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Strategy Research January 11, 2016 Thematic Strategy China in Transformation (VII): Foshan is committed to city upgrades Changes in Foshan Foshan has achieved extraordinary economic development, but its urban development has lagged. Foshan recorded a CAGR of 16% in GDP over 1978~2014, much faster than the nation’s 10%. In 2014, the city had the largest economic output in Guangdong’s prefecture-level cities, with a per capita GDP higher than Beijing and Shanghai. Its industrialization was led by private entrepreneurs and was domestic-oriented, ensuring more stable economic growth. But the free hand in economic development also led to disorder in urban construction and a deterioration in the ecological environment. The city’s appearance was unworthy of its level of economic development. Hui WANG, CFA SAC Reg. No.: S0080514120001 [email protected] Guang ZHOU SAC Reg. No.: S0080513050001 SFC CE Ref: ALS668 [email protected] Foshan has implemented a program to upgrade the city, promote industrial restructuring and achieve a better integration of the city, industry and its people. In 2012, Foshan proposed a program to promote sustainable urban development through pollution controls, landscaping, re-engineering of urban functions, and reshaping of city value. The program is fully consistent with top-level designs for urban development proposed by the Central Urban Work Conference held at end-2015, and Foshan is playing a pioneering role. In the future, Guangzhou-Foshan integration and the coordinated development of the Pearl River Delta will provide more opportunities for Foshan. Land reforms in Foshan Foshan broke through land bottlenecks via reforms. Most of the land in Foshan was collective-owned. As the city underwent rapid industrialization, land soon became a bottleneck that limited its economic development. Therefore, Foshan implemented rural land joint-stock reforms and created a market for transactions in collective-owned land use rights. The government also expropriated land by providing farmers with high returns and diverse compensation. Foshan’s experience suggests that land reforms can unlock the value of land and offer a win-win situation. Property income accounted for a much higher proportion of farmers’ income in Foshan than nationwide. Foshan’s state-owned land transfer revenue contributed greatly to local government revenue. Related reports • Strategy | China in Transformation (VI): City value reshaped in supply-side reform (2015.12.23) • Strategy | China in Transformation (V): Hefei rising on a solid foundation (2015.12.10) • Strategy | China in Transformation (IV): Wuhan, a pioneering city puts on a new look (2015.09.22) • Strategy | China in Transformation (III): (2015.07.21) From Foshan to China, the inspirations Given the wide diversity of economic growth across China, it is important to study different cities to understand China’s economy. Foshan does not have natural resources or policy advantages, but it has a long history of pioneering market reforms in China. The balanced and well fitted relationship between government and market is the key to the remarkable success story of Foshan. Regulation AC certifications and important disclosures are located at the end of this research report CICC Research: January 11, 2016 Contents Introduction: why Foshan? ................................................................................................. 4 The changes in Foshan ....................................................................................................... 6 A healthy economy dominated by the industrial and private sectors ......................................... 6 Industries: local government engineered an innovative path to industrial upgrades ..................13 Urban construction: city upgrades as part of supply-side reforms ...........................................17 Foshan’s land reforms ...................................................................................................... 20 Foshan broke through the land bottleneck via reforms ..........................................................20 Reforms unlocked the value of land and created a win-win situation .......................................22 Figures Figure 1: The sixth leg of our field trip of Chinese cities – Foshan ................................................ 5 Figure 2: Foshan is located in the PRD and borders Guangzhou to the east ................................... 7 Figure 3: From 1978~2014, Foshan’s GDP grew at a CAGR of 16%, significantly outpacing the nation’s 10% .......................................................................................................... 7 Figure 4: Among Guangdong’s prefecture-level cities, Foshan ranks first in terms of GDP and second in terms of per capita GDP, but its tertiary industry has a relatively low proportion of GDP .................................................................................................... 8 Figure 5: Foshan’s per capita GDP reached US$16,000 in 2014, ranking eighth among the 56 cities with resident populations of >7mn and higher than in Beijing and Shanghai ................... 8 Figure 6: The industrial sector’s proportion of Foshan’s GDP reached 60%, at a historic high and much higher than the national level of 36% ............................................................... 9 Figure 7: The secondary industry contributed the most to Foshan’s economic growth ..................... 9 Figure 8: Foshan is among China’s areas with the most developed private economy .....................10 Figure 9: Growth in FDI attracted by Foshan slowed while FDI as a percentage of Foshan’s GDP continued to fall ................................................................................................... 10 Figure 10: Foshan’s export growth slowed ...............................................................................11 Figure 11: Foshan’s industrial sales have gradually shifted to the domestic market .......................11 Figure 12: Foshan has had relatively stable FAI ............................................................................ 12 Figure 13: Foshan’s mainly self-funded FAI mostly goes to real estate and the industrial sectors ... 12 Figure 14: Foshan has developed town-based industry clusters ................................................ 14 Figure 15: The growth in Foshan’s industrial value added slowed markedly due to the large proportion of traditional industries ........................................................................ 14 Figure 16: Foshan accounts for >10% of the national output of home appliances and wall tiles ......15 Figure 17: Industrial enterprises in Foshan increased their R&D spending in recent years, raising the R&D intensity significantly ................................................................................15 Figure 18: Foshan’s listed companies ......................................................................................16 Figure 19: Changes in Foshan’s urban area and population ........................................................17 Figure 20: Foshan had an urbanization rate of 95% in 2014 ......................................................18 Figure 21: Foshan’s pollution controls have been effective judging from its sewage treatment rate and sulfur dioxide emissions ................................................................................ 19 Figure 22: The structure of Foshan’s land use ..........................................................................22 Figure 23: Farmers in Foshan benefited from the appreciation in land prices ................................22 Figure 24: Property income accounted for 13% of farmers’ income in Foshan’s Nanhai District, Regulation AC certifications and important disclosures are located at the end of this research report 2 CICC Research: January 11, 2016 much higher than the nation’s 3% and Guangdong’s 9% ...........................................23 Land appreciation contributed greatly to Foshan’s government revenue .......................24 Provincial government fund revenue as a percentage of total government revenue........24 Proportion of provincial public fiscal revenue that is related to real estate ....................24 Foshan’s investment in real estate development over the first 11 months of 2015 grew 10.9% vs. the nation’s 1.3% growth; Foshan’s real estate development investment as a percentage of GDP has been relatively stable ........................................................25 Figure 29: Growth in Foshan’s housing sales area and price index ..............................................25 Figure 30: Foshan’s average housing price is less than 2/3 that of Guangzhou’s ...........................25 Figure Figure Figure Figure 25: 26: 27: 28: Regulation AC certifications and important disclosures are located at the end of this research report 3 CICC Research: January 11, 2016 Introduction: why Foshan? Being an ordinary city, Foshan achieved extraordinary development. Its experience is worth studying and learning. Foshan is just an ordinary city in China. Foshan, one of 19 prefecture-level cities in Guangdong Province, does not have rich natural resources like cities in northeastern China, or an abundance in land and cheap labor like cities in central China, or relative policy advantages like municipalities, provincial capitals or sub-provincial cities. Traditional industries make up a high proportion of Foshan’s economy, while it has encountered issues in transportation, environmental and others during its urban development. Foshan is relatively unknown by people outside of China, with its main claim to fame probably being Chinese martial arts (Bruce Lee’s ancestral home was in Foshan). However, Foshan’s development has been extraordinary. Foshan has achieved rapid economic growth since China started to reform and open up, and it is one of the areas in the country with the most well developed private economy. From 1978~2014, Foshan’s GDP grew at a CAGR of 16%, significantly outpacing the nation’s 10%. Foshan’s per capita GDP reached US$16,000 in 2014, higher than in Beijing and Shanghai and met the World Bank’s standard for a high-income economy. The private economy contributed 60% of Foshan’s GDP and 70% of its value in industrial output and has been a key driver of its economic development. In 2014, the city had the third largest economic output in Guangdong Province, only behind Guangzhou and Shenzhen. Foshan is in the forefront of China’s land reforms and urbanization. The high proportion of collective-owned land in Foshan has made reforms imperative for the purpose of industrial development and urban construction. The city’s government has vigorously pushed ahead with land reforms, which have unlocked the value of land, made enough land available for urban construction and industrial development, and increased the incomes of farmers and the government’s revenue. In 2014, Foshan had a resident population of 7.3mn and an urbanization rate of 95%. To find out the story behind Foshan’s success, we visited Foshan on the sixth leg of our field trip of Chinese cities. Regulation AC certifications and important disclosures are located at the end of this research report 4 CICC Research: January 11, 2016 Figure 1: The sixth leg of our field trip of Chinese cities – Foshan 2 5 Zhengzhou 4 3 Chongqing Hefei Wuhan 6 1 Foshan Shenzhen Source: CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 5 CICC Research: January 11, 2016 The changes in Foshan A healthy economy dominated by the industrial and private sectors Foshan’s economy grew rapidly since China started to reform and open up In 2014, Foshan had the third largest GDP in Guangdong, behind only Guangzhou and Shenzhen; its per capita GDP ranked eighth among cities similar size and was higher than in Beijing and Shanghai. Foshan is located on the Pearl River Delta (PRD) and borders Guangzhou to the east. The area is a pioneer in China’s reforms and opening up and one of China’s most important economic hubs. In 2014, Foshan’s GDP reached Rmb744.2bn, ranking first among Guangdong’s prefecture-level cities. From 1978~2014, Foshan’s GDP grew at a CAGR of 16%, significantly outpacing the nation’s 10% (Figures 3 & 4). The city’s per capita GDP reached US$16,000 in 2014, ranking eighth among the 56 cities with a resident population of >7mn and higher than in Beijing and Shanghai. The other top-ranking cities are mostly municipalities or provincial capital cities (Figure 5). Compared with the other cities we visited: Compared with Dongguan, also a prefecture-level city in Guangdong: both Foshan and Dongguan are dominated by the private economy. Like Dongguan, Foshan had also attracted foreign direct investment (FDI), but with the rise of local SMEs, the proportion of foreign-invested enterprises has gradually declined in Foshan, making its economic growth more endogenous and resilient. Dongguan has more foreign-invested enterprises and is more impacted by industry relocations. Since 2009, Foshan’s GDP has grown at a CAGR of 10.9%, much faster than Dongguan’s 7.8%. Compared with Shenzhen, which is also along the Pearl River: both Foshan and Shenzhen have high per capita GDP of >Rmb100,000. Nearly half of Foshan’s residents do not have a local hukou, while this percentage is as high as 70% in Shenzhen. Both cities export a significant proportion of their industrial products to overseas markets. But in recent years, more of Foshan’s sales of industrial products have shifted to the domestic market and the proportion of exports has declined to 14%. Both are highly industrialized but Foshan’s industrial sector is dominated by traditional industries, while Shenzhen has successfully achieved industrial transformation and upgrades. Compared with the capital cities of inland provinces: although Foshan does not enjoy advantages in terms of resources, land, labor and policy, it is ahead of most inland cities in terms of economic development, economic vitality, land reforms and urbanization. With the improvement of transportation infrastructure in inland regions, Foshan’s experience in reforms can be drawn upon by inland cities. Regulation AC certifications and important disclosures are located at the end of this research report 6 CICC Research: January 11, 2016 Figure 2: Foshan is located in the PRD and borders Guangzhou to the east Foshan Source: Baidu, CICC Research Figure 3: From 1978~2014, Foshan’s GDP grew at a CAGR of 16%, significantly outpacing the nation’s 10% Foshan GDP per capita (RHS) Foshan GDP Growth (%) 40 National GDP growth National GDP per capita (RHS) (Rmb) 101,617 100,000 35 CAGR: 16% 30 80,000 25 60,000 20 15 40,000 8.3 10 20,000 6.9 CAGR: 10% 5 2015 2013 2014 2011 2012 2007 2008 2009 2010 2003 2004 2005 2006 2001 2002 1999 2000 1995 1996 1997 1998 1991 1992 1993 1994 1988 1989 1990 1987 1983 1984 1985 1986 1979 1980 1981 1982 0 1978 0 Source: Foshan Statistical Yearbook, Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 7 CICC Research: January 11, 2016 Figure 4: Among Guangdong’s prefecture-level cities, Foshan ranks first in terms of GDP and second in terms of per capita GDP, but its tertiary industry has a relatively low proportion of GDP Proportion of tertiary industry, % 55 Area represents GDP per capita Dongguan 50 Zhuhai Shaoguan 45 Maoming Qingyuan Meizhou Jiangmen Zhongshan Shantou Heyuan Zhanjiang Huizhou ShanweiChaozhou 40 Foshan Zhaoqing Yunfu Yangjiang 35 30 Jieyang GDP, Rmb bn 25 - 100 200 300 400 500 600 700 800 Source: Guangdong Statistical Yearbook, Wind Info, CICC Research Figure 5: Foshan’s per capita GDP reached US$16,000 in 2014, ranking eighth among the 56 cities with resident populations of >7mn and higher than in Beijing and Shanghai (Rmb) 160,000 GDP per Capita (th) Population (RHS) 30,000 149,497 140,000 129,925 24,152 128,478 120,000 107,683 107,545 25,000 21,148 105,202 103,757 101,617 100,000 99,995 98,972 97,343 20,000 14,722 80,000 60,000 15,000 12,927 10,629 10,579 7,221 8,844 8,188 10,000 7,663 7,296 40,000 5,000 20,000 - 0 Shenzhen Suzhou Guangzhou Changsha Nangjing Tianjin Hangzhou Foshan Beijing Ningbo Shanghai Source: CEIC, Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 8 CICC Research: January 11, 2016 Economic structure Foshan is highly industrialized. The industrial sector contributes 60% of Foshan’s GDP and is the main driving force behind its rapid economic growth. The industrial sector is the main driving force behind Foshan’s rapid economic growth. Since 1978, the industrial sector has contributed half of Foshan’s GDP and its contribution peaked at 63% in 2008. Currently the industrial sector contributes 60% of Foshan’s GDP, well above the national level of 36%. The secondary industry makes a much greater contribution to Foshan’s economic growth than the primary and tertiary industries and is the pillar of Foshan’s economic development. The development of the tertiary industry has been relatively slow. From 1978~2000, the tertiary industry’s proportion of Foshan’s GDP increased from 18% to 45%. Over the same period, the proportion of the secondary industry fluctuated between 50~60%, while that of the primary industry shrank rapidly. But after 2000, Foshan became more industrialized, with the proportion of the secondary industry rising above 60%. Meanwhile, the proportion of the tertiary industry declined. In recent years, Guangzhou and Shenzhen saw rapid development of their service sectors, with the proportions of their tertiary industries outstripping that of their secondary industries. Under the plans for the integrated and coordinated economic development of Guangzhou-Foshan, the development of the city’s service sector has been relatively slow compared with other cities in Guangdong (Figure 4). Figure 6: The industrial sector’s proportion of Foshan’s GDP reached 60%, at a historic high and much higher than the national level of 36% Industrial sector 's proportion of Structure of Foshan's GDP Primary sector 2% Other service sectors 14% Real estate 6% Financials 4% (%) Foshan's GDP National 60 Foshan Shenzhen 59.7 50 39.8 40 Hotels & Restaurants 2% Wholesale & retail 8% Transportati on, Storage & Logistics 2% Construction industry 2% Industrials 60% 35.8 30 20 2014 2011 2008 2005 2002 1999 1996 1993 1990 1987 1984 1981 1978 10 Source: Foshan Statistical Yearbook, Wind Info, CICC Research Figure 7: The secondary industry contributed the most to Foshan’s economic growth (%) 25 Contributors to Foshan's economic growth Primary sector Secondary sector Tertiary sector Structure of Foshan's GDP (%) 70 Secondary sector Primary sector Tertiary sector 60 61.8 20 50 15 40 36.4 30 10 20 5 10 0 1.8 2014 2011 2008 2005 2002 1999 1996 1993 1990 1987 1984 1981 1978 2013 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 0 Source: Foshan Statistical Yearbook, Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 9 CICC Research: January 11, 2016 The type of economy Foshan is dominated by the private economy and local enterprises. Its economic growth is vibrant, endogenous and resilient. Foshan is dominated by the private economy and its economic development is vibrant. Foshan is among China’s areas with the most developed private economy. In 2014, the private economy contributed 61.2% to Foshan’s GDP and 69.6% of the value of its industrial output (Figure 8). Private enterprises have become an important driving force behind Foshan’s sustained, rapid and healthy economic development. Currently, there are 145,000 private enterprises in Foshan, accounting for 87.8% of the total number of enterprises in the city. The proportion of foreign-invested enterprises declined and the dependence on foreign investment was reduced. Like other cities in the PRD, Foshan attracted foreign investment as early as when China began to reform and open up. Before 2000, FDI represented >10% of Foshan’s GDP and foreign-invested enterprises contributed 40% of Foshan’s industrial output value (32% from Hong Kong, Macau and Taiwaninvested enterprises). But after 2000, Foshan’s local enterprises prospered and its dependence on foreign investment was reduced. In 2014, FDI represented only 2% of Foshan’s GDP and foreign-invested enterprises’ proportion of Foshan’s industrial output value fell to 30% (the proportion of Hong Kong, Macau and Taiwan-invested enterprises dropped 14ppt). Figure 8: Foshan is among China’s areas with the most developed private economy Foreign-invested Structure of gross industrial output in Foshan 100% 8 9 32 32 14 90% HK/MC/TWinvested 14 Others 70% 60% 18 23 5 50% 15 40% 21 25 13 10 2 30% 25 20% 12 26 13 22 28 4 0 2013 10% 8 0% 3 2003 1998 Private Private economy 80% 2008 Company limited by share Company limited Associated Joint stock cooperative Colletive SOE Source: Foshan Statistical Yearbook, Wind Info, CICC Research Figure 9: Growth in FDI attracted by Foshan slowed while FDI as a percentage of Foshan’s GDP continued to fall (US$ Actual utility of FDI in Foshan Actual utility of FDI Growth rate mn) Foreign dependency degree of Foshan's economy 45% 20% FDI/GDP 40% 18% 2,500 35% 16% 2014 0% 2012 2% 0% 2010 4% 5% 2008 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 0 6% 2006 10% 500 8% 2004 15% 2002 1,000 10% 2000 20% 12% 1998 25% 1,500 14% 1996 30% 1994 2,000 Source: Foshan Statistical Yearbook, Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 10 CICC Research: January 11, 2016 Exports Foshan’s industrial sales have gradually shifted to the domestic market. The proportion of exports fell gradually, but industrial sales have continued to grow. Foshan’s industrial sales have gradually shifted to the domestic market. Like other cities in the PRD, Foshan is closely linked with the global economy and exports its products to global markets. The proportion of exports in Foshan’s industrial sales peaked at 32% in 2004, only half of Shenzhen’s peak level but much higher than 10 years ago. Foshan’s exports took a hit from the global financial crisis and the proportion of exports in Foshan’s industrial sales dropped 7ppt in 2009. In fact, Foshan has been gradually shifting to the domestic market since 2004. Even though the proportion of exports fell gradually, its industrial sales have continued to grow. Figure 10: Foshan’s export growth slowed Export of Foshan (US$ bn) 50 Export (LHS) Growth rate 40% Trend of growth rate 45 30% 40 35 20% 30 25 10% 20 0% 15 10 -10% 5 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 -20% 1994 0 Source: Foshan Statistical Yearbook, Wind Info, CICC Research Figure 11: Foshan’s industrial sales have gradually shifted to the domestic market (Rmb bn) Industrial sales output value Export 1,800 share Growth rate 1,668 50% 45% 1,600 40% 1,400 35% 1,200 30% 1,000 25% 800 17% 20% 600 15% 14% 400 10% 200 5% - 0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Foshan Statistical Yearbook, Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 11 CICC Research: January 11, 2016 Investment FAI in Foshan has been relatively stable. FAI accounts for ~30% of Foshan’s GDP vs. the nation’s 80%. Unlike some cities with excessive investment, Foshan has had relatively stable fixed asset investment (FAI). In terms of FAI as a percentage of GDP (Figure 12), Foshan and the nation have shown diverging trends. Since 2000, the nation’s FAI has increased rapidly from 30% of GDP to 80% of GDP, while Foshan’s FAI only rose from 20% to 35%, lower than Guangdong’s 39%. In recent years, growth in the nation’s FAI has slowed markedly, while Foshan’s growth has been relatively stable at around 15%. In terms of its investment structure, real estate investment and industrial investment each accounted for ~35% and their proportions have gradually increased since 2009. The proportion of infrastructure investment reached ~30% in 2009 and 2010, before declining to 18% in 2014. In terms of the sources of investment funding, self-funding accounted for 55%, but lower than the nation’s 70%. Figure 12: Foshan has had relatively stable FAI Growth rate of FAI (%) 50 National FAI/GDP 90% Foshan 45 80% 40 70% 35 Foshan National Guangdong 80% 60% 30 50% 39% 2015 Sep YTD 40% 16.2 30% 2011 2008 2005 2002 1999 1996 1993 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 0% 1999 10% 0 1998 5 1990 20% 1987 10.30 1984 10 35% 1981 15 1978 20 2014 25 Source: Foshan Statistical Yearbook, Wind Info, CICC Research Figure 13: Foshan’s mainly self-funded FAI mostly goes to real estate and the industrial sectors Structure of Foshan's FAI: by invetment sector Others 12% Structure of Foshan's FAI: by Source Other sources 26% Infrastructu re investment 18% Capital in budget 2% Domestic loans 15% Property 36% Industry 34% Selffunded 55% Source: Foshan Statistical Yearbook, Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 12 CICC Research: January 11, 2016 Industries: local government engineered an innovative path to industrial upgrades Manufacturing Foshan is an important manufacturing base in China, but the large proportion of traditional industries calls for transformation. The local government engineered an innovative path to industrial upgrade. Foshan is an important manufacturing base in China. Foshan’s traditional leading industries include machinery & equipment, home appliances, ceramics & building materials, metal processing & products, textile & apparel, electronic information, food & beverage, fine chemicals & pharmaceuticals, and household products. Foshan accounts for >10% of the national output of home appliances (including electric fans, cameras, rice cookers, air conditioners, refrigerators) and wall tiles (Figure 16). In addition, Foshan’s emerging industries (optoelectronics, environmental protection, new materials, new pharmaceuticals, alternative-fuel vehicles) are flourishing, on the back of improving supply chains. The city has developed town-based industry clusters (Figure 14). Foshan has five districts — Chancheng, Shunde, Nanhai, Sanshui and Gaoming, each with its distinctive industrial development. Foshan has developed town-based industry clusters, such as the home appliance industry cluster in eastern and central Shunde District, the furniture industry cluster in Lecong Town; the nonferrous metal processing industry cluster in Dali Town of the Nanhai District, the metal hardware processing industry cluster in Danzao Town, the textile industry cluster in Xiqiao Town; the ceramic industry cluster in Shiwan Town of the Chancheng District and the food & beverage industry cluster in central Sanshui District. The development of industry clusters creates economies of scale, can boost the economic development of towns and villages and residents’ incomes, and greatly contributes to Foshan’s economic growth. Foshan feeling the pressure for industrial transformation. In 2014, Foshan’s industrial value added grew 9.9%, faster than the nation’s growth. The value added in high-tech manufacturing industries grew 15%, while traditional manufacturing industries grew only 6.2%. The growth of traditional industries slowed, while that of high-tech manufacturing industries remained fast. The growth in overall industrial value added slowed markedly, due to the large proportion of traditional industries (Figure 15). But in recent years, industrial enterprises in Foshan increased their R&D spending, raising R&D intensity to a level significantly higher than the nation as a whole (Figure 17). Foshan’s government engineered an innovative path to industrial upgrade, relying on city upgrades to promote industrial upgrades and create a virtuous cycle between them. Unlike most of the inland cities which promote industrial upgrades by attracting investment and high-tech industries, Foshan is committed to relying on city upgrades to promote industrial upgrades and create a virtuous cycle between them. Specifically, Foshan focuses on building a high-quality environment to live and facilities to attract and gather high-end talent and high-tech enterprises. Under this method, Foshan’s government reduced its direct intervention in industrial development and instead created favorable conditions for industrial upgrades. This places industrial upgrades on a more solid foundation, though it may take longer to achieve the upgrades. Regulation AC certifications and important disclosures are located at the end of this research report 13 CICC Research: January 11, 2016 Figure 14: Foshan has developed town-based industry clusters Guanyao: toys Heshun:construction materials Datang: vegetables Lishui: socks Dali: aluminium extruded sections Shishan: auto components Songgang: appliances Yanbu: underwear Luocun: lightings Shiwan,Nanzhuang: ceramics Chencun: flowers and plants Jinsha: hardware Jiujiang: metal products Hecheng: plastic materials Renhe: furniture building materials Beijiao: appliances Lunjiao: wood machinery Genghe: stainless steel products Genglou: cultures Daliang: mechanical plastics Lecong: furniture Longjiang: furniture Junan: jeans and clothing Source: Baidu, CICC Research Figure 15: The growth in Foshan’s industrial value added slowed markedly due to the large proportion of traditional industries Structure of Foshan's manufacturing Electric equipment and machinery, 22% Others, 29% Industrial value added growth rate YoY (%) Foshan National 25 20 15 Wearing apparel, 3% 10 Basic chemicals, 4% 9.9 8.3 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 5 General purpose machinery, 4% Textiles, 5% Metal products, 9% Metal smelting and pressing, 5% Non-metal minerals, Electronic 8% and telecommun Rubber ication products, equipment, 6% 6% Source: Foshan Statistical Yearbook, Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 14 CICC Research: January 11, 2016 Figure 16: Foshan accounts for >10% of the national output of home appliances and wall tiles Output of major industrial products 4,500 As % of China, 2014 (RHS) As % of China, 2008 (RHS) 4,000 30% 3,500 23.2% 3,000 22.5% 2,500 2,000 8.8% 10.7% 8.4% 4.6% 5.7% 5.3% 6.1% 19.8%20% 15% 10.6% 10.1% 25% 20.0% 19.8% 16.2% 16.7% 15.1% 1,500 1,000 35% 32.9% 12.9% 10% 8.7% 8.7% 5% 4.4% 500 - 0% 10th 10th mn Washing machines Bicycles Paint 10 th tons 10 th 10 th sq.km 10 th 10 th Air Electric Lightings AluminiumRefrigerator Ceramic products tile conditioners cookers 10 th 10 th Cameras Electric fans Source: Foshan Statistical Yearbook, China Statistical Yearbook, cnii.com.cn, CICC Research Figure 17: Industrial enterprises in Foshan increased their R&D spending in recent years, raising the R&D intensity significantly 1.1% R&D of industrials as % of revenue Foshan Foshan: number of invention patent 1,400 National Number 1.0% Growth 80% 1,200 70% 0.9% 60% 1,000 0.8% 90% 50% 0.7% 800 0.6% 600 40% 30% 20% 0.5% 400 10% 0.4% 0% 200 0.3% -10% 2014 2013 2012 -20% 2011 2014 2010 1996 1998 2000 2002 2004 2006 2008 2010 2012 2009 0.2% 2008 0 Source: Foshan Statistical Yearbook, Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 15 CICC Research: January 11, 2016 The financial industry The development of Foshan’s financial industry has been relatively slow. There is still significant potential for enterprises in Foshan to leverage the capital market. The development of Foshan’s financial industry has been relatively slow. The total market capitalization of China’s listed companies (A-shares, H-shares and USlisted Chinese companies) has exceeded China’s GDP. Although Foshan has the eighth highest per capita GDP among cities with similar population sizes, it has only 34 listed companies with a total market cap of ~Rmb550bn, equal to only 74% of Foshan’s GDP. Foshan has only 41 companies listed on the rapidly developing New Third Board, accounting for only 6% of Guangdong’s total. Some of Foshan’s booming industrial towns do not consider going public as a way to grow their businesses. For example, there is no listed company in the furniture industry cluster of Lecong Town. There is still significant potential for enterprises in Foshan to go public. Please see Figure 18 for a list of Foshan’s listed companies. Figure 18: Foshan’s listed companies Ticker Name Sector Rating Cur. MktCap Price (billion) 31-Dec C.BUY RMB 140.0 32.8 Chg. 2015Y 23% Earnings growth P/E 2014A 2015E 2016E 15E 97.5 21.1 18.6 11.0 P/B Div.Yield LF TTM 2.9 3.0 000333.SZ Midea Home Appliances 603288.SH Haitian Food & Beverages BUY RMB 95.7 35.4 61% 30.1 20.6 19.8 37.9 11.9 000541.SZ Foshan Elec Home Appliances n.a. RMB 18.4 16.7 115% 5.7 n.a. n.a. 50.5 4.7 1.0 0921.HK Hisense Kelon Home Appliances n.a. HKD 12.2 4.1 -40% -45.7 n.a. n.a. n.a. 1.1 - 000921.SZ Hisense Kelon Home Appliances n.a. RMB 10.2 9.5 14% -45.7 -5.7 16.9 20.5 3.3 - 002705.SZ Xinbao Home Appliances n.a. RMB 9.2 20.9 43% 11.0 42.7 13.2 30.4 4.0 1.2 002543.SZ Vanward Home Appliances n.a. RMB 8.0 18.2 65% 7.7 15.4 17.0 26.0 2.9 1.0 000533.SZ Macro Home Appliances n.a. RMB 7.0 10.2 71% -30.4 14.0 9.0 48.5 5.1 0.5 002076.SZ Cnlight Home Appliances n.a. RMB 6.6 18.0 153% 7.0 325.1 70.5 90.2 7.0 0.3 002291.SZ Saturday Apparel n.a. RMB 6.8 17.0 113% 5.7 -2.6 2.9 193.8 3.7 0.5 Chigo Home Appliances n.a. HKD 1.0 0.1 -27% -140.5 n.a. n.a. n.a. 0.3 - Shenglu Telecom Nationstar Optoelectronics Information Technology Technology Hardware Technology Hardware Technology Hardware Real Estate n.a. RMB 16.6 37.1 172% 965.4 185.9 77.2 120.7 7.3 0.0 n.a. RMB 8.0 16.9 61% 28.1 25.4 36.1 44.3 2.9 0.8 n.a. RMB 7.3 36.6 169% 3.0 288.9 150.2 44.9 9.4 1.1 0449.HK 002446.SZ 002449.SZ 002670.SZ 300417.SZ 2007.HK 3623.HK 600323.SH 2128.HK 600499.SH 300004.SZ 002260.SZ 002711.SZ 002611.SZ 300415.SZ 2083.HK Huasheng NANHUA Instruments Country Garden China Success Financial Services Finance Grandblue Environmental Environment Service China Lesso Construction Group Materials Keda Clean Environmental Energy Service Nanfeng Machinery Ventilator DEA General Aerospace&Defense Aviation Europol Internet Dongfang Machinery Precision mi Precision Mach Machinery n.a. 4.2 102.3 4.4 6.4 18.8 131.0 12.0 0.2 HOLD HKD 71.8 3.2 11% 20.1 -5.6 24.0 6.2 0.9 8.4 n.a. HKD 1.7 3.5 29% 38.7 n.a. n.a. n.a. 1.6 0.5 n.a. RMB 12.3 16.1 12% 32.0 32.3 34.9 30.3 2.9 0.6 n.a. HKD 16.8 5.4 45% 7.2 21.7 14.2 7.5 1.5 2.4 16.0 22.6 20.5 61.0 4.5 22.7 3.8 0.9 19.3 62.6 BUY RMB RMB 342% 1.3 23% n.a. RMB 13.5 26.6 30% 134.6 104.4 4.4 0.1 n.a. RMB 12.0 45.2 266% 65.1 n.a. RMB 11.6 35.0 80% 8.0 36.9 73.5 n.a. 35.1 0.0 66.8 9.1 n.a. RMB 8.7 14.9 77% 49.8 3.9 64.9 0.2 102.5 9.2 n.a. RMB 5.6 23.2 144% -3.4 16.3 0.1 7.0 63.0 7.5 0.9 -112.1 200.0 Nature Home Light Industry n.a. HKD 1.4 1.0 -25% -154.6 n.a. n.a. n.a. 0.5 1.5 000973.SZ FSPG Hi-Tech Chemicals n.a. RMB 12.6 13.0 110% 1.5 n.a. n.a. n.a. 6.2 - 002666.SZ Delian Group Sunwill Precising Plastic Dymatic Chemicals Jingyi Metal Chemicals n.a. RMB 10.0 13.3 103% 1.0 20.9 26.3 51.4 3.9 0.5 Chemicals n.a. RMB 6.6 41.1 153% 11.7 n.a. n.a. n.a. 6.2 0.2 Chemicals n.a. RMB 5.9 14.1 113% -16.9 191.9 -27.4 21.2 3.3 0.7 n.a. RMB n.a. n.a. 5.5 - 6.5 1.2 5.6 n.a. 0.7 3.3 002676.SZ 002054.SZ 002295.SZ 3386.HK 0098.HK Dongpeng Xingfa Aluminium Metallurgy Construction Materials Construction Materials 5.9 23.6 156% n.a. n.a. n.a. HKD 3.8 3.0 9% 70.5 -12.4 n.a. HKD 1.1 2.7 62% 72.0 n.a. 14.4 n.a. Note: the rating “n.a.” indicates we do not cover that company and that market consensus earnings estimates are used. Source: Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 16 CICC Research: January 11, 2016 Urban construction: city upgrades as part of supply-side reforms Foshan has grown into a large city Foshan is a multi-center large city with a resident population of 7.3mn and an urbanization rate of 95%. Foshan’s urban built-up area has reached 155 km2, driven by adjustments in administrative divisions and urban construction. The five districts of Foshan (Chancheng, Shunde, Nanhai, Sanshui and Gaoming) were formerly independent counties. Over 1992~1994, Shunde, Nanhai, Sanshui and Gaoming became countylevel cities governed by Foshan on behalf of the province. In December 2002, Shunde, Nanhai, Sanshui and Gaoming became administrative districts of Foshan but retained some degree of fiscal independence and autonomy in planning. Foshan’s original urban districts were merged to become the Chancheng District to be directly governed by Foshan’s government. Hence, Foshan became a multi-center city. The city’s urban built-up area expanded 10x from 14 km2 in 1985 to 155 km2 in 2012. Foshan has been attracting people with its rapid economic development. The city has a resident population of 7.3mn and an urbanization rate of 95%. Foshan had a population of only 2.34mn in 1978 and its resident population increased to 7.3mn in 2014, of which 50% did not have a local hukou. The proportion of Foshan’s resident population without a local hukou has continued to increase, suggesting a continued net inflow in population. Foshan had an urbanization rate of 95% in 2014, well above Guangdong’s 68% and the nation’s 55% (Figure 20). Figure 19: Changes in Foshan’s urban area and population Foshan's urban area (km2) 180 820 Constructed urban area 155 160 140 Foshan's population (%) Population of Hukou Resident population 720 735 620 120 520 100 420 80 386 320 60 2014 2011 2008 2005 2002 1999 1996 1993 1990 1987 1984 1981 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 20 1989 - 1987 120 1985 20 1978 220 40 Note: The change in urban area in 2002 was mainly caused by adjustments to administrative divisions. Source: Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 17 CICC Research: January 11, 2016 Figure 20: Foshan had an urbanization rate of 95% in 2014 100% Urbanization rate (%) Foshan China Guangdong 95% 90% 80% 70% 68% 60% 55% 50% 40% 30% 20% 10% 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 0% Source: Guangdong Statistical Yearbook, CICC Research Urban development has been more oriented towards quality But Foshan’s urban construction lagged behind. Foshan’s government proposed a city upgrade program in 2012 to achieve better integration of industry, city and people, which is fully consistent with the top-level design proposed by the Central Urban Work Conference. Foshan’s urban construction lagged behind its economic development and population growth. Foshan’s rapid industrialization led to problems with air and water pollution. A multi-centered urban construction gave the impression that there was no city center and downtowns and the suburbs did not look much different from each other. The appearance of Foshan was unworthy of its level of economic development. City upgrades should be part of supply-side reforms. The root cause of urban problems is a structural mismatch between supply and demand. Supply-side reforms, which call for effective supply, demand cities to be upgraded. Foshan launched a three-year action plan for city upgrades in 2012, opening the exploration of urban transformation and environmental re-engineering to promote urbanization. In April 2015, Foshan extended its city upgrade action plan by two years in order to achieve a better integration of industry, the city and its people. Foshan’s exploration and method of urban development are fully consistent with the top-level design laid out by the Central Urban Work Conference held at end-2015.1 It has played a pioneering role. Foshan’s efforts in upgrading the city have begun to pay off. We visited a number of city upgrade projects in Foshan and found that its upgrade program has begun to pay off: The economy has become more diverse, as high-end manufacturing, services and Internet finance companies are attracted to Foshan (e.g. the Chancheng District’s Smart New City project). The city has become more beautiful. Its integrated urban transport system is basically complete (e.g. the Jihua Road renovation project). The city has continued to improve its cultural development (e.g. Lingnan Tiandi, a major urban renewal project which combines the traditional Lingnan culture and modern urban life and has become Foshan’s city landmark and a destination for cultural tourism). 1 For an analysis of the Central Urban Work Conference, please see China in Transformation (VI): the value of cities to be reshaped on supply-side reforms, published on December 28, 2015. Regulation AC certifications and important disclosures are located at the end of this research report 18 CICC Research: January 11, 2016 The living environment has improved significantly (e.g. Tongji River treatment project, Chuihong community enhancement project). There are a lot of such city upgrade projects which have improved Foshan’s image. Figure 21: Foshan’s pollution controls have been effective judging from its sewage treatment rate and sulfur dioxide emissions (%) (Ton th) Urban's sewage treatment rate 100% 97% 95% SO2 discharge amount 130 124 120 90% 110 85% 80% 100 75% 90 70% 65% 80 60% 58% 72 70 55% 2014 2013 2012 2011 2010 2009 2014 2013 2012 2011 2010 2009 2008 2008 60 50% Source: Foshan statistical bulletins, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 19 CICC Research: January 11, 2016 Foshan’s land reforms Foshan broke through the land bottleneck via reforms To break through the land bottleneck, Foshan’s government created a market-oriented land system where the government and the market fit well. Foshan’s experience suggests that breakthroughs can be made in China’s land reforms. Foshan’s rapid economic development was driven by industrialization and improved land productivity, making land more valuable. However, there is state-owned land and collective-owned land in China, according to the Land Management Law. Unlike state-owned land, collective-owned land is generally not tradable and thus its value cannot be unlocked. Since most of Foshan was rural when the Land Management Law was promulgated in 1986, most of the land in Foshan was collective-owned. As Foshan attracted more industries and people amid the rapid industrialization, land soon became a bottleneck that limited its economic development. In the past, construction land usually came from land expropriation, which faced great resistance due to the low compensation offered to farmers. Moreover, the land used by farmers was scattered, making it difficult to be used on a large scale. In order to break through the land bottleneck and develop the economy, Foshan created a marketoriented land system. On the one hand, Foshan formed a collective-owned land use rights market, which was informal at first but was then legalized. In 1992, Nanhai County (now Foshan Nanhai District) was the first to implement rural land joint-stock reforms. Collective-owned property and land were converted into shares to form joint-stock cooperative organizations, which then directly leased the land out or built plants and leased them out. Farmers obtained shares by contributing their contracted land as capital and enjoyed dividends annually. In 1994, the land joint-stock reforms were implemented across Nanhai County. Gradually, Foshan formed an informal market for transactions in collective-owned land use rights. The market was informal because transactions in collective-owned land use rights did not enjoy explicit legal protection, banks would not accept such property rights as collateral, and the market was open to only local enterprises. Such transactions were not halted immediately as the PRD served as a testing ground for reforms and opening up. In January 2015, the State Council issued the Opinions on Pilot Reform of Rural Land Expropriation, Collective-owned Commercial Construction Land Transfer and Housing Land System, and decided to select 33 counties (cities, districts) for the pilot reforms. Foshan Nanhai was selected as a pilot reform district to allow the transfers of rural collective-owned commercial construction land, and its collective-owned construction land transactions have been legalized. On the other hand, Foshan’s government also expropriated land by providing farmers with high returns and diverse compensation, and reclassified the expropriated land as state-owned land which can be transferred legally. In December 2001, the Ministry of Land and Resources approved Foshan as a pilot city for reforms in the land expropriation system, facilitating innovation in the city’s compensation standards and resettlement process. Regulation AC certifications and important disclosures are located at the end of this research report 20 CICC Research: January 11, 2016 In 2002~04, Foshan issued the Regional Unified Land Expropriation Compensation Standards Implementation Program, the Transportation Infrastructure Construction-Related Land Expropriation and Resettlement Compensation Standards and Implementation Program, the Opinions on Deepening Land Expropriation System Reform, and the Opinions on Implementation of Basic Old-age Insurance Subsidy System for Landless Rural Residents. It established a formal and unified system for land expropriation compensation standards: Foshan quantified land expropriation compensation standards to link land compensation and resettlement subsidies directly with the area and type of land rather than with the annual output value of land, greatly improving the efficiency of land expropriation. Foshan set the comprehensive land price for each area and significantly raised the average land expropriation compensation standard. Collective-owned construction land should be deemed to have the same price as state-owned construction land when calculating expropriation compensation. Specifically, compensation should be equal to the local urban benchmark land price subtracted by the transfer price or equal to the assessed value subtracted by the transfer price. As for resettled farmers, Foshan not only gave them monetary compensation, offered them urban hukous, and helped them find urban jobs, but also retained 10~15% of the expropriated land for farmers to provide them with space for development. Foshan implemented a land expropriation social security system to provide subsistence security, pension insurance and basic medical insurance for farmers to address their worries after their land was expropriated. Foshan has attached more importance to the economical and intensive use of land in recent years, and ensured the efficiency of land use through the orderly reconstruction of old towns, old factories and old villages. Judging from the change in arable land area (Figure 22), Foshan’s land reforms made the fastest progress in 2001~06. With the advance of Foshan’s land reforms, industrialization and urbanization, the size of Foshan’s urban and rural construction land, transportation land and other construction land has continued to expand. Foshan has a total land area of 385,000 hectares. In 1996, construction land accounted for only 20.8% and agricultural land accounted for 75.1%. In 2005, the proportion of construction land rose 10ppt to 30.8%, while that of agricultural land declined 15.6ppt. Foshan’s plans for land use emphasize the economical and intensive use of land and the tightening of the supply in construction land. It targets only a 5ppt increase in the proportion of construction land by 2020 compared with 2005. Foshan’s experience suggests that breakthroughs can be made in China’s land reforms. Foshan’s local government created a market-oriented land system in which the government and the market fit well. But Foshan’s experience also has certain regional characteristics: Foshan is densely populated but economically developed. Many farmers have their own factories and do not rely on farming as a livelihood, and therefore are willing to transfer their land for income. On the other hand, whether land can be transferred also depends on its location. There should be market demand for land in good locations. Foshan’s industrial towns and industry clusters are dispersed over its five districts. There is relatively abundant land for transfer. Regulation AC certifications and important disclosures are located at the end of this research report 21 CICC Research: January 11, 2016 Figure 22: The structure of Foshan’s land use (Acres) Foshan's land use structure Cultivated land 1,400 2001: 1,249 1,300 Others 4.1% 100% 90% 1,200 Construction 70% 1,000 Agricultural land 8.3% 30.8% 35.3% 59.5% 56.4% 2005 2020 20.8% 80% 1,100 land 9.7% 60% 900 50% 800 40% 2006: 672 700 75.1% 30% 600 20% 500 10% 400 0% 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 1996 Source: Foshan’s land use plans (1997~2010) & (2006~2020), Foshan Statistical Yearbook, CICC Research Reforms unlocked the value of land and created a win-win situation Foshan’s land reforms have unlocked the value of land and contributed greatly to the property income of villagers, local government revenue, real estate market development and industrial development, thereby boosting Foshan’s economic growth. Thanks to land reforms, Foshan achieved a high urbanization rate of 95% as of 2014. Land reforms increased the property incomes of farmers Reforms can unlock the value of land and create a win-win situation. Property income accounts for a much higher proportion of farmers’ income in Foshan than in the nation. In Foshan, farmers can enjoy property income from the transfer of collective-owned land or the expropriation of land by the government. Farmers in Foshan can have two sources of income: Wages from urban jobs or net operating income from their own businesses. Property income from shares in collective-owned land, including dividends and gains in land value. Villagers in Foshan have benefited from the 150% rise in local land prices from 2000 to 2015. In 2013, property income accounted for 13% of per capita disposable income of rural residents in Foshan Nanhai District, much higher than the levels of Guangdong and the nation (Figure 24). Figure 23: Farmers in Foshan benefited from the appreciation in land prices 35% 32% 29% 30% Average land price (Rmb/m2) Compensatory payment/ land price National 3,800 Foshan 3,300 25% 2,800 21% 20% 2,300 15% 1,800 10% 1,300 5% 0 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2000-2002 2003 1992-1999 2002 800 1988-1991 2001 1986-1987 2000 0% Source: Foshan Local Records (1979~2002), Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 22 CICC Research: January 11, 2016 Figure 24: Property income accounted for 13% of farmers’ income in Foshan’s Nanhai District, much higher than the nation’s 3% and Guangdong’s 9% Structure of disposible income of Nanhai's rural residents Operating income 10% Property income/ farmer's per capita income 10% National 9% Guangdong 8% 7% 6% 5% Wage income 73% 4% 3% 2% Property income 13% Transfer income 5% 1% 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0% Source: Nanhai District Statistical Yearbook, Wind Info, CICC Research Land contributed a great deal to local government revenue The sharing of benefits with farmers and the market from collective-owned land did not reduce Foshan’s revenue from the transfers in state-owned land, which contributed greatly to local government revenue. Although Foshan offered high land expropriation compensation to farmers and retained some land for farmers whose land was expropriated, while some collective-owned land also entered the market informally. The sharing of benefits with farmers and the market from collective-owned land did not reduce Foshan’s revenue from the transfer of state-owned land, which contributed greatly to local government revenue. Over the past five years, revenue from state-owned land transfers contributed ~40% of Foshan’s total government revenue vs. Guangdong’s 29% and the nation’s 18%. Foshan’s real estate investment and sales are relatively healthy, with ~24% of public fiscal revenue being related to real estate. Foshan’s real estate development investment as a percentage of GDP has been relatively stable, up from 8% in 2000 to 11% in 2014, while the nation’s figure rose from 5% to 15% (Figure 28). Foshan’s real estate investment in the first 11 months of 2015 still grew 11%, while the nation’s growth slowed to 1%. Foshan’s housing sales area in the first 11 months of 2015 increased 47%, also better than the nation’s figure. Foshan has a relatively high inventory in commercial real estate, but the local government has tightened the approvals of commercial real estate projects and support the use of already approved land for other purposes. Under the Guangzhou-Foshan integration development strategy, rail transportation between Guangzhou and Foshan will become more convenient, while at present, Foshan’s average housing price is less than 2/3 that of Guangzhou’s. In addition, Foshan’s city upgrade program has been fruitful. The appearance of the city is continuing to improve and it now has a better environment, greening and urban management. There is still great potential demand for real estate in Foshan, a satellite city of megacities. Regulation AC certifications and important disclosures are located at the end of this research report 23 CICC Research: January 11, 2016 Figure 25: Land appreciation contributed greatly to Foshan’s government revenue Proportion of land and real estate related goverment revenue in 2013 Foshan Guangdong 41% Land transfer revenue/government revenue 55% Revenue of state-owned land transfer / total government revenue (budget) Foshan National 50% 48.6% 45% 29% 40% 41.4% 35% 30% 25% Proportion of real estate related local public revenue 25% 20% 24% 18.4% 15% 0% 20% 40% 10% 2010 2011 2012 2013 2014 2015 Note: Total government revenue = public fiscal revenue + government fund revenue. Source: Foshan financial bureau’s annual draft budgets, CEIC, Wind Info, CICC Research Figure 26: Provincial government fund revenue as a percentage of total government revenue 60% Government fund's revenue/ total government revenue in 2013 50% 40% 34% 30% 20% 10% 0% Note: Revenue from state-owned land transfers accounted for 80~90% of government fund revenue. Source: CEIC, CICC Research Figure 27: Proportion of provincial public fiscal revenue that is related to real estate 45% 40% Property related revenue / total government revenue in 2013 35% 30% 25% 24% 20% 15% 10% 5% 0% Source: CEIC, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 24 CICC Research: January 11, 2016 Figure 28: Foshan’s investment in real estate development over the first 11 months of 2015 grew 10.9% vs. the nation’s 1.3% growth; Foshan’s real estate development investment as a percentage of GDP has been relatively stable (%) 60 Real estate development investment growth rate Foshan National Guangdong Real estate development investment amount / GDP Foshan National Guangdong 14.9 (%) 16 50 14 40 12 30 11.3 2015/11 20 13.5 10 10.9 0 1.3 -10 -20 11.2 10 8 6 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 4 Source: Wind Info, CICC Research Figure 29: Growth in Foshan’s housing sales area and price index (2010/12=100)70 Housing sales area growth (%) 60 Foshan 145 National 140 50 large and medium cities' new housing price index 70 large & medium cities Tier 1 cities 135 40 30 20 12. 8 10 130 Tier 2 cities 125 Tier 3 cities 120 115 -7. 6 -10 110 105 -20 100 -30 2015-08 2015-04 2014-12 2014-08 2014-04 2013-12 2013-08 2013-04 2012-12 2012-08 2012-04 2011-12 2011-08 2011-04 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2010-12 95 -40 Source: Wind Info, CICC Research Figure 30: Foshan’s average housing price is less than 2/3 that of Guangzhou’s 25,000 (Rmb/m2) Average housing prices of 40 cities (2014) 20,000 15,000 10,000 5,000 - Source: Wind Info, CICC Research Regulation AC certifications and important disclosures are located at the end of this research report 25 CICC Research Important legal disclosures General Disclosures This report has been produced by China International Capital Corporation Hong Kong Securities Limited (CICCHKS). 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