The Deloitte Research Monthly Outlook and Perspectives


The Deloitte Research Monthly Outlook and Perspectives

Issue 81

Published date: 2 April 2023



More policy oomph needed in light of market turmoil

China's widely-anticipated Two Sessions unveiled a conservative growth target with an emphasis on job creation, implying a subtle departure from ramping up infrastructure investment – an approach which would have worked should leverage be low and external demand strong. The key question is to what extent the financial turmoil in the wake of SVB's failure will cast an even bigger shadow over an already challenging external front. Will greater policy support be warranted? If so, would a stronger policy response ignite inflation?

Let's begin with the key metrics set out at the Two Sessions. Low base effects from the GDP growth rate in 2022 are a necessary condition for a strong recovery, but it is more than just anecdotal evidence of busier travel flows and crowded restaurants since early January that has prompted us to revise up our 2023 GDP growth forecast from 4.5% to 5% (from our Feb monthly report). The fact that almost all employees have returned to the workplace after an earlier-than-usual Chinese New Year indicates that consumers are not suffering from quarantine and lockdown scars. However, even with revenge consumption unfolding to the possible extent of a double-digit rebound, a potent recovery still requires a significant pickup in private investment. The 2023 GDP growth target of "around 5%" is therefore not only attenable but also necessitates a continuation of the policy pivot from quantity to quality. To quote Premier Li Qiang, "most people do not keep an eye on GDP growth all the time. What they care about more are the things that happen in their everyday lives, like housing, employment, income, education, medical services and the environment." Indeed, to have a job creation target of 12 million, comparing to 11 million in 2022, sends a loud and clear message that what matters are jobs, which are more easily created by the services sector. But this job creation campaign will run into a few headwinds this year. First of all, the sheer number of new university graduates entering the workforce this year is enormous at 10.76 million. Second, the impact of Covid-19 on university graduates from the previous two years (intuitively, employers might have reduced interest in recruiting graduates who have had to linger in schools for another year or so) will be felt in the job market. And finally, private enterprises need policy assurances and easier access to capital. The rise in the youth unemployment rate is a growing social issue, but slacks in the labor market are one reason why China is unlikely to face inflationary risks in 2023. As such, the CPI target of 3% is likely to be met or even undershot in 2023.

Chart 1: Unexpected slack in the labor market tempering inflation

Source: Wind, Deloitte Research

Precisely due to anaemic demand in the economy such as in the property sector, the People's Bank of China cut the reserve requirement ratio on March 17, with the intended objective of easing monetary conditions especially for property developers and smaller firms. The timing of the PBOC's easing coincided with the rescue efforts orchestrated by the Fed following SVB's collapse on March 9. Judging from the gyrations in the Treasury market in response, investors appeared to have taken the view that financial sector stress will spill over to the real economy. Lower interest rates and a softer dollar will give the PBOC more leeway as it guides interest rates lower, but the Fed's balancing act in stabilizing the financial system and arresting inflation is daunting. Surging prices of gold and Bitcoin also reflect market doubt about the credibility of major central banks. For China, even if US regional bank stress could be contained, tighter financial conditions will bring about greater risk aversion within the region, as evidenced by the almost 20% correction in the Hang Seng Index, a key barometer of investor sentiment.

If the PBOC were determined to ease policy in the absence of the SVB turmoil, its accommodative monetary stance ought to be more potent given that most central banks have to scale back their tightening efforts. Other than the special tools in the PBOC's toolbox, it might be time to cut interest rates outright. We suspect that will be the PBOC's next move. A recovering Yen indicates that investors do not regard the SVB-triggered crisis as another Lehman moment just yet. Therefore, China could also resist a forced appreciation of the RMB so that monetary conditions won't be overly tightened. Against the potential risk of deflation and financial market volatilities, the debate between getting investment going versus engineering a consumption-led recovery is bound to resurface. The argument for the former has been that such a bazooka is bound to immediately give a sizable boost to economic growth. The experience of the 2008 GFC global financial crisis has suggests that the side effects of a large fiscal stimulus – leverage, overcapacities and unintended consequences (e.g., rising protectionism which could be triggered by social dislocation and mistrust). Swift action taken by the Fed and regulators over the past ten days have indicated that the collapse of SVB is not a repeat of the GFC.

For China, higher quality growth, in practice, means a less binding GDP growth target. This transition is more urgent, and also stems from external factors such as protectionism and geopolitics. On Covid-19 policies, China's effective resumption of business since the summer of 2020 engineered an export boom which has been reinforced by a consumption frenzy in many developed countries over the past two years. Such a boom has also led to significantly increased production of many industrial products, such as containers. A large fiscal stimulus will exacerbate over-capacities, in turn, fanning protectionism and worsening asset quality. In conclusion, China's goals from the Two Sessions are intact but monetary policy could have been bolder in light of the tighter financial conditions brought about by SVB. The need to step up monetary easing is more apparent following the latest FOMC meeting where the Fed raised the Fed Fund Rates by 25bps, signalling a its tightening cycle is approaching the 9th inning.

Chart 2: Unless targeting final demand, otherwise worsening overcapacities


Source: CCIA, Wind, Deloitte Research


How far are we from the next generation of clean energy technologies?

Although many countries are making the transition to a low-carbon economy, we still have a long way to go to achieve net zero emission. However, there does seem to be a broad consensus now on the best way forward: transitioning to clean energy is now widely accepted as the best way to reduce CO2 emissions. In response to climate change, the world is seeing a new wave of regulatory measures centred around sustainability. This has accelerated innovations in clean energy technology, giving birth to technologies that are more efficient and cost-effective. What does the next generation of clean energy technology look like? And how far are we from it?

Accelerating the development of clean energy technologies

Developing a new energy industry is fast becoming the most popular choice for countries looking to reduce emissions quickly and efficiently as well as foster new economic growth drivers. Supportive policies and capital investment can help the ecosystem of clean energy technologies to innovate and keep pace. The explosion of emerging technologies is not only present on the production side, but also in energy storage and utilization, where a new generation of products, such as redox flow batteries and solid-state batteries, are also gaining momentum.

In the solar photovoltaic sector, while N-type cell technologies such as Topcon and HJT are gradually being put into mass production, perovskite has attracted lots of attention as a new choice of raw material thanks to its many advantages such as high efficiency, rich reserves, low cost and short production process. Many manufacturers are building or already have built megawatt-scale production lines and gigawatt-scale production is also on the agenda. For the utilization of deep-sea wind energy, the use of carbon fiber materials could bring about mass reduction and enhanced performance for wind blades. Some manufacturers have already produced wind blades using carbon fiber, and the application is expected to expand as the patent of Danish wind giant Vestas expired in 2022. While the upward trend in wind turbine capacity continues, segmented blade technology which is still in demonstration phase may be the key to tackle the obstacles in manufacturing and transportation of wind turbines. As for EV-batteries, battery manufacturers as well as EV manufacturers are racing to develop solid-state batteries, and semi-solid-state batteries as an alternative will be delivered even earlier.

Chart 3: Emerging clean energy technologies roadmap

Source: International Energy Agency*, Deloitte Research
* This figure adapted IEA’s framework for energy storage and added our research findings and observations for other types of new energy.

China has a clear production capacity advantage in several areas such as photovoltaics, wind power, energy storage, and power batteries, thanks to its sound industrial system, strong policy support, and market-driven demand. China currently dominates the manufacturing capacity of most clean energy technologies and leads the innovation in niche fields such as perovskite solar cells. It's worth noting that China's unparalleled advantage in manufacturing has accelerated the commercialization of emerging technologies of solar photovoltaic and batteries. The next step is to increase capital investment in these technologies and optimize industrial support for technologies still in the research and development phase.

Increasing importance of clean energy tech startups

Driven by the global development of clean energy technologies, startups have become increasingly attractive to business acquirers and investment institutions globally and in China as well. From 2018 to 2022, the overall size of China's clean energy technologies financing market had been on the rise. According to the online investment database CVSource, 285 clean energy technologies companies received financing in 2022, with a total amount of RMB 53.4 billion. For example, INFI-SOLAR, a perovskite solar cell startup in Shenzhen, completed angel round financing in tens of millions of RMB in June 2022, which was jointly invested by Country Garden Venture Capital, Glory Ventures and Vlight Capital. The financing was for the construction of a large-size perovskite solar cell module test line, the expansion of research and development and the creation of a mass production technology team.

Chart 4: Financing distribution of clean energy technology enterprises in China from 2018 to 2022


Source: CVSource

At the same time, leading companies have also launched a series of collaborations with clean energy technology start-ups. China's power grid company works with Topsky Energy to develop energy storage technology to balance grid load and improve the reliability and stability of the power system. Through such collaboration, start-ups can leverage the resources and professional expertise of leading companies to expand their scale of products and solutions, while providing leading companies with innovative technologies and business models.

Key factors for emerging technologies to scale up

While these emerging clean energy technologies are undoubtedly attractive with superior performance and broad application scenarios, there remain three hurdles to be overcome before they can truly be deployed:

  1. Reduce production costs. The rapid growth of the world's new energy installed capacity over the past decade has been driven by continued LCOE declines. Since subsidies for clean energy are gradually being reduced, it becomes imperative for the next generation of technologies to achieve cost reduction and efficiency improvement through process upgrading and material iteration.
  2. Achieve effective and sustainable manufacturing. The extremely uneven geographical concentration of critical raw materials, the increasingly prominent imbalance between supply and demand, and uncertainties in international trade policies all aggravate supply chain risks. To realize mass production, manufacturers need to not only streamline production processes and improve the level of standardization, but also to ensure supply through better cooperation in global supply chains and a circular economy.
  3. Expand use cases and establish business models. Applicable business models can effectively link technology and market demand, some of the new generation of clean energy technology enterprises in photovoltaic, wind power, nuclear energy, hydrogen energy, energy storage have completed many application demonstrations. In the future, we still need to further expand the application scenarios, clarify revenue models, strengthen collaboration with high-quality ecological partners, in order to realize large-scale application of technology.
  4. Brand building is often an aspect that energy companies overlook. Technological and business model innovations need to be closely integrated into brand strategies in order to maximize the value of innovation achievements.


Expansion of Cross-border e-commerce spurs logistics development

Four major players have led rapid growth of China's cross-border e-commerce exports

The development in recent years of online transactions and contactless payment systems have greatly facilitated international trade and commerce. This became startlingly apparent during the pandemic when cross-border e-commerce was an important force in stabilizing foreign trade and maintaining the health of the domestic economy. Since then, the Chinese government has also introduced several important support policies for the sector which have significantly boosted cross-border e-commerce. Preliminary Customs data estimates that China's cross-border e-commerce imports and exports reached RMB 2.11 trillion in 2022, up 9.8 percent year on year. Among them, exports reached RMB 1.55 trillion RMB, up 11.7 percent year on year while imports reached RMB 0.56 trillion, up 4.9 percent. According to app rankings released in September 2022 by the app analytics and data company, users rated four Chinese companies amongst the top shopping apps worldwide. These were Shein, AliExpress, Tiktok and Temu. The AliExpress platform had already planned for overseas expansion as far back as in 2010, while the remaining three emerged in the last decade, as part of the wave of domestic enterprises that were accelerating their overseas expansion. Through leveraging China's manufacturing base, these leading players have identified market demand with precision and have built up unique advantages in the process.

Chart 5: overseas expansion models of the four major cross-border e-commerce platforms


Source: Xiaguangshe, Deloitte Research

Cross-border e-commerce helps logistics companies gain market dominance

Cross-border logistics involve a long sequence of connecting links, and in general this is done through subcontracting different parts of the job to complete the entire delivery process. Cross-border e-commerce allows Chinese merchants, brands and platforms to access overseas consumers. It also gives local Chinese logistics enterprises the opportunity to connect directly with international suppliers and obtain greater bargaining power. From the perspective of the entire chain, China's cross-border e-commerce logistics enterprises have business advantages in front- and middle-end activities, i.e., from pick-up to warehousing, while the last mile of delivery is generally outsourced to overseas local logistics providers. Therefore, by establishing new channels in cross-border e-commerce consumption, Chinese cross-border logistics enterprises can now extend their role as subcontractors to eventually become general contractors and gain market dominance through covering a larger portion of connecting links in the entire delivery chain.

Cross-border e-commerce seller delivery has two models: self-delivery and overseas warehouse models. Self-delivery is currently the mainstream service model, including small postal packets, and delivery through international logistics and special line logistics providers that are easily accessed by small- and medium-sized businesses. The overseas warehouse model on the other hand, is similar to integrated supply chain logistics services (e.g., JD logistics, Amazon logistics), and allows export enterprises to prepare goods in large quantities in advance and ship them to overseas warehouses, so as to achieve timely sales and distribution in overseas locations. With a faster response time and higher stability, it is the preferred choice for high-end brands and stores. While the overseas warehouse model costs more than the self-delivery system, it can solve specific order fulfilment difficulties that the self-delivery model is not equipped to tackle, such as providing effective after-sales services for goods that are oversized, over weight limit and highly valued. The overseas warehouse model also improves peak season fulfilment efficiency of FMCGs. As Chinese brands expand overseas and flexible supply chains becomes the trend, the overseas warehouse model is bound to increase in importance over the long-term.

Long-term capability building will be key for logistics providers

At present, Chinese sellers remain concerned about the operation and service capacity of existing overseas warehouses as certain recurring problems, such as low efficiency of the last mile of overseas warehouse model and lack of localized services, have yet to be tackled. At the same time, the cost advantage of the self-delivery model will diminish after the reform of foreign consumption tax and postal terminal fees. The long-term development of cross-border e-commerce will demand continuous and steady improvement in transportation operations, information integration, and cargo delivery for cross-border logistics providers.

Looking ahead, logistics enterprises can optimize operating costs by improving capabilities in the following four aspects:

  • Digitalization: Cross-border e-commerce involves many countries and logistics links, and through the development of digital technology, merchants can provide customers with real-time tracking and visual mapping of logistics trajectories. This will go a long way in improving customer trust and stickiness. At the same time, digital transformation of the entire chain helps improve the operational efficiency of each link, thereby improving the timeliness and stability of delivery.
  • Integration: Leading logistics enterprises are already actively deploying and integrating various resources including overseas warehouses, customs clearance, trunk lines, and dispatch. Operating costs can be further optimized by building integrated service capabilities, thus reducing the waiting time at each link and the order response time. Integration will ensure better logistics timeliness.
  • Customization: Every customer has different needs. In order to develop customer trust and stickiness, it is important to meet the more personalized logistics needs of customers, such as providing customized value-added services in the warehouse (return and replacement, local labelling, local replacement packaging and other services), and stay closely connected with the brand's upstream supply chain model to provide suggestions for optimization at the supply chain level.
  • Stability: Cross-border e-commerce can be easily disrupted. Through mergers and acquisitions, alliances, in-house construction etc., cross-border logistics trunk line capabilities including aviation trunk lines and maritime trunk lines, should be obtained in order to build a globally connected, collaborative and efficient international trunk network. In addition, connecting this with terminal distribution will ensure the stability and longevity of the logistics system.

With the development of more overseas e-commerce, a strong domestic supply chain system and the continuous improvement of the products and services of the four leading overseas players, China's cross-border logistics sector will be able to hold onto its market dominance and expand further.

Financial Services

The time for private pension funds has come

On November 4, 2022, five Chinese ministries co-issued the Measures for the Implementation of Individual Pensions, and on November 25, the Ministry of Human Resources and Social Security announced that the private pension system will be introduced in 36 pilot cities with 23 participating banks. This marks the launch of China’s first private pension scheme. The private pension business is being introduced in response to the shortcomings of PillarⅢ in the Chinese pension system and to gradually align with the international mainstream 3 Pillars pension system. In the medium and long term, the private pension system is expected to improve the capital allocation of Chinese residents, which has far-reaching significance for financial institutions in the deployment of commercial pension funds and the development of the capital market.

Getting old before getting rich

With an aging population, the pressure is on. Mr. Zhou Xiaochuan, former Governor of the People's Bank of China, recently said, "we do not have time left to further delay the pension issue, and it will be much harder to deal with it in the future." In 2022, China's birth population was 9.56 million, a 10% decrease from last year, the first negative population growth since economic reform and opening. The number of people aged 65 and over accounted for 14.9%, which, according to international standards, is a deeply aging society. The Organization for Economic Co-operation and Development (OECD) predicts that the number of elderly people over 65 years old will exceed 300 million in 2035, and elderly dependency ratio will reach 50% in 2054, with about 2 workers supporting 1 elderly person. As a developing country, China has a relatively low GDP per capita. Hence, it is faced with a rapidly aging society without adequate wealth accumulation to support pension outlays. This poses a serious threat to the economy, hence the fast-tracking of pension reform.

Low level of Chinese pension reserve makes developing private pension more urgent

The 3 Pillars pension system proposed by the World Bank is the international mainstream model, namely Pillar I - public pension schemes, Pillar II -enterprise annuity, and Pillar III - private pension schemes. In 2021, the total pension assets of 38 OECD member countries reached USD 60.84 trillion in total, of which the pension assets of Canada, the United States, Switzerland, and the United Kingdom have exceeded their GDPs.

In 2021, the balance of China's 3 Pillars of pension funds is RMB 6.3 trillion, RMB 4.5 trillion and RMB 1 billion, accounting for less than 10% of GDP. The percentage of private pension was close to zero. In 2020, Pillar I of social security fund registered negative growth and is unlikely to provide in-depth protection going forward. Developing private pension finance has therefore become urgent.

Chart 6: 2021 assets in retirement savings plans & public pension funds in OECD countries

Source: OECD

Improving residents' asset allocation and injecting long-term stable incremental funding in capital markets

Generally, the income level in developed countries is high. As marginal consumption decreases, savings and pension assets increase. Private pensions then become stable source of capital pools in their capital markets. In the United States, in 1974, the launch of the Individual Retirement Account (IRA) played a major role in growing the capital pool of capital markets in the following decades. By the end of 2021, the total amount of US IRA accounts was USD 13.91 trillion, or about 60% of GDP, and about 74% of their investment was in stocks and bonds.

In the past few years, the assets of Chinese residents have mainly been allocated to real estate and savings. The introduction of the pension system will help cultivate residents' awareness of private pension planning, which is expected to promote personal financial investments, and increase allocation to equity and fixed income financial products. The injection of long-term stable funds into the capital market will help develop direct financing, support the financing of the real economy and enterprises, and improve the efficiency of capital allocation.

In order to improve the attractiveness of private pensions, this reform introduced the EET tax system, a set of tax incentives. T stands for taxation, and E stands for exemption. EET stipulates that contribution and investment in private pension schemes are exempt from the individual tax, and they are taxed only in the distribution process and the tax rate is reduced from 7.5% to 3%. At present, the annual contribution limit of private pensions is RMB 12,000, and this limit will be raised in the future as the economy and residents' incomes improve.

CICC expects that by 2030, private pensions are expected to bring in RMB 1-3 trillion of incremental funds. In the next 5-10 years, the proportion of private pensions in GDP will gradually rise to 3%-5%, and its market size may exceed RMB 5 trillion.

Chart 7: US IRA account assets are mainly allocated to stocks and bonds


Source: Wind, Investment Company Institute (ICI)

Capturing business opportunities arising from private pension schemes

Private pension account funds can be used to purchase eligible wealth management products, savings deposits, commercial endowment insurance and mutual funds. Banks, wealth management institutions, mutual funds, and insurance companies are all promising participants, as financial institutions can leverage their knowledge and experience of financial markets to capture the business opportunities inherent in private pensions. For example, commercial banks have a natural advantage in account opening. Relying on their retail branches and customer resources, they can act as agents for various pension financial products. Mutual funds, with their advantage of investment research, can develop different types of pension target funds to meet the needs of customer groups with different risk preferences.

Along with comprehensive financial market opening up, foreign players are permitted to engage in private pension schemes. Their practical experiences of overseas commercial pension operation will serve as references for the Chinese market. The asset management industry should actively embrace the era of private pensions by consolidating pension management capabilities and engaging in investor education, such as helping investors to establish pension reserve awareness, develop regular savings and investment habits, earn long-term compound interest, and establish sufficient capital reserves for private pension schemes.


A full "Digital China" in the making

China’s digital economy has become an important growth engine for the country, reaching RMB 45.5 trillion in 2021 and accounting for roughly forty percent of GDP. By 2025, this will exceed RMB 60 trillion. It is against this background of exponential growth that the Central Committee and the State Council released the "Overall Deployment Plan for the Construction of Digital China" (called “the Plan" for short) in February 2023. It lays out the future direction of digital development and digital governance in China. The far-reaching nature of the Plan can be seen in the following four domains: digital infrastructure construction, integration of digital technology in the real economy, data security, and innovation systems.

Digital Infrastructure development to be elevated

On the one hand, digital infrastructure represented by computing power and network will remain the "core infrastructure" underpinning the development of Digital China and driving digital industrialization. Consequently, 5G, Internet of Things, edge computing and other fields will usher in greater opportunities, and information infrastructure such as cloud computing and data centers will also grow further. On the other hand, as data becomes a new kind of production factor, the smooth transmission of data resources shall be crucial. Hence, data exploitation and sharing will become a necessity. As digital technology is a key means of data mining, related industries will develop rapidly. The market-oriented allocation of data elements depends on the establishment of data trading platforms, therefore big data exchanges and other data trading exchanges will become more popular.

Chart 8: China's Digital Infrastructure Investment (RMB Trillion)

Source: Industrial Securities, Goldman Sachs, Deloitte Research

Deepening the integration of digital technology in real economies

"Digital China" covers all aspects of society. In time, digital technology will become deeply integrated into economic, political, cultural, and social life, as well as ecology. The application of digital technology in real economies will be more extensive, especially in key sectors such as agriculture, industry, finance, education, medical care, transportation, and energy. In the future, as more enterprises undergo digital transformation, business operations will become more integrated and scalable, and application scenarios for digital integration will increase.

At the same time, diverse application scenarios also put forward higher requirements for innovation in digital technology and digital applications. For example, in the case of smart vehicles, product optimization and technology iteration rely on the effective use of data. After software-defined vehicles become a reality, leading car companies will pay more attention to the development of proprietary software capabilities and will try to achieve differentiated competition through self-developed and controllable software. Where the environment is concerned, in order to achieve the "dual carbon" goal, data crawler and digital twin technologies have reconstructed energy management systems. One such example is the Zhejiang power system carbon emission monitoring platform, which effectively enables the digitalization and intensification of energy production processes. The application of digital technology also promotes the disclosure of climate information and the monitoring and measurement of environmental indicators. In this way, digitalization is creating opportunities for the formation of a unified national carbon emissions trading market.

Data security and governance to be a core focus

Without security measures, processes involving data collection, transmission, processing, as well as the application of data elements, can pose hidden dangers to business operations and even economic and social security. Therefore, data security protection is a crucial element in the development of Digital China.

Ensuring data security for data sharing requires a robust digital governance system, which will in turn increase the government's ability to maintain an open digital ecosystem. In terms of underlying design, it is necessary to establish a credible and controllable digital security barrier. Hence it will be important to improve network security laws, regulations, and policy systems for enhanced data security protection. Establishing a basic system for data classification and hierarchical protection and improving network data monitoring, early warning, and emergency response system is also required. In addition, in the future national security will also become a key theme, and future innovation will revolve around national security.

Chart 9: China's Digital Security Market (RMB 100 million)


Source: Government Publication, Intelligence Research, Askci, Deloitte Research

Cultivation of the innovation system to usher in a new wave of innovations

Strengthening the digital technology innovation system is important for the development of "Digital China". In order to truly tackle bottlenecks in key core technologies, the establishment of a digital technology innovation system that makes full use of the new nationwide digital system to mobilize national resources and achieve breakthroughs in key core technologies is essential. At the same time, the dominant positions of enterprises in scientific and technological innovation will be further emphasized and technological backbone enterprises will play a lead role. For this it is important to strengthen protection of corporate intellectual property rights by improving profit distribution mechanisms for intellectual property conversion and to actively encourage capital to participate in the development of "Digital China". Building a digital technology innovation system will require first building an investment and financing system in which social capital can effectively participate, and then, cultivating digital and technical talents to drive innovation.

Overall, the Plan and a series of related policies and measures have built a detailed policy support system that includes not only broad directives but also quite specific measures -- creating a powerful base for the development of the digital economy. "Digital China" will guide further penetration of information technology into all aspects of society and the economy. Digital transformation across industries will promote in-depth collaboration and integration. This will help to create new business models. Also, improved digital infrastructure will make public services more user friendly.

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