and RMB 45 billion respectively, as capital support. They will also offer preferential policies to encourage private capital into the garbage incineration treatment field.68
69 12th Five-Year Development Plan
70 BP Statistical Review of World Energy 2012
71 BP statistical review of World Energy 2012
72 IBISWorld Thermal Power Generation China 2012
73 International Energy Agency, 24/5/2012,
http://www.iea.org/newsroomandevents/news/2012/may/name,27216,en.html
74 World Nuclear Association; http://www.world-nuclear.org/info/inf63.html
networks. With a currently installed capacity of over 900 GW, second only to the U.S., and plans to reach over 1,500 GW, there seems to be little sign of a long-term slowdown in China’s energy demands.
The majority of this growth and the majority of China’s energy production are expected to remain contingent on coal-based power generation, but the 12th Five-Year Plan’s objectives
for sustainability have set ambitious targets for reductions in China’s dependency on coal and other fossil-fuel derived power. The government has set out to increase non-fossil fuel usage in primary energy consumption to 11.4 percent by 2015, with a longer term target of 15 percent by 2020. This coupled with a reduction of 16 percent in overall energy consumption per unit of GDP and a 17 percent reduction in carbon dioxide highlight China’s commitment to reducing its reliance on fossil fuels.69
Energy consumption structure, 2011
Oil 18% Coal 72% Natural gas 5% Others 5%
Source: National Energy Administration
Coal
Coal remains China’s primary source of power generation, accounting for over 65.8 percent of the country’s current energy production. Already, 49.5 percent of the world’s coal burnt for electricity is done so in China, and despite possessing more than 13 percent of the world’s known coal reserves, it is still a substantial net importer.70
Due to the government’s continual desire for more efficient coal-fired plants, in 2006 it introduced the ‘Program of Large Substituting Small’, shutting down inefficient smaller coal
from medium and larger plants, as well as through renewable and other non-thermal power generation techniques.
Due to stricter emissions standards from the government, falling profitability from the high price of coal and rising wages, operating margins for coal-fired plants are just 3.5 percent, causing many enterprises to shut down. The government’s initiatives and margin-squeezing through higher coal prices and higher wages have seen the number of enterprises falling by 1.5 percent annually,71 down to 1,198 in
2012, which has further concentrated the industry. However, currently the largest player, Datang International Power Generation, holds just six percent of the market, and the top four less than 16 percent of total revenue.72
Although foreign companies face licensing restrictions and due diligence requirements, they are actively encouraged to participate in related businesses, such as coal bed methane or coal mine methane extraction projects, where there is scope for new energy, capital and emissions efficient technologies.
In 2011, China’s emissions rose 9.3 percent, driven substantially by higher coal usage, and reaffirming its rank as the world’s largest emitter of carbon dioxide. By 2030, China is expected to account for 52 percent of the world’s coal-fired power emissions,73, 74 Given the importance of
coal-fired power in China, sustained government initiatives to reduce China’s carbon emissions intensity appear a long-term threat to the coal-fired power industry. However, due to the scale of China’s energy needs, the relatively low-cost nature of coal-fired power and China’s substantive coal reserves, there appears little likelihood of coal power being replaced as China’s dominant energy provider.
According to the coal industry’s 12th Five-Year development
plan to 2015, China’s coal production capacity will reach 4.1 billion tons per year. During the 12th Five-Year Plan period,
the national coal development plan is to control the eastern, stabilize the central, and develop the western region. In addition, through mergers and acquisitions, the number of national coal mine enterprises should be limited to within 4,000, with the average size increased to over 1 million tons per year.
In order to ensure safety in production and achieve the integration of coal resources, the Chinese government has carried out the 2010 plan of integrating the coal industry, but the actual effect has not been wholly satisfactory. Thousands of small coal mines have merged with state-owned or state-backed coal enterprises, greatly reducing the private composition proportion. This reduction of private coal mines has decreased production efficiency, and to a certain extent, has negatively affected the price of coal.
75 BP Statistical Review of World Energy 2012
76 BP Statistical Review of World Energy 2012
77 BP Statistical Review of World Energy 78 12th Five-Year Development Plan
79 BP Statistical Review of World Energy 2012
80 12th Five-Year Plan
81 People.com.cn, 20 February 2012, ‘Private enterprises have become an important power of China’s oil reserve’,
http://finance.people.com.cn/GB/1045/17164409.html
Oil and gas
Over the last 10 years, China’s crude oil production has seen little expansion in production volumes, despite an ever growing demand for oil. Production has grown at just over two percent per annum since 2002, meaning China is now heavily reliant on imported oil. The 12th Five-Year Plan intends
to see an acceleration and development of offshore and deep-water oil and gas fields, in an apparent recognition of a mounting issue.
Downstream refining capacity has seen strong growth since 2002, with capacity increasing from 5.9 million barrels per day to nearly 11 million per day in 2011,75 and demand for oil
reaching 9.8 million barrels per day.
Natural gas is an increasingly important natural resource to China, due to its lower cost and carbon nature. With the central government committed to reducing the intensity of China’s carbon dioxide emissions while providing a secure energy future, tapping the 3.1 trillion cubic meters of natural gas reserves will become increasingly important.76 With
production in 2011 hitting 107 billion cubic meters, an 8 percent increase on 2010, and consumption of nearly 130.7 billion cubic meters a 20.5 percent increase,77 investment
in natural gas from explorations to pipeline is booming. In the first half of 2012, there was an 89 percent year-on-year
growth in oil and gas extraction investments. Under the current Five-Year Plan, China will construct the second phase of its China-Kazakhstan oil pipeline, its portion of the China-Myanmar pipeline as well as significant longitudinal gas pipeline investments. The aim of which is to have around 150,000 km of pipelines for oil and gas by 2015.78
China is the world’s largest consumer of primary energy fuel, consuming 2.6 billion tons of oil equivalents in 2011 to fire its power stations, with a little over 900 GW of capacity available. By contrast the United States uses a lean 2.3 billion tons of oil equivalent to generate over 1000 GW.79 Much of this
inefficiency is located within the power plants themselves, and substantial scope for improvement remains. However equally contributory is the outdated transmission networks within China. To accelerate this, the government plans to build over 200,000 km of super-high voltage lines and build and develop smart grids to facilitate more efficient energy transmission.80 Foreign players such as Siemens have already
begun involvement with the building and operating of smart grids, and foreign investment is permitted for innovations and efficiency technologies.
Since 1992, there have been various channels of private capital flowing into the oil industry. The entry points include: oil refining, warehousing, logistics and product sales fields. Presently, China has more than 80,000 private oil enterprises and total storage capacity of up to 200 million tons.81
Domestic oil usage
Production
Imports
Volume of oil usage
(in thousand bar
rels per da y) 2001 12,000 10,000 8,000 6,000 4,000 2,000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Nuclear power
With a stable base-load power, limited carbon emissions and a coastal location, nuclear power has been perceived as an attractive method of powering China’s burgeoning eastern cities. After a nationwide halt in nuclear power construction in the wake of the Fukushima nuclear incident, for the purpose of conducting a safety review, construction has now resumed in the sector. By the end of 2011, China had seven nuclear power plants put into operation, reaching 12.6 million kW and saw a 16.9 percent increase in nuclear power consumption in 2011,82 with a production target of 80 GW by 2020.83 Due to
the post-Fukushima temporary halt on construction in 2012, this is not expected to be reached; rather it is more likely to see 60 to 70 GW installed.
Currently, 13 nuclear power plants are being constructed or expanded, with installed capacity of 34.0 million kW, and a construction scale ranked first in the world. By 2015, China is expected to have over 40 GW of nuclear capacity.84 By 2020,
Chinese installed nuclear power capacity is planned to reach 58 million kW, with 30 million kW under construction. With 100 new plants in the pipeline, China will eventually be the
world’s largest nuclear producer.
Due to the sensitivity and importance of nuclear power, the government has set up strict qualifications and regulations for nuclear power enterprises. Currently, only three companies (China National Nuclear Corporation, China Guangdong Nuclear Power Holding and China Power Investment Corporation) can undertake nuclear investment and development. However, domestic private capital has already begun to express an active interest in the nuclear power equipment manufacturing field.
Renewable energy
China is currently the world’s largest producer of renewable energy, but it pl
