The Peoples Republic of China (PRC) is the worlds largest country by population, housing nearly a fifth of the world

population, and is one of the largest countries in the world by landmass (9,596,961 km2). It has also quickly become one of the largest economies of the world, with its GDP growing at an average yearly rate of nearly 9% since 1978. Historic Background The PRC was established in 1949, and since then, the Communist Party has been the only legal party. The National Peoples Congress (NPC) maintains a command economy by setting economic policies based on Socialism. The NPC appoints the Premier of the State Council and other high ranking officials. The State Council is the highest administrative authority of the state; it supervises and coordinates all ministries and commissions, including the power industry.

Since the late 1970s, the PRC has set up reforms to open its market. The main reforms were the following: 1970s: The government relaxed its controls over many industries, navigating the PRC towards more market-oriented policies. 1980s: In an effort to stimulate modernization and foreign investment, the PRC began delineating Special Economic Zones (SEZs) for foreign investment. The original four were Shenzhen, Zhuhai, Shandou, and Xiamen. 1990s: o The PRC continued moving towards a socialist market economy, with the government creating stable and competitive economic environments through laws and regulations. o Foreign investors began to manufacture and sell a wide range of goods on the domestic market. It also eliminated time restrictions on establishing joint ventures, allowed foreign partners to become chairs of joint venture boards, and authorized the establishment of wholly foreign-owned enterprises. o More preferential tax treatment was offered to wholly foreign-owned enterprises and contractual ventures, and foreign companies, which invested in SEZs or projects encouraged by the state, including energy, communications, and transportation. o The government authorized foreign banks to open branches in Shanghai. Also, foreign investors were allowed to purchase B shares of selected firms listed on the Shanghai and Shenzhen Securities Exchanges (SHSE and SZSE).

The PRC houses 1.3 billion consumers, with urban incomes growing at 14% a year since 1978. As such, the PRC is often noted by foreign investors as being prime for investment. Issues in the PRC Currency Issues:

1980s and 1990s: Rapid growth fueled problems of inflation 1990 and 1991: Government tightened control over capital, reducing demand and GNP. Inflation was at 2.1%. Subsequently, as government began easing controls, greater demand caused an increase in prices, causing national unrest. o SOEs experienced the most slowdown o 1992: reduced controls led to double-digit inflation. o Soft corrections were necessary for attracting and maintaining domestic and foreign investors.

Political, Economic, and Legal Climate FX rate has rapidly declined by 40%, due to discrepancies between official and actual spot rates. 1994: government foreign currency reserves increased by more than 50% Possibility for 20% withholding tax in the future; currently, 10% withholding tax warranted by treaty with the US Stable but aging leadership of Deng Xiaoping Almost no trade deficit No withholding tax on dividends or capital gains earned by foreigners, but no guarantees for the future

PRCs Power Industry PRCs power Industry is overseen by the Ministry of Electrical Power. It has the following attributes: Scarce commodities in industrialized areas Power generation and distribution overseen by China Huaneng Group Huaneng Power International Development Corporation (HPIDC), a joint venture with foreign investors, to develop power plants and distribute power in the fastest growing provinces Many new plants needed to accommodate growing demand No direct competitors Key Factors for Success Due to reforms since 1978, the amount of Foreign Direct Investment (FDI) has growing tenfold. It is necessary for foreign investors to: Understand the PRCs main strategic goals and needs, which include: o Building reserves of cheap foreign capital to foster economic growth, finance positive NPV projects, and open new investment opportunities for Chinese firms o Modernizing technology to improve power production o Expanding the power sectors capacity to match increasing demand Invest with partners that have experience in dealing with foreign investors, strong relationships with national and local governments, and good market leadership.

Be an investor of a powerful industrialized country, in order to have strong bargaining power, prevent unfair treatment, and take advantage of stronger currencies and larger stock exchanges. HPIs Strengths and Weaknesses

Strengths Strong connections with central and local authorities: -HPIDC, a Chinese government-foreign joint venture, is the major shareholder (54%) of HPI, -Local government investment companies own the remaining shares, -HPI's managers are former top management of HPIDC and Ministry employees

Weaknesses Dispersion of HPI's power plants: 1,600km distance between each of five coastal provinces -Far from coalfields -Primitive transportation infrastructures

Reliable plants: Using modern technology from abroad, more reliable than the average PRC power plant

Issues of Insurance: -Lack of insurance for business interruption -Lack of insurance for third-party liability

Rapidly-growing target market: 23% of the population, 31% of the national GDP

Issues of Allotment: -No guarantees that the company will continue to receive transportation, coal and oil allotments; as such, market prices are much higher Potential Shortage of Skilled Operational Personnel: -If expected rates of growth in electrical production occur, HPI could face a shortage of skilled operational personnel - Expensive foreign engineers

HPIs increasing profitability and efficiency: Net profit margin growth of 1.1 pts; plants completed on time and within budget

Sustainable profitable activity: Because HPI is the exclusive developer of new planned plants in provinces, it will have a guaranteed rate of return on electrical generating assets.

HPI Opportunities and Threats Opportunities Threats

High demand for HPI securities at NYSE

Risk of Natural Disaster

Broader international exposure Access to many international and institutional investors Exception for Chinese companies to present only 2 year audited financial reports

Risk of Equipment Breakdown Risk of Labor Disruption Dispersion of plants

Logistics and control problems Environmental protection laws and regulations. Government support may not last long