Preparing for China's Urban Billion

1. RIC, 4th annual conference New Delhi November 21, 2008 Preparing for China's Urban Billion Stefano Negri, McKinsey Global Institute This report contains information that is confidential and proprietary to McKinsey & Company, Inc., and is solely for the use of McKinsey & Company, Inc., personnel. No part of it may be used, circulated, quoted, or reproduced for distribution outside McKinsey & Company, Inc. If you are not the intended recipient of this report, you are hereby notified that the use, circulation, quoting, or reproducing of this report is strictly prohibited and may be unlawful.

2. Methodology • Sources of distinctiveness • Econometric model (22,000+ equations) – macro and demographic forecast 2007-2025 • Scenario analysis – 4 alternative scenarios depicting contrasting directions for China's future urbanization, size and pattern • City visits – visited 14 different cities and interviewed >100 local government officials and business leaders to complement the model findings • Granularity –Yearly historical and forecast data at national and city level • Comparability –Urban definition consistent with international standard and applied to all indicators • Completeness –Time series data consistent with theory and individual city behavior, providing data and forecasts for 858 cities, including 195 "unofficial cities" Harbin,Heilongjiang Beijing Huhehaote,Inner Mongolia Taiyuan,Shanxi Xingping,Shaanxi Suzhou,Anhui Nanchong,Sichuan Shanghai Taizhou, Zhejiang Chengdu,Sichuan Cangnan, Zhejiang Changsha,Hunan Xiamen,Fujian Shenzhen, Guangdong McKinsey developed an innovative, unique perspective on the booming urbanization in China

3. 5 • By 2025, two-thirds of China’s citizens will live in cities … • … that’s nearly 1 billion people Chinese cities are redefining urbanization scale, over the next 20 years … • How many additional people will live in Chinese cities vs today? • More than 350 million people, more than the population of the entire United States • How many cities in China will have more than one million inhabitants? • More than 200 cities; in Europe today there are only 35 cities of that size • How many new skyscrapers will be built? • There will be up to 50,000 new skyscrapers, the equivalent of building ten New York cities • How many new mass transit systems will be built? • Up to 170 new mass transit systems; in Europe today there are about 70 Source: Demographia; China-All-City model output, McKinsey Global Institute analysis

4. 54 • Distributed Growth • Townization China's urbanization could follow different paths • Scenarios • Super cities • Hub and spoke • A small number of very large cities emerge (>20 million), 4 of them reaching 30 - 40 million people each • 11 economic clusters of large cities of 30 - 90 million people each emerge • Major and very small cities decelerate, and a large number of cities from1.5 million - 5 million emerge • Many small cities (500,000 - 1.5 million) emerge, including almost 300 rural counties becoming cities • Examples of “boosted cities” in each scenario • Shanghai • Beijing • Yangtzi River Delta cities • Taizhou • Harbin • Xingping • Country examples • Japan • Korea • US • Germany • Concentrated urbanization • Dispersed urbanization Source: McKinsey Global Institute analysis

5. China's energy demand will more than double in all scenarios by 2025 • Urban energy intensity • BTU per Renminbi • Urban energy demand • QBTUs • Urban GDP • Renminbi trillion • 12 • 2005 • 5,233 • Super • cities • 68 • 1,920 • 131 • Hub and • spoke • 68 • 2,082 • 142 • Distributed • growth • 60 • 2,258 • 139 • 54 • Townization • 2,140 • 123 • +138% Source: McKinsey Global Institute analysis

6. 76 • In all Europe (including Russia), there are approximately 70 subway and light rail systems • 150,000 to 400,000 additional rail cars needed • Between 4.5 and 7 trillion RMB over the next 20 years Mass transit requirements could vary widely depending on urban shape • Qualified cities by 2025 • Criteria* • Light rail • City population: ≥ 1.5 million • City GDP: ≥ RMB 60 billion • Distributed growth • 171 • Trend Line • 131 Subway • City population: ≥ 3 million • City GDP: ≥ RMB 100 billion • Hub & Spoke • 130 • Super cities • 102 • Townization • 85 * Based on Chinese Government criteria, population and GDP in 2020 Source: Urban Statistical Yearbook of China; Criteria of subway/light rail development issued by Ministry of Construction

7. Number of Skyscrapers in Chicago China will build a Chicago every year POTENTIAL ANNUAL CONSTRUCTION OF LARGE SKYSCRAPERS* Number of buildings above 30 floors, 2005 - 2025 • Hub and Spoke • Super cities • Trend line • Distributed growth • Townization * Smoothed to 5-year intervals Source: NBS; press clippings; team analysis, city visits

8. 83 • McKinsey & Company • 17/F Platinum - 233, Tai Cang Road • 200020 Shanghai - PRC • Mobile: +86-15821665209 • Email: stefano_negri@mckinsey.com Contact information • For more information and to download the full report • http://www.mckinsey.com/mgi/ • Stefano Negri, McKinsey Global Institute

9. BACKUPS

10. 146 To tell the future, we had to understand the past POPULATION BY CITY SIZE Millions of people • CAGR, 1990-2005,percent • Population • Real GDP • 5.6 • 14.5 • 572 • N/A • N/A • 32 • We discovered that there are various ways to define Chinese cities (e.g. Chongqing) • We corrected statistical distortions (e.g. hukou vs census) • We uncovered 195 “hidden cities” • We established that migration is only half the story • 9.5 • 17.4 • 84 • 8.0 • 15.8 • 161 • 254 • Mega (10M+) • 0 • Big (5 - 10M) • 21 • 2.0 • 9.3 • 51 • Mid-sized (1.5 - 5.0M) • Small (0.5 - 1.5M) • 5.0 • 13.6 • Big town (<0.5M) • 1990 • 2005 * Include 663 official cities and 195 additional areas that we consider as cities using various government criteria to qualify them. These criteria were discontinued in 1996 for practical reasons but, in our view, remain valid Source: McKinsey Global Institute analysis, China-All-City model output

11. 1 2 3 4 5 6 The urbanization research produced a set of insights which are very relevant for businesses • Urbanization is inevitable – and cities will be the clear drivers of China's economic growth • 1 billionurban population • >90%GDP from urban areas • City clusters will provide a new lens to assess opportunities in China • 11 clusters are emerging, with average population of ~60 millionsand ~60%of total urban investments • Different urbanization paths could drive significantly different outcomes for China Variability between urbanization scenarios: • 20% in GDP • 15-30% of demand for natural resources • Investment growth will continue, and public spending will come along • 40+ trillion USD(2005 through 2025) • 170+new MT systems,360'000+ kmof new water pipe, x6 healthcare spending • Middle class (household income 40k-200k RMB/yr) will make up almost 80%of total consumption • Burgeoning middle and upper middle class will take off • Spending in key areas such as environmental protection is bound to raise (e.g., 100% SO2 scrubbers) • China's "growing pains" will generate new markets and business opportunities Source: McKinsey Global Institute analysis

12. 154 1 • XX • CAGR, percent • Mega and midsized city populations will grow faster over the next 20 years • An urban billion will be attained by 2030 China is moving toward an urban billion TREND LINE FORECASTS POPULATION BY CITY SIZE Millions of people • 2.4 • 926 • 6.9 • 120 • 1.1 • Mega cities (>10 million) • 572 • 3.4 • 32 • 316 • Big cities (5 - 10 million) • Midsized cities (1.5 - 5 million) • 161 • 2.2 • Small cities (0.5 - 1.5 million) • Big towns (<0.5 million) • 0.3 • 2005 • 2025 Source: McKinsey Global Institute CAC model, McKinsey Global Institute analysis

13. 10.100 1 • 2007 • 2025 • Beijing and Shanghai already megacities in 2007 Six new megacities will emerge by 2025 TREND LINE FORECASTS Millions of people • 14.7 • Beijing • 26.8 • 17.1 • Shanghai • 25.1 • Tianjin • 12.6 Beijing • Shenzhen • Tianjin • 12.4 • Wuhan • Shanghai • 11.9 • Chengdu • Wuhan • Chongqing • Chongqing • 10.7 • Chengdu • Shenzhen • 10.3 • Guangzhou • Guangzhou • 10.1 Source: McKinsey Global Institute CAC model, McKinsey Global Institute analysis

14. 21 1 Even with conservative assumptions, urban GDP will more than quadruple by 2025 SENSITIVITIES • Urban GDP/total GDP • Percent • Urban GDP • RMB trillions • Urban GDP/capita • RMB thousand • 75 • 2005 • 12 • 21 • 90 • 2025 Low • 54 • 62 • +350% • +195% • 92 • 2025 High • 68 • 76 • +467% • +262% Source: McKinsey Global Institute analysis, China-All-City model output

15. 2 • Hubs • Fixed asset investment in 11 economic regions will represent almost 60% (13 trn RMB) of total urban investment in China by 2025 • Beijing / Tianjin • 28 • Shenyang / Dalian • 22 • Qingdao / Jinan • 35 • Shenyang • Xian • 8 Beijing • Dalian • Tianjin • Zhengzhou • 23 • Shanghai • 58 • Qingdao Huang River • Xian • Jinan • Chengdu / Chongqing • 31 ` • Zhengzhou • Shanghai Yangtze River • Wuhan • Chengdu • Wuhan • 27 • Changsha • 20 • Changsha • Chongqing • Fuzhou • Xiamen / Fuzhou • 14 • Guangzhou • Xiamen Xun River • Shenzhen • Guangzhou / Shenzhen • 23 Clusters of cities with average population of ~60mln provide a new lens to assess market opportunities ECONOMIC REGIONS • Number of cities in the region • Regional hubs Source: McKinsey Global Institute analysis

16. 3 Each scenario has pressures – But these appear less intense overall in concentrated urbanization • Concentrated urbanization • ALL URBAN CHINA • Pressure points • Hub and spoke • Distributed Growth • Super cities • Townization • Land development • Congestion • Jobs and skills • Funding • Water • Energy • Pollution Source: City visits; interviews; McKinsey Global Institute analysis

17. 6 At local level, regardless of scenarios, it is possible to define an "urban productivity agenda" for Chinese cities NOT EXHAUSTIVE • High-level initiatives • Examples of detailed initiatives • Land • Build dense cities with integrated urban planning design • Create strategic land development plans (combining zoning, building heights, transit plans) • Develop integrated, mixed use areas • Implement car traffic demand management • Incentivize energy and water efficient industrial equipment • Establish and enforce energy saving building codes • Increase control, emission standards on pollutants • Resources • Manage demand, not only supply of resources • Increase productivity in public services and capital expenditures • Introduce productivity based performance systems on public service provision (e.g., healthcare) • Increase transparency in city budgets and infrastructure spending • Economics • Improve quality and relevance of educational process • Partner with local companies to increase internship / team work (e.g., establishing joint vocational education and training institutions) • Introduce performance management systems on labor productivity and employability measures rather than, for example, enrollment rate • People Source: McKinsey Global Institute analysis

18. 83 The China urbanization story • China's urban success story will continue, with massive changes in the next 20 years • China has set ambitious economic goals. Urbanization is key to make that happen – urban GDP / capita will grow five times and cities will generate more than 90% of China's GDP • Urbanization will continue, but with it will be different from the urbanization China experienced in the past 15 years (e.g., migration will be the driving force) • Pressure will intensify on several areas and will need to be managed, especially if China continues to follow a dispersed pattern of urbanization – land and spatial development, resources and pollution, human capital, funding • There is an opportunity to shape China's future towards a more productive urbanization – with policy interventions both at national and local level • Between all possible urban shapes, concentrated growth is the most efficient and beneficial way to go for China (higher GDP, more efficient use of resources, more productivity from its talent pool) • "City level productivity initiatives" are an opportunity to reduce the cost of urbanization while increasing quality of life (China could cut its public spending needs by 2.5% of GDP, reduce SO2 and NOx emissions by upwards of 35%; halve its water pollution; and deliver private sector savings equivalent to an additional 1.7% of GDP in 2025) and opening new business opportunities