The Deloitte Research Monthly Outlook and Perspectives
29 May 2020
Jobs will be underpinned by focused fiscal reliefs not a GDP growth target
The delayed Two Sessions have not delivered surprises on either growth target or stimulus. Assuming Q2 will have a positive GDP growth rate, China does need a strong dose of counter-cyclical measures and improved external environment in order to achieve above 3% in 2020. The question is whether such growth target would resurface in 2021. By emphasizing the importance of employment, policymakers have essentially made job creation a much higher priority than headline economic growth. In our view, this is a right move because an unrealistic GDP growth target would imply wasteful investment and a whole host of negative consequences such as worsening excessive capacities of industrial products. If the Government really wants to prevent large layoffs, fiscal capacity should not be a binding constraint at this juncture.
On employment, the question which seems to have perplexed investors is whether a much lower GDP growth rate in 2020 would result in a sharply rising unemployment rate? It is true that the goal of additional job creation in 2020 was set at 9 million, comparing to what has achieved of 13.5m and 13.6m in 2019 and 2018 respectively. However, if policymakers make unemployment prevention the top policy priority, fiscal outlays could have been spent more judiciously unlike in the past when jobs were tied to large investment projects. A key lesson from covid-19 is policymakers in many countries have effectively implemented schemes such as PPP (Payroll Protection Program) in the US in an effort to minimize job losses by extending loans to SMEs. Such schemes are widely implemented in most developed countries with reduced red tape unlike fiscal reliefs in previous downturns. In Asia, Singapore has used two supplementary budgets to unveil measures to support SMEs. In fact, the loans which are extended to firms for keeping their employees on the payrolls will be converted into grant. Could China unveil similar schemes? Yes, but not in the same vein. Throughout the outbreak, China's system has demonstrated several remarkable strengths: 1) mobilize resources in containing coronavirus; 2) convince the market that pockets of financial stress is unlikely to manifest into systemic risk; 3) pool resources to help the recovery of Wuhan and Hubei province. It might be unrealistic for China to undertake Singapore type of measures, but Beijing does have fiscal resources given low interest rates. If we look at special bond of RMB1trn which is earmarked for public health and fiscal reliefs, according to China's Finance Minister Liu Kun during the Two Sessions, it is not inconceivable to use most of it for maintaining the minimum incomes of millions of unemployed.
The magnitude of stimulus falls right in the middle of market expectations of RMB7trn to RMB10trn. 2020 fiscal deficit is projected to be RMB8.5trn with breakdown of RMB3.76trn (general deficit), RMB3.75trn (designated for local governments) and special bond issuance of RMB1trn (post-covid recovery). As we have been arguing all along, policymakers would like to avoid another flood irrigation type of stimulus as in 2008. Fiscal expansion aside, monetary policy is likely to stay accommodative in 2H. The PBOC could cut reserve requirement rate by another 100bps this year. There is also room for the PBOC to guide USD/CNY higher in light of dollar's continued strength. In fact, it is unlikely for the greenback to retreat before many emerging markets whose debt crisis sees resolutions. Therefore, the PBOC is unlikely to buck. We stick to our original forecast of 7.20 in 2020.
Chart: Debt risks in EMs will keep dollar strong
Embracing the new era of digital currency
The COVID-19 pandemic has served as a catalyst for the digital economy, heating up the race for a central bank backed global digital currency. One indication of the importance of this race is the fact that both China's central bank (PBOC) and Libra (sponsored by Facebook in June 2019) released news of their latest developments more or less simultaneously. On April 15, news of PBOC’s internal test for the app interface of their digital currency (DC/EP) wallet leaked out, telling the world that China is set to become the first economy to issue a digital legal tender. The very next day, the Libra 2.0 White Paper was released, representing the vision of the developed world, led by the US, for a future legal digital currency system. These developments have indeed brought us several steps closer to making the dream of a "legal digital currency + cashless society" a reality. However, the two approaches, that of the PBOC and of Libra, are very different.
DC/EP is significantly different from Libra 2.0
CBDC (Central Bank Digital Currency) is a digital currency issued by the central bank of a country. Because it is issued by the highest banking authority of a country, and endorsed by a sovereign nation, it has a legal status and trustworthiness that other crypto currencies don’t have. In the last few years, the move towards the introduction of a digital currency has been gradual but inexorable and several countries including Japan, the Eurozone and America have been studying different ways of making this possible. The immediate benefits of digital currency include lower costs, prevention of counterfeiting and ease of monitoring money laundering. In the long run, CBDC will have a profound impact on the business practices, financial transactions and regulatory approaches of society as a whole.
The PBOC's digital currency, officially named DC/EP (Digital Currency and Electronic Payment), is positioned to replace M0 (paper money and coins) very soon. At present, China's retail payment system is solidly dominated by Alipay and WeChat Payment. These ‘cashless’ systems of payment have been so popular that every year, the number of cash and ATM transactions have decreased significantly. Thus, the proportion of M0 in circulation is shrinking, and now accounts for less than 4% of broad money (M2) supply. After its official launch, DC/EP is likely to replace some Alipay and WeChat Payment transactions, which can help the central bank gather more comprehensive and complete data on the nature of digital transactions in the Chinese economy today. At the same time, DC/EP will also promote the restructuring of the credit system, the improvement of supervisory technology and the development of inclusive finance.
Table: difference between DC/EP and Libra2.0 (information as of April 2020)
While DC/EP is focused on the national arena, American social networking giant Facebook’s Libra focuses squarely on the international arena. Libra is positioned as a borderless independent digital currency and global payment system that transcends national sovereignty, central banks and commercial banks. It is backed by an independent non-profit association of corporates, educational institutions and multilateral institutions called the Libra Association (registered in Switzerland), a unique grouping of non-State actors who hope to reshape the global monetary system in the future. According to the recently launched Libra official website, Facebook only retains its subsidiary Calibra (responsible for Libra wallet development), while the Libra Association, a Swiss non-profit organization, is in full charge of operations management and has applied for a payment license from the Swiss Financial Market Supervisory Authority (FINMA). While the founding leadership role of Facebook has ended, the nature of Libra and its aim - maintaining the interests of a dollar-dominated international monetary system - has remained unchanged. The key to Libra getting approval from regulators around the world rests, however, with the US. The Libra 2.0 White Paper is interpreted by the market as a compromise with regulators (mainly US authorities), and differs from version 1.0 in the following way: the anchoring currencies are divided into two categories. One is the original basket of currencies, of which the dollar is likely to be the largest component, while the other is the introduction of a single stable fiat currency which can be linked directly to the dollar or the pound to keep its value stable. Chinese experts have taken a dim view of Libra, seeing it more as an attempt by the US dollar to block the internationalization of the RMB than as an independent digital currency. The launch of PBOC’s DC/EP will definitely play a positive role in the internationalization of the RMB even though that was not PBOC's original intent (replacing M0 and some Alipay and Wechat Payment transactions).
Trillions of business opportunities
The digital currency revolution is under way. Since the outbreak of COVID-19, major economies such as the Euro Zone, Canada, Singapore and Japan have stepped up their research on the CBDC, but few of them have adopted it. China’s DC/EP project was firstly proposed by Mr. Zhou Xiaochuan in 2014, the then governor of PBOC. At present, DC/EP is being tested at China’s Big Four State-owned banks and piloted in Suzhou, Shenzhen and other cities. It is expected to be officially launched soon.
DC/EP is positioned to replace M0 which is currently about RMB8.1 trillion, which means that the DC/EP volume will reach trillions of yuan. Related areas include currency issuance (core banking systems), circulation (electronic wallet, payment) and management (encryption, identity authentication), which will create a large number of business opportunities centring around the transformation of banking IT systems, payment services and encryption technologies, with a higher demand for network information security. At present, the three telecom operators, China Mobile, China Unicom, China Telecom and the Big Four State-owned banks, are participating in the pilot tests while third-party institutions in related fields will also have the opportunity to become cooperative partners of the Central Bank and provide support services soon.
The countdown has begun for issuing of the CBDC, an event that will certainly transform the Chinese financial industry, ushering in a new era for the monetary system. What remains to be seen is the quality and effectiveness of the digital currency system. However, what is certain is that the tide of change is irreversible. The DC/EP is a recognition by the government that the RMB needs to actively participate in the research, development and application of a global digital currency system in order to be a strong contender in the race for a global digital currency.
The moment for Satellite Internet has arrived
On April 20, the National Development and Reform Commission (NDRC), in a clarification to a question, included Satellite Internet in the scope of communication network infrastructure, highlighting its national strategic position and potential economic value. China is not the first in this regard. Several countries around the world have regarded Satellite Internet as a national strategy, announcing plans for the construction of a satellite communication network. In the U.S., commercial operators such as SpaceX and Oneweb are moving ahead rapidly with their satellite constellation plans and domestically, China is also accelerating its own effort. China has implemented policies to promote the development of domestic commercial aerospace and a large number of private enterprises have emerged in the ecosystem of satellite manufacturing, ground stations and ground terminals.
By the end of 2020, there will be more than 700 satellites in low-earth orbit (LEO) seeking to offer global broadband internet. Though these won’t be enough to connect all consumers and enterprises around the world, they may be able to offer partial service by late 2020 or early 2021, likely starting with the higher latitudes.
Figure: Global Satellite Internet Projects (partial)
Both traditional aerospace giants and newer technology companies are entering the market, funding, developing, and deploying mega constellations with the aim of bringing affordable high-speed internet access to the world. The profit motive is clear enough. Connecting those in currently unserved and underserved areas can create millions of new customers and enable new business models. In terms of the number of would-be customers, the size of the market is gigantic: only about 51 percent of the world’s population was using the internet as of the end of 2018. Even many developed countries do not have universal internet access, or at least access at a tolerable speed. A US Federal Communications Commission (FCC) report stated that 21.3 million Americans lack access to a broadband internet connection.
But why has Satellite Internet suddenly become such a hot topic?
Getting into orbit has become much less expensive. Satellite manufacturing and launch costs have come down dramatically since the turn of the century, thanks to new launch services and greater competition. Between 1970 and 2000, the average cost of launching an object into orbit was about USD 18,500 per kilogram. With the advent of new launch providers such as SpaceX and others, companies can now put a kilo into orbit for around USD 2,720, about 85 percent less.
Satellites and their manufacturing methods are becoming more advanced. Earlier, constellations containing hundreds or thousands of individual satellites couldn’t be built in a reasonable timeframe or at a reasonable cost. Now, with the advent of mass production in this sector, companies are resorting to a more modular design for these individual satellites, building them on standardized bus-networks with smaller and more advanced components.
The demand for connectivity has increased. In addition to the billions of unserved and under-served people in the remote or less-developed corners of the world, demand is also being driven by ever-growing expectations as wave after wave of new technologies have made it easier and easier to stay connected. As technologies advance, consumers, companies, and governments now expect to be able to stay connected no matter where they are.
But the Satellite Internet business won’t be an easy sell as operating in space and starting a new business are both notoriously hard and offer little room for error. Here are a few of the most important hurdles that companies in this nascent industry will need to clear:
Meeting service expectations. Will a company’s constellation deliver the promised speeds and latency? Will it be fast enough for high-definition video, high-speed financial trading, and near real-time control over vast networks of IoT (Internet of Things) devices?
Ensuring satellite reliability. The advanced satellite buses and the manufacturing techniques for making the new generation of satellites are relatively new and untried. While these techniques do make it possible to meet mega constellations’ short timeframes for construction, launch, and deployment, companies need to keep in mind that they should first invest in designing and testing the outputs before going into mass production. Otherwise they will not be able to create robust, reliable systems that will work for a lifetime in orbit. If there is a problem with a satellite, companies must be able to ensure that it can be quickly and safely de-orbited.
Managing space debris. Many are justifiably worried that introducing thousands upon thousands of new objects into LEO will not only crowd existing orbits, but create a dangerous environment with the potential for exponentially more collisions among satellites.
Addressing economic uncertainties. Companies and investors have already sunk billions into satellite broadband constellations. However, little is known about what these services will actually cost consumers and businesses in terms of subscriptions and user terminals — and if the cost will be competitive with more traditional alternatives. Additionally, many of these satellites have a relatively short life expectancy of less than seven years. This means that companies will need to regularly launch new satellites to replenish the fleet as well as to safely de-orbit old ones, creating ongoing operational costs and a highly dynamic orbital environment.
China’s EV charging push: Old wine in new bottles, or not?
Under China’s “new infrastructure initiative” (investment spree) , charging stations, along with 5G stations and five other sectors, have been singled out as key areas to pour money into. The government estimates that the sector will attract about RMB10 billion in 2020 alone, adding about 200,000 and 400,000 chargers for public and personal use respectively, and 48,000 new charging stations.
Chart: Electric vehicle to charger ratio by end of 2019
China’s NEV charging industry has known numerous ups and downs since 2014 when private enterprises were first allowed to participate in the sector, going from investment binges to a wave of bankruptcy filings in less than 6 years. The number of charging station companies dropped from 1,000 at its height to less than 100 by the end of 2019 and even now the majority of them aren’t able to make a profit. In the meantime, the market has become highly concentrated with the top 3 companies having about 70% of the market share.
So, will it be déjà vu all over again?
We believe that the charging industry – once accused of “aggressive investment and reckless expansion” - will take a completely different approach this time around.
The biggest difference is the change in business model. National grid companies, the leading players in the EV charging industry, intend to transform themselves from asset-heavy to asset-light companies. In order to do this, they will form partnerships with different parties (real estate companies, auto dealerships, parking lot operators) to reduce their share of the initial investment outlays for construction. Meanwhile, the State Grid Corporation of China (SGCC) has decided to improve interconnection among existing charging points by incentivizing personal users and small operators to share their facilities, thereby enabling SGCC to enlarge the size of its charging network (self-built and third parties).
Another key change is the movement towards a vehicle-to-grid (V2G) format. Chargers will be reconfigured or newly built to be bidirectional, through which EVs are able to not only import electricity but feed electricity stored on their batteries back to the grid. The “new infrastructure initiative” is all about integration -- encouraging traditional industries to leverage cutting-edge technologies and making city infrastructure more intelligent by incorporating ICT. Electric vehicles are the best means of connecting the utility and transportation sector. In the context of V2G, an electric vehicle recharges its battery during off-peak hours when electricity prices are low, and discharges and sends excessive electricity back to the grid during peak hours under the premise that the vehicle has adequate power for its normal operation. Ideally, the car owner can make a profit by selling excessive electricity and charging back up regularly in exchange for a lower charging rate.
The SGCC recently launched a V2G pilot program in the north eastern provinces of China by allowing electric vehicles there to participate in their “load shifting and peak shaving” (削峰填谷) project. The underlying principle of the vehicle-to-grid (V2G) project is to balance demand and supply on-demand. It works as follows: electric vehicles embedded with V2G solutions charge twice during off-peak hours (once during the day and once at night), thus avoiding electricity consumption surges significantly. They discharge twice at times of peak demand (both daytime and night) in a way that compensates for peak load. The V2G program is also expected to be financially beneficial to charging station companies as they bring in additional revenue from trading electricity and providing load balancing services.
Chart 2: Evolution of vehicle-grid integration
Last, but not least, a highly connected charging infrastructure will become an important data portal for various parties. For instance, the announcement of the “new infrastructure” investment has not only attracted hardware makers and network operators, but also auto OEMs, mobility platforms and mapping companies which are more interested in acquiring data regarding locations, real-time status (such as charger availability and pricing) , numbers of chargers, and utilization hours. Some are taking a further step by connecting data interfaces with charger operators in order to offer users with appointment, navigation and payment services.
Take auto OEMs for an example. They are eager to exploit the potential value of data such as users’ charging behaviour and battery lifespan so as to support R&D in upcoming models and to develop battery recycling solutions. As for the grid companies, their upgraded investment in charging stations is part of the efforts to develop a smart grid strategy. They’re eyeing batteries in electric vehicles as ideal solutions for a distributed energy resource and load management system. Besides, the two national grid companies, not content with the current situation of only being utility providers, have set ambitious goals for the EV charging sector by expanding their presence from highways and public roads to residential buildings and parking lots as well as extending V2G pilots to a larger commercial use.
The old era of land grab expansion is gone. This time around, in the context of the “new infrastructure” spending plan, the EV charging sector is determined to make the integration of transportation and the electricity grid become a reality through V2G technology. Various players up and down the industry chain are ramping up investment while at the same time taking care to get the biggest ‘bang’ for their buck.