1、,Ben Bei,January 10, 2013Reforming China Battlingcorruption daunting but essentialPortfolio Strategy Research,Anti-corruption identified as top priority by party leadershipChinas new party leadership has clearly elevated the fight againstcorruption as a high priority. Labeled by party secretary Xi J
2、inping as a riskthat may lead to the collapse of the party and the country, corruptionproblems (bribery/graft, extravagant government spending) have been onthe rise in recent years. Main causes are attributed to issues such as a highlevel of govt administrative control, lax supervision, low transpar
3、ency, lack,Helen Zhu+852-2978-0048 Goldman Sachs (Asia) L.L.C.Timothy Moe, CFA+852-2978-1328 Goldman Sachs (Asia) L.L.C.,of independent judicial system and low civil servant pay.Jason Sun,Still early days: reform policies to take shape over timeSenior leadership has promised reforms, and some initia
4、l policies havealready emerged. But most of the anti-corruption reforms are likely to taketime to introduce, and likely face enforcement challenges. Some of thepotential policies mentioned by the leadership include curbing of govtpurchase of extravagant items, and the sunshine law (asset disclosure)
5、.Experts/officials feel that anti-corruption measures are likely to enhanceeconomic growth, even if growth in certain areas may slow near-term.Equities impacts: risks mainly on select high-end areas short termWe see earnings impacts to exposed sectors as gradual, but valuationpressure may show up so
6、oner as policy newsflow intensifies in the comingquarters. We feel downstream sub-sectors involved with high-end govtconsumption are at greater (and earlier) risk of demand erosion, includingwhite liquor, gaming, luxury auto dealers/retail/property. In contrast,midstream and upstream sectors (SOEs/m
7、onopolies/resource-intensivesectors, and their product/service providers, respectively) may see only aneutral impact or share reallocation. The internet may emerge a surpriseindirect beneficiary as its rising role in corruption supervision enhancesuser loyalty. If anti-corruption is effective in the
8、 long term, it should bepositive for market earnings / valuation (higher and better quality growth).Anti-corruption: downstream high-end products are most at risk,+86(10)6627-3187 Beijing Gao Hua Securities Company Limited+852-2978-1220 Goldman Sachs (Asia) L.L.C.Chenjie Liu+86(10)6627-3324 Beijing
9、Gao Hua Securities Company Limited,CategorySectors,UpstreamSelect industrials/equipment makers/property developers/drug producers,MidstreamTelecom/utilities/ railroad/transport/commodities/banks,DownstreamWhite liquor/gaming/luxury autodealer/high end retail/ airline(intl)/ high end property,Players
10、 with more commoditized,products and local reliance,Negative impact on,Impact,Share reallocationPlayers with more competitiveproducts and less local reliance,Broadly neutral to slightpositive over time,demand; may reflectin valuations beforeearnings impact,Source: GS Global ECS ResearchGoldman Sachs
11、 does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment
12、 decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.,The Goldman Sachs Group, Inc.,Goldman Sachs,1),2),3),2,January 10, 2013,China,Exec
13、utive summaryWe expect anti-corruption will be a focal issue in 2013 and beyond in China, after the newleadership emphasized its importance to the Party and the country. In this report, throughstudy of articles/speeches by government officials, scholars and relevant experts, weprovide a backdrop for
14、 the corruption problem in China and its causes, as well as potentialpolicy actions. We then analyze potential impacts on various listed sectors, where we thinka clampdown on corruption may put some high-end consumption sub-sectors at risk.We have observed a rising leadership focus on anti-corruptio
15、nChinas top leaders have recognized and highlighted the threat of corruption to Chinasstability and development. The anti-corruption conviction was emphasized at the 18th PartyCongress and has been reinforced by many party leaders since.Corruption has worsened in recent years in China, according to
16、the World Banks index,and public discontent has risen, adding the urgency of changes. Two problem areasfrequently mentioned by officials include bribery/graft and extravagant governmentconsumption. Various officials, experts and academics cite some of the key causes ofcorruption to include structura
17、l issues like power concentration, insufficient supervision,low transparency, lack of independent judiciary and low civil servant pay.More policies to come but the road is still longWe are at a very early stage in the anti-corruption fight, given the complexity of the issuesat hand and the leadershi
18、p transition. Policymakers have promised more action to come.Details remain elusive and implementation/enforcement will likely face challenges. Someof the likely policies being cited in the media include restricting some types of governmentconsumption, implementing a sunshine law (asset disclosure),
19、 and closer supervision.Investors have expressed concerns with the risks that anti-corruption will hindereconomic growth. We find that many experts disagree, arguing that corruption leads toinefficient resource allocation, undermines economic planning and hurts competitiveness.Sectoral impacts vary,
20、 with risks skewed to high-end consumptionWe expect anti-corruption actions could affect listed equities. For near to medium term,earnings impacts of affected areas may be gradual, but valuations could react faster.Downstream may see demand risk: Some high-end product subsectors that maysee demand p
21、ressure include white liquor, gaming, luxury auto dealers / retail /property. Direct govt consumption may slow first as it is easier to supervise.Midstream impact likely neutral: These are govt/regulators or monopoly/SOEs.We see listcos impact as neutral or mildly positive, as efficiency may gradual
22、lyimprove. Past unexpected mgmt changes have usually not affected share prices.Upstream may see market share shifts: These are sectors that may sell togovt/SOEs or are highly regulated. We expect share reallocation may occur, whereplayers with stronger products and less localized reliance may gain s
23、hare.The internet may benefit, as its role in anti-corruption supervision enhances user loyalty.Longer-term, if anti-corruption is effective, it should be positive for both market earningsand valuation (higher economic growth, better sustainability, and lower social risks).Goldman Sachs Global Econo
24、mics, Commodities and Strategy Research,3,January 10, 2013,China,Anti-corruption is a key agenda for the new leadershipChinas new leadership announced anti-corruption as one of its top priorities at the 18thParty Congress. Deemed by party secretary Xi Jinping as a major threat that may causethe coll
25、apse of the party and the country, corruption has indeed been on the rise in recentyears in China, according to World Bank indices. Policymakers and academics haveidentified some of the causes to include high governmental administrative control, laxenforcement, insufficient transparency, lack of an
26、independent judicial system and low civilservant pay.Corruption has been identified as the biggest threat to Chinasstability and developmentCorruption, or the use of public office for private gain, has been highlighted as a top risk byChinas leadership. While anti-corruption efforts have long been i
27、n place (run by theCommunist Partys Central Commission for Disciplinary Inspection, or CCDI), theleaderships emphasis on its importance and corruption risks were highlighted at the 18thParty Congress in November 2012.Both outgoing party secretary Hu Jintao and his successor Xi Jinping identified cor
28、ruptionas a significant threat to the sustainability of the party and the country. Their commentshave been echoed by Li Keqiang (a Politburo Standing Committee member), Wang Qishan(Politburo Standing Committee member, newly appointed head of the CCDI), and manyother senior leaders. Overall, public a
29、wareness of increased conviction has surged as well,as demonstrated by recent Baidu search data (Exhibit 2).Exhibit 1: Top leaders emphasis on corruption as a top risk to Chinas stability has heightened, starting with the 18thParty Congress,Leader,Date,Occasion,News flow quotation,If we fail to hand
30、le this issue corruption well, it could prove,Hu Jintao,11/8/2012,18th Party Congress,fatal to the party and even cause the collapse of the party and,the fall of the stateThere are three tasks that are most important in the next fiveyears or further ahead: 1) increasing income levels, improving,Wen
31、Jiabao,11/8/2012,18th Party Congress,the social safety net and reducing income disparity; 2) anti-,corruption, which decides the future of the party and thecountry; 3) enhance and improve the party leadershipIt is evident that corruption eventually could cause the collapse,Xi Jinping,11/17/2012,Poli
32、tburo meeting,of the party and the state. Some corruption cases that occurredwithin recent years were very serious and created an adverse,image and impact,Wang Qishan,11/30/2012,Symposium meeting about The conduct of party members will influence peoplesanti-corruption confidence in the party and its
33、 own futureCorruption is common in some fields. Certain govt officials,Xi Jinping,12/31/2012,Politburo meeting,especially senior officials, have seriously flouted the law and its,disciplineSource: Xinhua Net, P, S, GS Global ECS ResearchGoldman Sachs Global Economics, Commodities and Strategy Resear
34、ch,1),2),4,January 10, 2013,China,Exhibit 2: Baidu search data shows a surge of public attention on anti-corruption-relatedsearches around/post the 18th Party CongressNote: “Public interest trend” and “media coverage trend” are two indices compiled by Baidu tocapture public and media attention level
35、s towards certain key words.Source: Baidu indexLeadership indicates a meaningful step up in anti-corruption effortsto comeSome of the early commentary from senior leadership has mentioned potential moves tocome. However, not many details have yet been decided or are available. In general, mostof the
36、 leaderships commentary refers to two common types of corruption behavior:Bribery and graft by officials (regulators, policymakers) or state-ownedenterprises; for personal gain (usually economic gain).Extravagant and unnecessary forms of government consumption, such asbanquets, travel and entertainm
37、ent.Goldman Sachs Global Economics, Commodities and Strategy Research,-,-,-,PBOC,5,January 10, 2013Exhibit 3: Top leadership has mentioned a number of different areas to be addressed,China,Leader,Date,Occasion,News flow quotation,Govt officials at all levels should obey discipline rules strictly.,Xi
38、 Jinping,11/17/2012,Politburo meeting,Educate and manage relatives and colleagues. Any breach of the,laws and party discipline rules will definitely be punished.Set new eight rules to reduce excessive adherence to protocol,Xi Jinping,12/4/2012,Politburo meeting,e.g, simplifying expenditure on meetin
39、gs, govt banquets andbusiness travel, and controlling appearances in high-profile,public occasions and publicationsCCDI entities at all levels should strengthen their own discipline,Wang Qishan,11/30/2012,Symposium meeting about and improve enforcement of the law.anti-corruption All sources of infor
40、mation/voice worth our attention, includinginternetStrictly implement the eight new rules and campaign against,Xi Jinping,12/31/2012,Politburo meeting,excessive adherence to protocol and bureacracy. Maintainpressure on the investigation of corruption cases and enhance,education of anti-corruption.So
41、urce: Xinhua Net, P, S, GS Global ECS ResearchVarious government agencies have already been active in introducing policies to fightcorruption in the past, but with mixed effectiveness. Since the 18th Party Congress, the newparty leadership has already released notices on curbing extravagant and unne
42、cessaryforms of government consumption. For example, a notice published December 27th on theCCDI website entitled Notification on self-discipline requirement during two holidays(referring to new year and Chinese New Year) emphasizes that government officials shouldrefrain from:Using public funds to
43、purchase cigarettes, liquor or giftsUsing government vehicles for personal purposesTourism, bonuses/gifts, gambling and banquets.Exhibit 4: Anti-corruption policies were already a priority earlier in 2012.,Date,Issuer,Title,Key contents,January 11, 2012,Supreme Court,Opinions on further strengthenin
44、g of trying criminal cases on - Emphasizes punishment of malpractice and corruption crimes byendangering safety at work government officials,February 12, 2012,MOF, MOS, NAO,SASAC,Regulating levels of consumption by SOE officials,- Lists 12 key prohibitions of levels of consumption,- Forbids use of p
45、ublic funds for buying luxury official vehicles,personal property, personal entertainment and unnecessary trips,October 1, 2012,State Council,Regulations on the administration of the institutional affairsof government,- Tightens government budgets at county level and above,- Emphasizes the importanc
46、e of restricting three kinds of businessconsumption (receptions, vehicles and overseas trips),October 23, 2012,State ElectricityRegulatoryCommission,Eight rules on electricity regulation,- Forbids the offering, receiving and soliciting of bribes fromregulators,- Forbids extortion and blackmail.,Nove
47、mber 1, 2012,Public opinions on administrative measures for pre-paidcards,- Sets a single-card cash limit on named and anonymous pre-paidcredit cards,- Requires real name for purchase and use of such cardsSource: Xinhua Net, GS Global ECS ResearchGoldman Sachs Global Economics, Commodities and Strategy Research,4-yearnetchange(2007-2011),a),b),6,January 10, 2013Exhibit 5: Several new policies were issued post the 18th Party Congress, mostly to do with direct governmentconsumption and behavior of government officials,
