China's economic and industry outlook for 2023

Economy

Policy support to unleash revenge consumption in the year of the rabbit

China’s management of Covid-19 has seen a dramatic transformation over the last month of 2022. On the latest developments, according to China's National Health Commission on December 26, all restrictive measures including quarantines and home observations for international travels will be scrapped since Jan 8, 2023. China's borders, which have effectively been closed for nearly three years, will therefore reopen in 2023. The infrastructure of mass PCR testing and movement tracking through telephone carriers were phased out. Even those who have not fully recovered from the virus are being encouraged to go back to work this week. In light of these changes, assuming adequate policy support, we see our 2023 GDP growth forecast of 4.5%, previously viewed as optimistic, as very much feasible. Of course, the decision taken by the government to bring an end to the zero-Covid policy has raised a few questions as well, however. Firstly, why now? Second, is China ready for such an abrupt exit in the midst of the winter flu season and while the roadmap remains unclear? And finally, will the economy be staging a strong rebound led by revenge consumption?

Let us address the questions above one by one. It is easy to say that more preparations ought to have been made before such a major relaxation to the policy in early December. But the reality is that such decisions are often taken due to various pressures. By Q4, the economy was already facing several headwinds such as a deceleration of the property sector and slowing export growth (2023 could be a more difficult year for China's external sector). Society had also begun to exhibit increasing fatigue over the zero-Covid policy, and even more so towards its over-zealous execution such as rampant lockdowns in many cities despite the central government's ‘20 measures’ around optimizing Covid management. As the saying goes, the rest is history. In hindsight, more efforts could have been made to roll out booster vaccines among the elderly and one could argue that the government should have procured cold medicines and then distributed them to all households. Nonetheless, financial markets have rewarded China's swift decision by staging a major rally of almost all China-related financial instruments from the Hang Seng Index to the RMB exchange rate within weeks. Investors' rationale was simple – ending the zero-Covid policy has underscored the ability of policymakers in their cost-benefit analysis. Meanwhile, in many major cities, most people have decided to stay home as the virus rips through the country. According to a survey through Weibo which garnered nearly 5,000 responses, more than 60% of people in Hebei, Beijing, Hubei, Sichuan and Liaoning have been infected.

Various models have projected number of Covid-induced fatalities, ranging from 0.05% to 0.1% of total population. Such predictions have been made based on what transpired in Hong Kong earlier this year. But much of fatalities could have been avoided should vaccination rate among the old be raised. But Hong Kong's experience in dealing with Covid since March this year suggests that vaccine mandates caused the curve to flatten quickly. The challenge for China, however, is that medical facilities in smaller cities and in the countryside are inadequate (the number of hospital beds per 1,000 people in rural areas across most provinces is only around five), while the Chinese New Year holiday presents an additional test as millions of migrant workers will return home for the first time in three years. On the economy, assuming that consumers are carefully gauging the impact of a flattening curve over the next few weeks, December data will likely stay sluggish, similar to what we have seen in November (as evidenced by PMI, retail sales and property investment data). As such, 2022 GDP growth might slightly undershoot our forecast of 3.5%. This is to be expected as it takes time for the general public – especially those who have not contacted Covid – to accept the notion that the virus is no more deadly than seasonal flu.

From the standpoint of policymakers, illusive revenge consumption is not the only risk. At the most recent Central Economic Work Conference, three chief economic difficulties were identified: weakening demand, supply chain shocks and subdued expectations. If weakening demand is reversed, private investment must be jump started while revenge consumption is needed. Supply chain stabilization is about improving the business environment against a geopolitical backdrop fraught with areas of contention. In concrete terms, this is about out-competing other investment-led markets such as the ASEAN region and India who may benefit from investment moving away from China. The good news is that financial investors' expectations have significantly improved since the second week of November thanks to the relaxation of Covid restrictions and stepped-up policy support to the ailing property sector. Relaxing Covid management controls is not only about demonstrating policymakers' capacity to weigh up the acute trade-off between economic growth and public health, but it is also a powerful move to dispel investor doubts about the priority of economic development as part of China's overall policy agenda.

Chart: Investors have turned bullish on the back of ending zero policy and reflation policies

Source: Wind

The chief risk faced by consumers remains the uncertainties stemming from the property market, not because the sector presents a systematic risk (we have been consistently downplaying such a scenario on the basis that the Chinese government has enough means of preventing such risk), but because consumers might be increasing their savings if they do not see much upside to holding real estate as a financial asset. Unlike in most countries, the lion’s share of Chinese consumer wealth is tied up with the property market and Chinese consumers have a cultural affinity towards brick-and-mortar. Of course, home affordability has become a pertinent social issue. To a certain extent, the mentality of tangping (lying flat) among China’s youth was partially caused by extremely high property valuations in major cities. The question is how to execute the task of raising homeownership while also preventing ‘bubbles’ from arising. The long-term solution is for local governments to move away from relying on land sales as their main source of fiscal revenue, but such a shift could only be made gradually under the pre-condition of developing a viable municipal bond market. In the short run, a stable housing market is the key to consumer confidence. In practice, this means that continued support for property developers is necessary because the aim is to complete unfinished projects, provide incentives for healthy developers to increase investment and to consolidate the industry. This is a tall order, but liquidity has returned to offshore USD bond markets within a short period of time on the back of a slew of policy support from liquidity injections, debt issuance and revived equity listing options based on policy directives from the China Securities Regulatory Commission (CSRC) on December 21, 2022.

Assuming the property market will be stabilized, stronger property developers will emerge on the back of further policy support and the PBOC's accommodative monetary stance. With the Fed heading to the final innings of their tightening campaign, China's monetary easing certainly faces fewer constraints. This is particularly true as USD/CNY hovers around 7.0, compared to 7.3 two months ago.

If consumers were to become more confident and embrace revenge consumption, China could avoid a large fiscal stimulative package which would have to target infrastructure. However, the biggest hurdle remains reviving private investment beyond the property sector. That is why the Central Economic Work Conference has prominently emphasized the role of the private sector by stressing the principle of the ‘two unshakables’ – to develop the public sector in an unshakable manner while encouraging and supporting the private sector in an unshakable manner. During the conference, platforms were singled out for their key roles in helping Chinese companies develop and internationalize their operations. We anticipate that concrete measures will be unveiled following such signals, such as the tutoring sector being rehabilitated. The underlying point is that policymakers appear to have a sense of urgency to boost consumption and private investment as external demand could face a more challenging environment in 2023. All in all, we see 2023 GDP growth narrowly exceeding our original forecast of 4.5%.

Energy

Adjusting to a low carbon future

Under China’s 30/60 carbon targets, energy and resources industries will strive for low carbon goals, not just paying for the emission but also benefiting from sustainability. Here are some trends worth watching:

Renewables capitalize on a green wave with next-gen technologies poised for mass production

Despite geopolitical tensions and trade uncertainty, a large scale expansion of the renewables sector is underway as there is a consensus around the need for a low-carbon energy transition. This, however, will only be possible with secured supplies. China has set a target for renewables to supply 33% of national power consumption by 2025. Renewable energy – mainly solar and wind energy – will meet over 70% of China’s additional electricity demand in the next three years as the nation aims to hit peak coal consumption by 2025 and peak carbon emissions by 2030.

Renewable technologies are evolving fast and will reshape the market landscape in a few years. In the case of solar panels, while the dominant Passivated Emitter and Rear Contact (PERC) technology is hitting its efficiency ceiling, next-generation technologies such as Tunnel Oxide Passivated Contacts (TOPCon) and Hetero-junction Technology (HJT) are poised for mass production on a gigawatt scale in a few years. Longi Green Energy’s HJT silicon solar cells have achieved a 26.81% efficiency rate in turning sunlight into electricity, 3% to 4 % higher than the mainstream PERC solar cell. In general, for every percentage point of efficiency improvement, a decrease of 3% in the electricity generation cost is possible. Nearly all of the major manufacturers now have this kind high-performance products in their portfolios. The competition will be how fast these manufacturers can realize mass production at a reasonable cost.

Fig 1. Trends for average efficiency of photovoltaic cells

Source: CPIA, Deloitte Research

Battery metals become the main target for M&A

While the decarbonization strategy is driving the rollout of new technologies, it is also pushing up demand for raw materials. For many raw materials, the increased demand will outstrip the sector’s ability to ramp up supply. Lithium, for example, may face a 150,000-ton gap between mining capacity and raw material demand by 2030, according to the IEA.

To ensure supply, Chinese enterprises are exploring and buying lithium projects both domestically and globally. A lot of mergers and acquisitions have taken place in the mining sector since 2022. Overseas acquisitions have also been ramped up. In January this year, Zijin Mining Group completed the acquisition of Canada's Neo Lithium Corp for $737 million and since then, Chinese upstream lithium firms have been expanding their overseas assets all through the year. To secure access to upstream resources, downstream battery and electric vehicle manufacturers also increased investment in battery metals. In March this year, BYD acquired over 5% of Shangxin Lithium Energy, while battery giant CATL was confirmed in November to be the first-in-line investor in Snowway Mining Development, the owner of a lithium ore mine in southwestern China.

Oil companies ramping up petrochemical production

Today roughly 80% of every barrel of crude is used to make gasoline, diesel, and jet fuels, with the rest going into petrochemical products. As demand for petroleum fuels gradually declines, the amount of oil used for petrochemicals will grow. Oil companies are expanding the scope of their operations to adapt to a decarbonizing world, investing in low-carbon energy and ramping up petrochemical production.

Fig 2. Apparent consumption trends of Ethylene, Gasoline and Diesel

Source: Wind, Deloitte Research

Sinopec plans to invest more than RMB 60 billion in its 11 high-end new material project clusters, with its 1.2 million tons/year ethylene cracking unit as the core business. The project broke ground on March 16 this year in Tianjin’s Nangang Industrial Zone. In October this year, the quenching oil tower of ExxonMobil's ethylene project in Huizhou was successfully delivered, bringing the first phase of this project even closer to completion. With an annual output of 1.6 million tons of ethylene, the project is expected to achieve an operating income of RMB 39 billion per year.

How is this relevant to carbon reduction? Oil companies can take several other steps, not just the ramping up of the petrochemical business. Starting with increased efficiency of production and saving energy to reduce carbon emissions, they then develop sustainable zero carbon alternatives for petroleum-based chemicals and ultimately deploy CCUS or carbon conversion technologies to strike for negative emissions.

Circular economy inspires the upcycle of CO2

Instead of capturing CO2 and storing it underground, a number of companies are now trying to recycle it into products that are both virtuous and profitable, by using renewable energy or excess resources that would otherwise be wasted. The kind of ‘virtuous cycle’ will make it possible reduce the CO2 that the industry releases into the air in the manufacturing process and lower demand for fossil fuels used in the process.

However, recycling CO2 is an increasingly crowded field, driven by the falling costs of renewables and rising carbon taxes and other climate incentives. At the same time, chemists have improved the efficiency of the underlying carbon capture technologies. A number of companies are trying out new CO2 recycling methods, ranging from co-opting biological process to using electrochemical cells as a catalyst for CO2 conversation to make other chemicals.

A chemical plant with the world’s largest facility for recycling CO2 into fuel is under construction in Tongyezhen, Henan Province. It will combine CO2 from a coking furnace with hydrogen to produce methanol. The plant is expected to recycle about 160,000 tons of CO2 per year, equivalent to the emissions from tens of thousands of cars.

As recycling CO2 gets more popular, debate on its validity rages on. Some argue that the recycling only delays the CO2 emission into the air and others believe the demand for CO2-recycled products are limited. Thus, to maximize climate benefits, it makes more sense to lock recycled CO2 into products that last for decades, for example, polymers and building materials.

Logistics

Innovation-driven, balanced development

From 2022 to the next year, China's macroeconomic structure will be reinforced under the rubric of "stability", and more emphasis will be placed on the quality of economic development rather than its pace. In this context, China's logistics market will also shift orientation from "high quantity" to "high quality" movement of goods. More attention shall be paid to technological innovation and how it can improve the quality of supply chains. At the same time, green logistics will take centre stage, rising to the level of national action.

China's logistics industry will show a stable development trend.

In the first three quarters of 2022, China's total logistics revenue reached RMB 247 trillion, up about 3.5 percent year on year, according to data released by the China Federation of Logistics and Purchasing. However, the pandemic dampened performance in the last quarter, especially in November-December. As a result, we conservatively forecast that China's logistics industry market size in 2022 will be the same as last year, around RMB 336 trillion. In 2023, with the rollback of the pandemic restrictions, the logistics industry will show growth again, with the total revenue reaching about RMB 350 trillion.

Chart: The total revenue of China's logistics Industry (RMB trillion)

Source: Wind, Deloitte Research

China will build a suitable supply chain and logistics system for domestic and international goods.

With a safe and controllable circular ecosystem as its development goal, China will continue to support the export oriented industrial network and its domestic supply chains. Priorities include developing cross-border e-commerce and overseas warehousing, expanding regular cross-border delivery channels such as international aviation, railway, and shipping, strengthening the RCEP regional service network and promoting the upgrading and transformation of logistics enterprises from a single supplier service system to a comprehensive logistics service provider system.

We will actualize the goal of a nation with developed transportation networks by improving the quality of transportation service.

The government will improve the overall functioning and deployment of infrastructure networks. To do this, it is making comprehensive plans for upgrading urban and rural infrastructure networks and enhancing delivery and logistics supply capacity and service quality to rural areas. To improve the efficiency of comprehensive transportation networks, China must continue its structural adjustment of transportation, strengthen the fast freight channels amongst different hubs, and construct a multimodal transportation information system.

Building a green logistics service system

As an important link connecting production, circulation and consumption, the sustainable development of transportation logistics will garner more and more attention nationwide. To achieve the green, sustainable development goal, logistics enterprises still need to connect multiple links in warehousing, transportation, packaging, and recycling. It must also implement a system of certification of the carbon footprint of the logistics industry. Research and development of green and low-carbon technologies for the transport sector and the promotion and application of green manufacturing and service systems are also priorities.

The impact on Chinese logistics enterprises is shown in the following three aspects.

Enhance end-to-end integrated logistics service capabilities

With a rising demand for reliable supply chain logistics systems catering to both domestic and international product flows, the development of logistics capacity of enterprises is bound to be more integrated with the industries they serve, which requires that Chinese logistics enterprises strengthen their "end-to-end" capacity construction. In order to create a global logistics service, Chinese logistics enterprises need to integrate various resources and elements more efficiently at home and abroad. To do this, they must improve their ability to collaborate across enterprises, industries and regions, and achieve the same capacity building skills as the global supply chain management system.

Reduce cost and increase efficiency with the help of digital intelligence

Becoming both more digital and more intelligent is the key to reducing costs and increasing efficiency. Logistics enterprises need to accurately control the whole process of logistics, improve their visualization of warehousing and transportation data, and raise the level of logistics system analysis, decision making and intelligent execution. This will enhance operational efficiency and improve production planning, inventory management, supplier replenishment, reverse logistics processing and other links in the chain. Finally, it is necessary to connect the data and business of upstream and downstream enterprises, thus fully integrating the digital world, physical world, business and customer experiences. In time, these improvements will lead to new innovations and application models, transforming the industry.

Diversified business expansion through mergers and acquisitions (M&A)

M&A is a crucial link in the process of growing into a large logistics enterprise. Through M&A, an enterprise can expand its scale, multiply its channels, broaden its range of business, accelerate the pace of digital transformation, and increase its influence. This has been demonstrated by two logistics M&A cases this year: Jd.com's acquisition of Deppon broadened its business range, while the merger of G7 and Easy Flow Technology strengthened the comprehensive digital service capabilities of the resulting company.

TMT

Fully focused on self-reliance 

China's long term goal has always been to cultivate an independent high tech ecosystem and achieve high-quality development of its digital economy. In 2023, we will continue to see the country focusing its efforts on better securing its supply chain resources as well as strengthening supply chain resilience, and focusing on key areas such as artificial intelligence and integrated circuits. The integrated development of the digital economy and the real economy will be continued while pursuing new driving forces for economic development such as the Metaverse .

AI in chip design: doing it faster, cheaper, and more efficiently

We predict that the world’s leading semiconductor companies will spend US$300 million on internal and third-party AI tools for designing chips in 2023. That number will grow by 20% annually for the next four years to surpass US$500 million in 2026.

Major chipmakers and designers are using advanced AI to design chips today. Future chips may be so much more complex that they will require AI tools to create them. Advanced AI will also become available through cloud-based EDA services, expanding the total addressable market and empowering smaller companies. In the future, big semiconductor companies could beef up their GNN and RL capabilities and offer design and co-design services to their top customers, including co-developing vertical-specific chips.

Radiation-hardened chips take space tech and nuclear energy to new heights

Ionizing radiation, either in space in medium or high orbits, or on earth in nuclear reactors, is bad for chips. It can cause errors or degrade the chips over time. Prior to recent advancements in radiation hardening, chips in space were generations less powerful than those used in even simple consumer devices. One way of making chips rad hard is physical: this can rely on shielding, special silicon technologies, or by using gallium nitride (GaN) or silicon carbide (SiC) compound semiconductors. We predict that the radiation-hardened electronics market will top US$1.5 billion in sales globally in 2023.

China has many achievements in this field: it has successfully developed a number of aerospace core integrated circuit products such as FPGA and CPU, which have been used in major aerospace projects such as Beidou navigation, manned spaceflight and moon exploration. In 2023, China will further the development and research of radiation-hardened technology. It has committed to increasing the local production of radiation-hardened chips. By integrating AI/ML capabilities alongside radiation-hardened chips onboard, space equipment will potentially be able to handle all advanced analytics by itself—image detection, image classification, automated decision, timely action.

VR’s move into mainstream depends on content

Applications that capitalize on virtual reality’s unique capabilities will be key to enabling VR to enjoy significant growth. We predict that the VR market will generate US$7 billion in revenue globally in 2023, an impressive 50% increase over 2022’s US$4.7B. About 90% of revenue (US$6.3B) will come from VR headset sales, of which 14 million units averaging US$450 each are expected to sell in 2023. VR content — principally games, but also some enterprise applications — will see revenues of approximately US$0.7B in 2023. We predict that the installed base of actively used VR headsets will reach 22 million in 2023, almost 50% higher than that of mid-2022.

New VR headsets for the 2023 model year should offer higher frame rates, higher-resolution displays and enhanced spatial audio. Games are likely to be one of VR’s major applications in the consumer space, particularly in immersive genres such as first-person shooters, racing games, and simulators. For enterprise uses, VR’s opportunity lies in simulating work experiences, visualizing enterprise and industrial-systems, and overcoming the challenges of distance.

For consumer VR to thrive, dedicated VR apps will likely need to see greater amounts of innovation. As of mid-2022, VR apps only numbered in the low thousands, compared to millions of smartphone apps. For enterprise VR, leaders should be very clear about which applications are uniquely or best suited to each device, given that the business applications are still developing in the near term. Businesses may also need other capabilities to support VR, including computation, connectivity, online security, technical support, and potential compliance support for data collection or deployment in critical use cases.

Value creation in the Metaverse

Currently, the public's impression and perception of the Metaverse comes more from gaming or social apps, but the future of the Metaverse is much more than that. We expect that the true value of the Metaverse will become evident in 2023 in the following five areas: 1.) Entertainment: activities such as gaming and social, into which players enter for immersive and realistic experiences that generate pleasurable gaming and social experiences; 2.) Experiencing a second life through creative collaboration platforms where creators build their own personal worlds in virtual space, allowing individuals the opportunity to experience life differently from the real world; 3.) Promoting efficiency and enhancing productivity in the real-world sectors of education, production and other areas not limited by time and space; 4.) Creation of wealth through trading of virtual currency and goods; 5.) Achieving influence and social status in the real world through participation in virtual communities enabled and fostered by the Metaverse.

The Metaverse, however, is still in an embryonic phase of development and there are still some significant bottlenecks at this stage. In terms of connectivity, people's access to the Metaverse is still dominated by wearable devices and human-machine interaction. But in the future, access and interaction will be more flexible and convenient. AR/VR is already moving towards light weight tools and convenience, but we predict that in the next 10 years AR contact lenses will mature.

Towards faster climate action

Deloitte’s 2022 CxO global sustainability survey found that technology executives viewed net-zero as a more urgent priority. And we predict that in 2023, the tech industry will move faster on climate action than other industries as more tech companies say they’re aiming for net-zero by 2030 than non-tech companies.

To meet the climate change challenge, tech leaders should start thinking about how their company’s mission, operations, business models, and products and services will need to change in order to become truly ‘green’. This can be done in the following ways:

1) Commitment to net-zero. A critical first step is to be clear about the company’s plan and timeline for reaching net-zero. Leaders should consider having their company’s reduction targets validated by an external organization.

2) Improve management and governance. Tech companies may need to update management and governance, such as creating a senior position to drive climate initiatives, linking executives’ compensation to sustainability performance, and improving data management processes to help ensure accurate ESG disclosures.

3) Adapt operations and products. Organizations may need to make buildings, equipment, and manufacturing more energy-efficient, use more sustainable materials, reduce travel, train employees on new practices, and purchase renewable energy. They may choose to double down on products/services with the most potential to reduce carbon.

4) Address the value chain. In the tech sector, value chain emissions are estimated to be 7 times greater than operational emissions. Organizations can work collaboratively with suppliers and partners to meet sustainability criteria.

Automotive

From niche to mainstream, the road to wider EV adoption

China's auto industry has experienced both ups and downs in 2022. The supply side has gone through major headwinds including commodity price hikes, production interruptions and supply chain crunches caused by the pandemic. On the demand side, loss of consumer confidence and weakened spending because of the pandemic and economic slowdown weakened consumer demand. However, with the introduction of stimulus measures in many provinces, the auto market has gradually come out of the doldrums and is heading for a rebound. Sales of new energy vehicles are leading the way with a penetration rate of 17% at the beginning of the year increasing to 27% in the first ten months. This year, annual sales are expected to double to 5.6 million units. In contrast, gasoline cars have experienced negative growth in sales three years in a row and the gap is expected to widen to 13% in 2022. The decline of the gasoline car market is one indicator of the successful penetration of new energy vehicles (NEVs) in China.

Looking ahead, there are many challenges facing the electric vehicle industry. These include the expiration of financial subsidies, constraints in mineral resources, diversification of consumer groups with increasingly sophisticated demands, and insufficient charging facilities with low charging efficiency. This is why the industry has yet to reach a consensus on whether the penetration rate of new energy vehicles, after hitting the 30% threshold, will quickly break through the 40% ceiling and climb to 50%, or whether the momentum of growth will slow down after hitting 40%. In addition to China, many countries around the world have announced plans to phase out gasoline cars, and sales bans will be implemented on them as early as 2030. So, the question remains - are the EV manufacturers, suppliers along the value chain, power grid companies, and city operators ready to face the whole of society transitioning towards a fully electrified future?

We believe that for EVs to go from niche to mainstream, they will have to overcome the following obstacles, during which technological innovations and new business models will have important roles to play.

Selling disruptive products to the mainstream

The proliferation of innovative products often follows an S-shaped curve. An industry in the early stage attracts mostly early adopters. As the technology matures and costs drop, more and more mainstream consumers become target users. So far, new energy vehicles have mainly been targeted at early adopters as product positioning emphasizes differentiation and personalization, the characteristics early adopters look for. These kinds of consumers are more open to new things, and their ability to pay is greater. However, in order to mainstream EV, manufacturers will have to target customers who usually pay more attention to reliability and cost, and often do not have high tolerance for the complications that accompany the adoption of new technologies. How to meet the needs of mainstream consumers will become the top issue for EV makers in the near term.

Mineral constraints

With rising penetration of EVs, establishing a safe, stable, and sustainable battery supply chain has become the focus of the global EV industry. The supply chain conundrum centres on three aspects: tight supply, uneven distribution of resources, and the environmental impact of mining. The price of lithium carbonate has increased tenfold in the past two years. Although many believe that with the newly announced lithium mine coming online the lithium supply crunch will be alleviated by 2025 at the latest, in the long run, lithium may face a long-term supply shortage. In the global transportation arena, electric vehicles have had centre stage in the decarbonisation drive. The increase in demand will inevitably lead to more frequent mining activities. How to ensure responsible mining has become the key factor influencing the sustainable development of the EV industry. To establish an economically and environmentally sustainable supply chain, players along the EV value chain need to make the following changes:

• Build a circular economy around batteries. Policy support and an influx of capital are accelerating the development of a circular economy centred around batteries. For example, the EU's new battery law sets minimum requirements for the recycling and reuse rate of key minerals used in retired batteries. The Chinese government is also speeding up the formulation of battery recycling management methods and corresponding standards. On the other hand, rising raw material costs have attracted investment in battery recycling from auto OEMs, battery companies, and third-party recyclers. Thus far though, investment has mainly flowed into companies focusing on greener recycling technologies and innovative business models.
• Ensure the sustainability of mining. The electric vehicle is intended as a major means to reduce dependence on fossil fuels as well as significantly reduce emissions produced by the automotive sector. But the high consumption of scarce minerals by electric vehicles has made it fall into another resource conundrum. The environmental impact and carbon footprint created during the exploitation of key minerals for EVs is far higher than that of the upstream activities of gasoline vehicles. European auto OEMs and battery companies have tried to combat this by investing in sustainable mining companies. European and American OEMs, including BMW, GM, and Ford, have signed long-term supply agreements with companies that adopt direct lithium extraction technology, which is more than 90% lower in carbon emissions than traditional lithium extraction methods.
• Follow closely the development and commercialization roadmap of alternative technologies. With the lithium supply crunch becoming more and more acute, the EV industry has turned to alternative technologies for solutions. A host of new non lithium-based batteries are under development. These include vanadium redox flow batteries, lithium-sulphur batteries, and lithium-air batteries. However, none of these technical routes can completely replace lithium batteries for now. Sodium batteries are the most highly anticipated, but due to bottlenecks such as low energy density and shorter lifecycle, sodium batteries haven’t been adopted in cars yet. However, it is expected that mass production of sodium batteries can be achieved in entry-level, purely electric models as scale production advances.

Charging dilemma

EV users’ pain point - insufficient charging facilities - hasn’t really eased. Even when the penetration rate of EVs has reached nearly 30% and the ratio of vehicles to charging piles has dropped to 2.6:1 (that is an average of 3 vehicles per one charging pile), charging facility availability remains a barrier to a wider EV adoption in the Chinese market. By examining the data, we have found that despite the growth in the total number of charging piles, EV users don’t have equal access to charging facilities. All EV models come with a portable charger that allows buyers to charge at home. However, every year less than 20% of Chinese EV buyers had their chargers built on apartment parking lots before 2021. Installing chargers in private apartment land in dense urban areas could be difficult as there’s limited space for parking and owners of parking lots need to upgrade the building’s electrical infrastructure to meet the peak electricity demand. Moreover, it is estimated that no more than 15% of Chinese households have access to permanent parking space, which puts the number of eligible households that have access to private chargers at under 420 million. To cope with the charging challenge, we recommend the following actions:

• To launch more charger sharing projects in urban areas to increase utilization of existing private chargers
• To incentivize public charging operators to build more high-power direct charging facilities on top of existing low power DC charging facilities
• To provide additional sources of income for charging operators to improve their return on investment for instance, to allow charging operators to trade on the electricity cash market by purchasing electricity at a lower rate and providing peak-shaving services for the grid to generate additional income.
  Grid overloading

With intermittent renewable energy such as solar and wind energy being connected to electric power grids at an increasing rate, the security and stability of the grid is facing numerous challenges. The charging and discharging of EVs is highly random. When we move towards a highly electrified transportation society, the charging of EVs can put burden on the power grid, especially when large numbers of EVs charge at peak hours at the same time, increasing the overall load and particularly the peak load of the grid.

According to the forecast by the State Grid Research Institute, random and unmanaged charging of EVs will lead to an increase of 153 million kilowatts in the peak load of the national grid in 2030, which is equivalent to 13% of the peak load at the present level of EV penetration (and without knowing the electric vehicle charging scenario of 2030). Thus, to stabilize the load by connecting charging stations and EVs with the grid’s network is significant both for the EV industry and the utility sector. To enable this, bi-directional charging or vehicle to grid (V2G) technology has become the focus. V2G technology treats EVs as a large source of energy that not only provides energy to power homes and vehicles but can also act as a backup storage system for the power grid. A growing number of auto OEMs have been experimenting with V2G technology with their EV customers. For instance, Ford has partnered with a local utility company on a demand-response pilot program that allows its EV users to feed energy back to the grid, helping to balance it during peak demand. From the perspective of users, consumers can use the peak and valley electricity prices of the grid to reduce charging costs, or profit from participation in the peak-shaving assistance of the grid.

Retail

The road to consumer demand recovery

It has been nearly three years since the outbreak of the pandemic, and China's consumer market has undergone several changes. In terms of the retail market, the scale of domestic online consumption continues to expand as consumers gravitate to online shopping. According to the National Bureau of Statistics, as of November 2022, the proportion of online physical goods retail sales had risen from 20.7% in 2019 to 27.1%. At the same time, due to the repeated COVID outbreaks, brick-and-mortar foot traffic has declined, and offline retail is recovering slowly. According to Win Shang, a data tracking service, the average daily foot traffic of shopping centers in the first three quarters of 2022 was 7.5% lower than in the first three quarters of 2021. Furthermore, from the beginning of 2020 to November 2022, offline retail sales of physical goods showed a negative year-on-year growth for 14 months. In terms of consumer goods, discretionary goods and essentials consumption continued to diverge. Since the COVID outbreaks, sales of food and beverages, daily necessities, and other essentials has maintained a steady growth while sales of non-essentials recovered slowly. Under the current circumstances, the consumer goods retail industry urgently needs new impetus to boost consumption.

Figure: Composition of total retail sales of social consumer goods

Source: National Bureau of Statistics, Wind

China has mapped out an outline for boosting domestic consumption and fostering a stronger domestic market in December, we believe that consumer confidence will gradually recover. Trends in the retail and consumer goods markets are as follows:

In the post COVID period, consumers will be rational, and optional consumption will rebound, but only gradually. With the optimization of COVID prevention policies in various regions, in-person shopping will gradually resume. Shanghai is a case in point: as of December 6, 2022, a negative nucleic acid test certificate is no longer required in public places such as in public transport, parks, and scenic spots in the city. With the ending of COVID restrictions all over the country, sales of consumer goods such as apparel and footwear, cosmetics, luxury goods, and in-person service consumption such as restaurants and entertainment will recover throughout 2023. The long duration of pandemic prevention policies has made consumers are rather conservative about their future income expectations. Also, consumers remain concerned about the risk of infection and minimize their exposure to public spaces. Taking all these factors into consideration, it seems likely that while consumers attitudes towards consumption will normalize gradually, revenge consumption is unlikely to occur in the short term. Hence, growth in the retail sector will be gradual.

New business models are promoting the accelerated integration of online and brick-and-mortar businesses. The pandemic changed consumer behaviour, promoting instant gratification of desires through online shopping. At the same time, the high cost of acquiring customers through online channels is a major bottleneck for consumer product and retail companies. In the future, the growth rate of online physical consumption will probably slow down, and offline retail and catering sales will recover. However, the latter need to accelerate recovery through the implementation of new forms of retail powered by digitalization. Fast demand delivery platforms such as Meituan have met the instant and contactless delivery needs of consumers and connected the supply and demand of consumers and offline physical stores, ushering in rapid development; In the future, consumers' demand for instant delivery will gradually extend from food delivery to daily necessities and lifestyle non-essential goods. On the supply side, with the gradual improvement of digital technology and supply chains, offline businesses connected to the customer through fast demand delivery platforms will gradually extend from supermarkets, convenience stores, and consumer brands to other businesses such as shopping malls, department stores, specialty stores, and even mom-and-pop shops.

2023 will see the retail market face both opportunities and challenges:

• Developing a sustainable path has become one of the keys to success in the industry. As the government advocates green consumption, green production and lifestyle, consumers are taking the sustainability of products as an important consideration in their consumption decisions. With this trend, consumer goods and retail enterprises that accelerate the implementation of green goals and deploy ecologically sustainable models of production will receive more policy support in the future.
• In the context of rural revitalization, there is still untapped potential in lower-tier cities and rural areas. The report of the 20th National Congress of the Communist Party of China (20th Party Congress) postulated that the strategy of comprehensively promoting rural revitalization and new urbanization must be advanced. Rural revitalization will more effectively promote consumption penetration across the board. The subsequent implementation of policies aimed at promoting consumption expansion, such as the construction of county-level business systems, will continue to benefit the consumer goods market, e-commerce platforms and offline retail enterprises that focus on the demand of consumers in lower-tier cities and rural areas.
• Strengthen consumer data security protection. With the rapid development of information technology, how to safeguard consumers' personal information is becoming an issue. For example, the phenomenon of internet companies using big data for price manipulation. With the promulgation of the Personal Information Protection Law and other policies, the market will be further standardized and supervised. Enterprises need to further strengthen the protection of consumer data to avoid the negative impact of consumer data leakage.
  

Government and Public Services

Digital transformation deepens as infrastructure investment emphasizes quality and efficiency

During the Central Economic Work Conference at the end of 2022, it was stressed that the country will strive to achieve an overall improvement in economic performance characterized by higher quality and reasonable growth in 2023. Shortly thereafter, the government released policies one after another to improve quality and efficiency in the Chinese economy. We can expect to see a rapid transformation in areas such as digital governance, next-gen urbanization and industrial land use so as to meet the new targets.

Digital government transformation programs enter an era of data integration

After more than ten years of development, digital governments have steadily moved from service-driven to data-driven modes of functioning. In 2021 the government proposed to accelerate the creation of a market for data in order to fully revitalize the value of data resources and promote the sharing of government data while strengthening the integration and protection of data resources. In October 2022, the State Council issued the Guidelines for the National Integrated Government Big Data System, focusing on the value of big data production factors for government affairs. The Guidelines intend to build a nationwide integrated directory of data from central, provincial, municipal, and county governments. It seeks to create a unified account of national government data and facilitate the transfer and sharing of data between regions and departments. As for data operation, following the principle of appropriate separation of management and operation, the government finds qualified and reputable third-party firms and organizations to carry out operational services, thus increasing public-private partnerships in digital governance. In 2023, with the goal of clearer government data mapping, the government big data system is moving to integrate higher-quality data. The government will also be improving primary databases such as population, natural resources, electronic licenses, as well as thematic databases that cover sectors such as health, social security, and ecological and environmental protection.

Investments in new infrastructure continue to assist urban digital transformation

New infrastructure is assisting China in transitioning from a global catcher to a leader in digital transformation. In Report on the Work of the Government (2019), the central government said will further develop next-generation infrastructure. In late 2022, the 20th Party Congress further proposed the goal of build a modern system of next-generation infrastructure. Nearly 70 central SOEs have announced increased investments total of more than 10 trillion yuan into the new infrastructure sector, covering 1,300 investment projects over the next five years. The government has requested that the scope of special bond support be appropriately expanded, with a priority placed on including new types of infrastructure projects. In the second half of 2022, the policy-based and project-based key instruments, worth 740 billion RMB, will replenish capital for special bond and facilitate the construction of new types of infrastructure, thus benefiting the development of the 5G base stations, data centers and smart transportation projects. These projects not only provide the hardware infrastructure for digital transformation, but also lay the groundwork for smart cities to implement cutting-edge technologies like digital twins and deep learning. In the second half of 2022, several cities, including Shenzhen, Shanghai, and Chongqing, announced plans for intelligent transportation systems. Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone mapped out a plan to achieve 100% coverage of cooperative vehicle infrastructure on its core urban routes by 2025. We predict a faster expansion of projects such as intelligent roads and car internet into various locations in 2023. Furthermore, urban streets will undergo a more intelligent transformation as cities move to strengthen pertinent laws and regulations to support the quick adoption of autonomous driving.

Urban renewal leading practices will apply while county area urbanization speeds up

Against the backdrop of a slowdown in the pace of urbanization, super-large and mega cities will continue to gain importance. The Report to the 20th Party Congress stipulated that “we would improve urban planning, construction, and governance and move faster to change the development models of super-large and mega cities; we will also carry out urban renewal projects and improve urban infrastructure to build livable, resilient, and smart cities.” This guidance, coming from the uppermost levels of government, has reinforced the thrust towards high-quality development of new urbanization. For large cities, urban renewal is critical for improving the quality of urbanization.
At the end of 2022, the Ministry of Housing and Urban-Rural Development issued the First List of Replicable Experiences and Practices for Urban Renewal Programs summarizing the experiences and best practices of the pilot cities such as Beijing, Shanghai, Chongqing, and Suzhou. In 2023, the pilot program is expected to be expanded to include more cities across the country. Furthermore, while China's urbanization rate of the permanent resident population has reached 64.72%, the urbanization rate of the registered population is only 46.70%, and there has been a 16-18% gap over the past decade. To increase the urbanization rate of the registered population, counties across China will speed up the urbanization process to accommodate the inflows of more rural residents who do not have urban household registration. The government repeatedly called attention to the counties' infrastructure construction deficiency in 2022, with four key directions: transportation facilities, water conservation facilities, resettlement housing, and landscape construction. In 2023, the government is expected to deploy a mixed source of funding from the fiscal budget, local-government special bonds, and infrastructure REITs to support the implementation of urbanization in the counties.

China's Urbanization Rate 2012-2021

Sources: National Bureau of Statistics, Deloitte Research

Multi-level factory floors help enhance the tax revenue of industrial parks

Increasingly limited industrial land supply has made industrial parks decide to build more capacity on certain existing pieces of land. Since 2005, industrial parks in Guangdong Province have been experimenting with multi-level factory buildings¹, which, in the following decades, was also taken up in the Pearl River Delta region. Among the 430 national industrial parks evaluated by the Ministry of Natural Resources, the floor area ratio² of industrial land in Guangdong was 1.09, 0.16 higher than the national average. In the eastern section of Guangdong, the floor area ratio reached 1.81, almost twice the national average. A higher floor area ratio leads to higher tax revenue. The average tax revenue per unit of industrial land and the average tax revenue per unit of common land in Guangdong were 2.34 times and 2.05 times the national average, which is RMB 15.88 million per hectare and RMB 11.06 per hectare respectively. After the 20th Party Congress in October, Shenzhen announced a plan to develop multi-level factory buildings each year with a minimum floor space of 20 million square meters in the next five years. A maximum floor area ratio of 3.5 to 4.0 is now permitted for industrial land in the City of Guangzhou’s Huangpu District, which will encourage more high-rise factory buildings. The experience in Guangdong Province provides a reference for other cities. Some biomedicine industrial parks in Beijing, Shanghai, and Suzhou have already initiated multi-level factory building projects. In 2023, we expect more industrial parks in the Beijing-Tianjin-Hebei regions and the Yangtze River Delta regions to carry out similar projects.

Average Tax Revenue per Unit of Land in Guangdong Province as compared to the China Average (RMB Million per hectare)

Sources: Ministry of Natural Resources, Deloitte Research

Life Sciences & Health Care

Turning point for the Healthy China program

China's life science and healthcare (LSHC) industry experienced various changes in 2022. In terms of basic research and R&D, the National Medical Products Administration (NMPA) has continuously issued a number of documents to promote the development of original innovation; medical pricing reform has been further deepened, and the implementation of national and local centralized procurement systems has become more frequent.

The LSHC capital markets had been hibernating for quite a while until early November 2022 when the rebound began. In 2023, with the optimization of pandemic restriction policies across the country, allocation and utilization of local medical resources will become more critical. Meanwhile, the much-anticipated economic recovery in 2023 will accelerate the development of the Healthy China program and the recovery of in-person medical services, thereby generating new opportunities for strategic partnership in the life science industry and the growth of demand for medical products.

Figure 1: The stock index changes of China's LSHC capital market (A share & H share)

Source: Wind, Deloitte Research

With the promulgation of the Notice on Further Optimizing the Implementation of New COVID Prevention and Control Measures by the State Council on December 7, 2022, local government authorities have adjusted their pandemic restriction policies. The standardization and optimization of PCR testing and risky areas was further clarified, and China has officially entered the post-pandemic era. However, with the easing of restrictions, public health resources will come under pressure. This will be the top challenge across the country soon. According to the National Health Commission, the current number of medical beds per 1,000 people in China is 6.7, and the number of ICU beds per 100,000 people is less than 4, highlighting a serious imbalance between medical resources and the number of patients. With the gradual adjustment and optimization of Covid restriction policies across the country, the increased flow of people across different provinces may lead to a jump in new infections in the short run, further increasing the burden on medical resources and manpower.

Increasing the vaccination rate for vulnerable groups, such as the elderly, is another key point that requires further efforts. As of November 2022, the vaccination/full vaccination/booster vaccination rate for people aged 60-79 was 90.7%, 86.4% and 68.8% respectively at the national level. But rates for people over 80 years of age were only 76.6%, 65.8% and 40.0%, respectively. Among the new COVID deaths in 2022, unvaccinated elderly people accounted for the largest proportion. To combat this, the State Council issued the Work Plan for Strengthening the Vaccination of the Elderly in November this year. It requires accelerating the vaccination rate for people over 80 years of age and continuing to increase the vaccination rate of people aged 60-79 to achieve greater coverage and protection of the entire population.

Looking forward to 2023, the 20th Party Congress report draws attention to the Healthy China program which will be accelerated, focusing on reform both on supply and demand sides. There are two major components to this:

• Extending the scope of medical pricing reform: In late 2022 new bidding rules were added to latest version of the National Reimbursement Drug List (NRDL). These new rules will lead to fiercer price competition among non-exclusive drugs, supplementing and improving the volume-based procurement (VBP) policy. The implementation of the new medical insurance payment method will help to reduce the financial burden of both basic medical insurance (BMI) funds and patients. At the same time, the types of products covered by national VBP are expanding steadily. And local VBPs have continued to implement their exploratory centralized procurement plans for biological drugs, TCMs, and medical equipment. It is expected that the national VBP will rapidly expand its coverage too.

Figure 2: Results of pharma VBP and NRDL dynamic adjustment

Source: public info, Deloitte Research

• Improving the diversified payment system: China's medical payment system has developed in phases and now boasts both high-coverage and greater affordability. In 2023, reform of the diversified medical payment system will be directed towards building a sustainable medical payment ecosystem, focusing on coordinating the high-quality development from the national level. At the same time, efforts will be made to improve and ensure the ability to pay for high-priced innovative drugs by expanding the scope of BMI funds, commercial insurance, and city-sponsored insurance programs.

Foreign companies are expected to accelerate their localization effort in 2023 while they seek to build diversified strategic cooperation with local companies to accelerate the imports of high-end products and to deploy local production capabilities. On November 9, 2022, the Ministry of Finance announced that it would actively advance the high-level opening up of government procurement programs to overseas players to ensure fair competition between domestic and foreign investment. In July 2022, the Ministry of Finance issued the Government Procurement Law of China (Revised Draft for Solicitation of Comments), which clarified that "products manufactured in China that meet the specified value-added ratio and other conditions shall enjoy preferential evaluation in government procurement activities", which means that foreign medical device companies that engage in manufacturing in China will receive the same benefits as local companies. In October 2021, the Ministry of Finance issued a Notice on Implementing Relevant Policies for Equal Treatment of Domestic and Foreign Enterprises in Government Procurement Activities which clarified that products produced by domestic and foreign companies in China shall not be treated differently, which means that both domestic and foreign companies can enjoy the same treatment in government procurement activities as long as their products are made in China. Therefore, to increase their presence in the Chinese market, foreign companies are increasing their localization efforts and actively seeking strategic local partnerships. Especially in the 14th Five-Year Plan period and under the "dual circulation" development strategy, foreign-local partnerships will bring benefits greater than 1+1, supporting foreign companies' localization efforts while helping local Chinese companies with innovative products to go global.

With the recovery of the economy and resumption of in-person medical services, demand for consumption medical services will grow rapidly in 2023.

• In the post-pandemic era, regulatory improvement in the medical aesthetic industry has led to the standardization of the industry. In addition, several innovative regenerative products related to medical aesthetics were successfully launched in H2 2021. With new innovative products and improvement of industry standardization, as well as the easing of pandemic restriction policies, demand for medical services with high consumption attributes is estimated to grow considerably.
• An aging population and a demand for chronic disease management combined with greater awareness of the importance of preventative healthcare continue to stimulate the development of high-quality digital healthcare. In 2022, "sub-health improvement services", "family health management services" and "chronic disease management" took the top three spots of all types of digital health management services³. Looking ahead, it seems likely that the demand for digital health and wearable devices will grow. The use of digital technology can effectively reduce the time and space cost of doctor-patient communications and go a long way towards reducing the burden on medical resources in the future.

Financial Services

Demand recovery to unlock new opportunities

In 2023, the much-anticipated recovery of the real economy will restore consumer confidence and demand, put social financing back on track, and boost the banking sector. At the same time, the launch of the personal pension program and the further opening up of the bond market will continue to bring new vitality to China's financial sector.

With demand recovery, "M2-TSF" gap to moderate

Even with loose monetary and credit policies in 2022, COVID restrictions resulted in weak demand overall and frequent risk events in the real estate sector. Monthly financing data shows that demand has been lower than expected and highly fluctuating.

Looking ahead to 2023, the pandemic restriction policy is expected to ease and China's economic activities will normalize further. Business investment and consumer demand are expected to recover and a series of supportive financial policies for the real estate sector will gradually take effect. Accordingly, credit and total social financing (TSF) data will rebound faster and will then slow down after peaking in the first half of 2023. The recovery of demand will probably lead to the withdrawal of the loose monetary policy that has been in place throughout 2022. Consequently, the growth of broad M2 money supply will fall and even return to a level slightly lower than the TSF growth rate, easing the “scissors gap” between M2 and TSF growth that appeared in April 2022.

Chart: M2-TSF “Scissors gap” becomes smaller (%)

Source: PBC, Wind

Asset quality benefits from economic recovery as banks stabilize margins via loan expansion.

The real economy is the foundation of finance. Asset quality will improve with the recovery of China’s economy since the banking industry is the stabilizer of the economy, accounting for over 90% of assets in the financial system. Various loose credit tools implemented in 2022 will be extended to 2023, including policy-based development financial instruments to support major infrastructure projects, 16 Financial Rules for real estate sector, and financing arrangements for private property enterprises to issue bonds. All this financial support for the real economy and the improved business conditions will have positive effects on the asset quality of the banking sector in 2023.

The "one up - one down" trend of non-performing loans (NPLs) will persist in 2023. Since the pandemic, increasing credit supply has resulted in an increase in NPLs. However, due to the expansion of credit assets and the increased rate of disposal of non-performing assets, the NPL ratio continued to decline from a high of 1.96% in Q3 2020 to 1.65% in Q3 2022, putting the NPL ratio back to the 2015 level. In 2023, decreasing NPL pressure should carry on and therefore banks should be able to reduce provisions to release funds for more credit supply. Expanding loan amounts could stabilize profit margins especially when current spreads are narrowing. Furthermore, according to the 20th Party Congress, the banking sector will be called upon to provide greater financial support to key areas, including scientific and technological innovation, infrastructure construction, green development, and rural revitalization.

Recent financial support for property developers will increase the exposure to the real estate sector in bank portfolios. China's big six State-owned banks who have sufficient capital and profit provisions will not be negatively affected. However, some small and medium-sized banks will face capital erosion pressures.

RMB trillion-scale personal pension program launched with various financial players competing for business

On November 4, 2022, five government ministries issued the “The Personal Pension Implementation Measure” paper. CBIRC and CSRC later issued supporting documents which stipulated the participation by banks, wealth management, insurance companies, mutual funds and others in the personal pension program. On November 25, MHRSS announced the launch of the personal pension system in 36 pilot cities and 23 banks. Under the regulatory requirements, residents participating in basic old-age insurance could open a personal pension account in banks, and use its money to purchase wealth management products, savings deposits, commercial pension insurance, mutual fund products and the like. Personal pension accounts are self-directed, with tax benefits, so more diversified pension products need to be developed in the future by financial players to satisfy the needs of customers with varying risk tolerance.

The personal pension program complements the third pillar of China's pension insurance system. CBIRC Chairman Guo Shuqing recently revealed that RMB 5 trillion had been accumulated as pension insurance reserves. By 2030, the scale of individual pensions is expected to increase by RMB 1 to 3 trillion, according to a CICC estimation. In addition to local institutions, foreign public funds are also entering the market. In November, Neuberger Berman became the second wholly foreign-owned public fund operating in China after BlackRock. The practical experience of foreign pension operators will accelerate the development of China's personal pension market, shining a spotlight on the further opening up of the Chinese financial market. In the medium and long term, China's personal pension program will inject long-term stable funds into the capital market and improve the efficiency of resource allocation.

Bond market will further open to support direct financing of enterprises

In May 2022, PBC, CSRC and SAFE jointly issued an announcement, establishing the principle of "one set of rules and one bond market", officially promoting the simultaneous opening of inter-bank and exchange bond markets. On November 18, PBC and SAFE issued regulations to further clarify the measures to manage cross-border money from foreign institutions investing Chinese bond market.

China's bond market has remained the world’s second largest since 2016, with a balance exceeding RMB 140 trillion. But foreign investors hold less than 3%. In the medium and long term, promoting the opening of the bond market could make full use of both domestic and international resources to serve the real economy. On one hand, economic transformation and upgrading requires a higher proportion of direct financing. Less dependence on banks' indirect financing could reduce risk concentration in the banking system and improve the overall efficiency of resource allocation. On the other hand, the opening up of the bond market will enhance RMB assets globally. Compared with the stock market, the bond market has larger capacity and lower volatility, hence it is able to absorb larger amounts of foreign funds without disrupting the capital markets and the economy. In the medium and long term, the RMB-denominated offshore bond market will smoothen the cross-border fund cycle, which will help the convertibility of RMB capital.

¹ Multi-level factory building is of higher floor area ratio than traditional factory buildings. It provides more space for R&D and manufacture in the same piece of land.

² The floor area ratio is the ratio of the total above-ground gross floor area to the net floor area.

³ 艾瑞咨询, 《中国在线医疗健康服务消费白皮书》, Sep. 2022