Huaneng Power International Inc.

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Question No. 1
You have been hired as an international investment banker by a large U.S. institutional investor who is considering purchasing HPI stock. Provide an analysis of i) China as an investment destination, ii) key success factors, and iii) HPI's strengths and weaknesses.

China, officially the People's Republic of China is the world's largest country by population and one of the largest by area, measuring about the same size as the United States. The country's varied terrain includes vast deserts, towering mountains, high plateaus, and broad plains. Beijing, located in the north, is China's capital and its cultural, economic, and communications center. Shanghai, located near the Yangtze, is the most populous urban center, the largest industrial and commercial city, and mainland China's leading port. One-fifth of the world's population--1.2 billion people—live in China. China recognizes more than 5O national minorities and many different regional languages. As a result of the reforms of the 1980s and 1990s, the Chinese economy grew almost 10 percent a year from 1980 to 2005, making it one of the largest economies in the world in the early 21st century.

China also opened its market to the outside world. To help quicken the pace of modernization, the state encouraged foreign investment and the import of advanced technology. In 1980 China began establishing special zones for foreign investment. The original four were called Special Economic Zones (SEZs) and consisted of Shenzhen, Zhuhai, Shandou, and Xiamen, all in southeastern China. By the late 1990s a variety of similar types of zones had been added, including a fifth SEZ, Hainan Island.

Most zones are located in urban economic centers, particularly coastal cities, cities along the Yangtze River, provincial capitals, and cities and towns along China's borders.

In 1992 the government announced the goal of establishing a socialist market economy, meaning a market economy led by the CCP. To accommodate this change and other economic reforms, the government has shifted its role in the economy. Under the planned economic system, the state determined production and pricing. In a market economy, however, consumer demand for goods and services determines production and pricing. The Chinese government's new role involves creating a stable and competitive economic environment through the application of laws and regulations.

Deng and Jiang's reforms in the 1990s were particularly successful at stimulating economic growth, but they also created problems for the Communist leadership. China's foreign debt began to increase rapidly, and growing consumer demand led to rising inflation.

Since the early 1990s, the government has allowed foreign investors to manufacture and sell a wide range of goods on the domestic market, eliminated time restrictions on the establishment of joint ventures, provided some assurances against nationalization, allowed foreign partners to become chairs of joint venture boards, and authorized the establishment of wholly foreign-owned enterprises, now the preferred form of FDI. In 1991, China granted more preferential tax treatment for Wholly Foreign Owned Enterprises and contractual ventures and for foreign companies, which invested in selected economic zones or in projects encouraged by the state, such as energy, communications and transportation.

China also authorized some foreign banks to open branches in Shanghai and allowed foreign investors to purchase special "B" shares of stock in selected companies listed on the Shanghai and Shenzhen Securities Exchanges.

During the four years to 1993, GNP (at current market prices Rmb million) had expanded by +96% or +18% CAGR 1989-93 (reviewed from inflation +51% or 11% CAGR 1989-93) to Rmb 3,138.0 billion.

Foreign investors often quote China as having 1.3 billion consumers, and with urban incomes growing 14% a year since 1978, often think that great numbers of unserved customers are...
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