The Deloitte Research Monthly Outlook and Perspectives


The Deloitte Research Monthly Outlook and Perspectives

Issue 82

Published date: 11 May 2023




Consumption gets a boost but still room for monetary easing

One of the key hypotheses underpinning China’s recovery in 2023 is “revenge consumption”, characterised by excessive spending after a long period of almost three years of Covid-induced lockdowns where consumers had limited opportunities to spend. This touted hypothesis has been validated by the travel boom during May holiday.

Chart: Consumption frenzy during May Day Holiday

Source: Ministry of Commerce, Deloitte Research

By late April, it was becoming clear that consumers were indeed trying to make up for lost spending opportunities. In Shanghai’s Hongqiao Railway Station, the busiest in the country, all tickets were sold out on April 28. A strong recovery in travel and hospitality-related sectors has also been evident from the significantly higher hotel rates and occupancy rates since February 2023. According to official statistics, the number of people who travelled during the May holiday reached 274 million, surpassing the same period in 2019 by 19%.  Consumer resilience was on full display at the 2023 Shanghai Auto Show in late April as well where EV manufacturers unveiled a dazzling array of new models. 2022 was a pivotal year where EVs made huge strides, with EV sales growing by 95.6% yoy. Based on what we have seen so far, the EV market in China will continue to go from strength to strength in 2023. Such a transformation is consistent with the overall theme around consumption upgrading which epitomises the confidence and spending prowess of young consumers. If revenge consumption materializes, should policymakers hold off from more supportive measures? We think not.

So far, compelling evidence in terms of data from Q1 and the May holiday does suggest that 2023 growth is likely to be comfortably above the government’s target of “around 5%”. There are also signs that the current recovery is unbalanced, with noticeable slack in the labor market. The unbalanced nature of the recovery is not solely down to the external environment, of which the global inflation outlook remains the biggest wild card. The Fed’s decision to raise the Fed Fund Rate by 25bps on May 3 to 5% during the most recent FOMC meeting was entirely expected. The Fed’s signal of leaving short term interest rates on hold was also widely anticipated. This has come as a respite as higher interest rates have taken a toll on regional stock markets this year and deterred the PBOC from cutting interest rates outright. In a way, corrections of stock markets have tightened financial conditions. The length of the Fed’s pause will be determined by the US labour market which has so far been unfazed amid a prolonged period of high interest rates and regional banks’ woes. For the majority of economies in the region, China included, the best-case scenario is a mild slowdown with a somewhat higher unemployment rate in the US; it is hard to envision inflation falling significantly otherwise. The price to pay will be that external demand stays strong while short term interest rates will have peaked, assuming a shallow recession in the US. Inflation is not an issue for most regional economies, especially in China, but if the Fed Fund Rate comes off even slightly by late 2023, regional central banks could start easing more forcefully. The risk that inflation won’t be easily arrested should not be ruled out.

Despite better-than-expected Q1 growth in China, we still see more room for monetary easing. China, so far, has registered a vigorous recovery thanks to its resilient consumers and outperforming exports, in March especially. We think export growth will normalize in Q2, at least based on regional trends. Exports to Taiwan and South Korea have been in a serious slump over the past six months due to their overreliance on semiconductors. We do not see consumers folding but they may opt for accelerating mortgage payments on lower refinancing costs. China’s optimal roadmap for de-leveraging is for local governments to identify other sources of revenue by tightening their belts while encouraging consumers to lower their savings rate. In other words, the policy of getting people to upgrade their purchases and homes is central to boosting consumption. This delicate balance requires a stable and vibrant residential housing market beyond just first tier cities. However, Chinese consumers tend to exhibit a herd mentality which has been reinforced by an extraordinary appreciation in house prices over time as the stock market has not proven to be a viable investment choice. Contrary to doomsayers, China’s housing market has held up this year against a broad backdrop of general price corrections in many countries. This is indeed remarkable because many property developers in China have seen their financing costs fall sharply since last November on the back of a slew of supportive measures dished out by the government. However, lower financing costs have not translated into growth in property investment. This is intuitive. If we look at the total sales of commercial residential buildings, the trend remains depressed, albeit with a blip in late Q1 (decreasing by 1.8% and 16.8% compared to 2022 and 2021 respectively). Developers are unlikely to ramp up investment unless new homes are being sold more convincingly. Therefore, the core focus for reflation in China ought to be focusing on the property market whose health profoundly affects consumer psyche. From this perspective, the Fed’s pause should give the PBOC more wiggle room for its targeted easing.

Chart: Developers remain cautious unless more new homes are sold

Source: Wind, Deloitte Research

At a Politburo meeting on April 28, 2023, the verdict on Q1’s strong recovery was “largely recovery in nature”. The meeting also foresaw many challenges for China to truly embark on “high quality” growth, and the crux of the policy responses rendered by the meeting was to “increase aggregate demand”. Such higher quality growth can’t be achieved by a large dose of fiscal stimulus, a point that has been repeatedly thrashed out by policymakers. From this perspective, an easier monetary stance ought to be on the cards.

Life Science & Healthcare

The path of survival for biotech companies

On March 9th, 2023, Silicon Valley Bank (SVB), the largest technology venture investment bank in the United States, collapsed. This had serious consequences for a large number of biotechnology companies and pharmaceutical investment institutions worldwide -- including some of China's leading innovative pharmaceutical companies and PEs/VCs. It is estimated that 12% of Silicon Valley Bank’s total deposits came from the healthcare and biotechnology industries, which is why the SVB collapse set off shock waves in the industry, globally. It also spotlighted the high expenditure and unstable cash flow of biotech companies, which will raise the bar higher for the commercialization and monetization ability of biotech in general.

The ups-and-downs of China's biotech capital market

Since the introduction of Section 18A by the Hong Kong Stock Exchange in 2018, the Chinese biotechnology industry has become a hot spot for investment. After the introduction of pre-revenue listings regulations in 2019 and 2021 for the STAR market and ChiNext respectively, investment interest in biotech grew exponentially. In 2020, higher valuations were given to biotech companies in both the A share and H share markets than to any other new entrant/player (Figure 1). However, since the first half of 2022, the number of fundraising events started to decline, and enthusiasm for life science & healthcare IPOs waned. As a result, the Shanghai Stock Exchange (SSE) Health Care Index, the Shenzhen Stock Exchange (SZSE) Biological Medicine 50 Index and Hang Seng HK-listed Biotech Index, all started trending downwards.

The valuation of biotech companies fell, and a period of valuation adjustment began in the China biotech capital market. Not until the end of 2022 did investment interest in biotech start to recover.   

Chart: Index Change of A share & H share (2020 to Q1 2023)

Source: Wind, Deloitte Research

The adjustment in valuation means that investors in the biotech industry have become more cautious about investing in biotech companies. No longer do they look primarily at the R&D potential of a company. They have higher requirements for the product portfolio/pipeline and monetization ability of biotech companies as well. This shift has undoubtedly increased the cash flow problems of biotech companies as they are now expected to explain to investors just how they plan to monetize the investor’s investment and in how long. Compared to 2020, by the end of 2022 almost all biotech companies were experiencing cash flow problems (Figure 2), but the main culprit was not the decrease in R&D expenditure but the failure of the companies to monetize adequately. Hence, of the 76 pre-revenue listed biotech companies, only 10 were able to successfully remove the ‘pre-revenue’ label. How the remaining 60 pre-revenue listed biotech companies will be able to maintain a stable cash flow without reducing R&D is a crucial hurdle in the short term. As for biotech companies hoping to go the IPO route, resolving the cash flow problem is critical.

Chart: Cash flow pressure for pre-revenue listing biotech companies on STAR market and HKEx

Note: the cash flow pressure was calculated based on R&D expense/net cash flow in operating activities

Source: Wind, Annual Reports of listing companies, Deloitte Research

Pipeline optimization and going lean have become a new path forward for innovative pharmaceutical companies

The existing global and domestic market turbulence, as well as the cooling of the primary market and a downturn in the secondary market, makes it imperative for biotech companies to "slim down," and to do it fast. As the importance of cash management has increased, biotech companies need to streamline their pipeline products and prioritize investment in more easily commercializable products which can enhance the monetization capability of the company. This applies across the board and cannot be stressed enough as not only local biotech companies but also multinational biopharma companies are carrying out expenditure reviews with the aim of cutting down on spending. Novartis spining off its generic unit Sandoz and the withdrawal of authorization in Biogen's termination of out-licensing cooperation with InnoCare are cases in point. The goal of either model is to reallocate existing resources and improve utilization efficiency.

Looking ahead, biotech companies need to re-examine and manage their product pipelines and advance clinical trials to adapt to the shift in market emphasis from R&D potential to monetization capability.

Government and Public Sector

Commercialization of public data speeds up

With the release of detailed regulations and guidance on the authorized operation of public data1, market-oriented operations are thriving. By October 2022, 208 provincial and city-level governments had launched public data platforms, accumulating more than six zettabytes of data. How to utilize2 the massive amount of public data to create market value and ensure that data risks are firmly under control has become the focus of digital governance. In December 2022, The State Council released a paper containing 20 measures to build fundamental systems for data usage, promulgating that the central government will make every effort to put a public data authorization mechanism into place. The governments or relevant agencies will provide public data to specially designated enterprises and/or institutions and will authorize them to process and commercialize this data under certain conditions and restrictions. In the past, many factors, such as data security, pricing and revenue distribution issues, hindered the commercial operation of public data. In March this year, Zhejiang implemented the country's first local regulation in the field of public data, putting forward an institutional framework for the authorization of public data use. Soon after, Hangzhou issued a trial policy, the ‘Hangzhou Public Data Authorization Operation Implementation Plan’. As a supporting policy of the Zhejiang regulation, the Hangzhou plan clearly stated that a “working mechanism of authorized operation of public data should be established before the end of 2023”. What this boils down to is that Hangzhou will build a comprehensive monitoring and evaluation system for authorized operation, release the first batch of authorized public data resource catalogues, and formulate a series of formal operational models related to operation management, product pricing and revenue distribution. It is expected that within the year, Shanghai, Beijing and other leading cities will all launch their own operational practices and policies. More provinces and municipalities are expected to follow suit.

Table: Data related regulations released by local governments in the last half year

Data source: local government websites.

Specialized State-owned enterprises were set up to drive public data operation business. While it is important to provide high-quality data products for market entities and for the smooth functioning of the economy, data operation enterprises should ensure that public data is properly protected. Hence, control of data and security protocols are of great importance in the commercialization of data. To ensure this, in some leading cities, the authorized data management enterprises are all local State-owned enterprises who are new to the field. There are two types of business models for public data operation companies, namely, the scenario-driven model and the data-driven model. Beijing has chosen the scenario-driven model, in which the Beijing Municipal Bureau of Economy and Information Technology (BMBEIT) authorizes Beijing Financial Holdings Group (BFHG) to undertake financial public data co-location and application business. The Beijing municipal government owns and controls the data while BFHG has been given the right to commercialize the data. Thus, for example, the BFHG has developed financial data products for enterprise credit information platforms in Beijing to assist financial institutions with evaluating the credit status of SMEs, thus enhancing their credit management capabilities. Shanghai has chosen the data-driven mode, in which the Shanghai municipal government authorizes the Shanghai Data Group Ltd (SDG) to operate on the whole city's public data. Supervised by the Shanghai Big Data Centre, SDG has been exclusively authorized with the right to operate public data, State-owned enterprise data and other social data resources in Shanghai. By authorizing State-owned enterprises in vertical fields, the scenario-driven mode can facilitate high efficiency in the development of data products. It also ensures that the city’s public data services are not monopolized by one or two enterprises. The advantage of the data-driven mode, on the other hand, lies in the fact that it is conducive to the formation of a synergy of cross-industry data. It is also easier for the government to supervise and regulate since the number of operating enterprises remains small.

Public data applications will transform the medical insurance sector. With a wide range of consumer groups and diverse consumer demands, data has a high commercial value in commercial medical insurance. The governments of Beijing, Hangzhou and many other places are keen to implement authorized public data operation in health insurance and other areas touching people's livelihood. On May 20, 2022, The General Office of the State Council issued the 14th Five-Year National Health Plan, proposing to compile a list of categories of data for release, and carry out a pilot operation of public medical and health data authorization. In January 2023, the National Medical Security Work Conference proposed that local governments should use big data to drive the reform and development of medical insurance, and make better use of the big data from medical insurance in a safe and orderly manner. With a clearer policy pathway and more scenarios of medical insurance data application, the medical insurance business will surely see the emergence of new business models and growth this year.


Price wars become a fight for survival

China's auto industry has been caught in a fierce price war since the first quarter of 2023. In January, Tesla announced price cuts ranging from 6% to 14% for all models. In response, in March, more than 40 auto brands slashed prices or launched promotional campaigns in various forms. Dozens of provinces and cities have introduced a slew of preferential policies for car purchases to stem weak consumer demand given that the automotive industry remains one of the pillars of the local economy.

What triggered the price war and what are its ramifications?

Let us look at the causes first. Changes on the demand and supply sides contributed to the outbreak of an industry-wide price war.

  • On the demand side, multiple factors such as lingering unemployment, and slow marginal improvement in residents’ income and weak consumer confidence have led to weak consumer demand. Meanwhile, the preferential purchase tax policy in the second half of 2022 resulted in an increase in front-end demand for gasoline vehicles.
  • On the supply side, leading EV companies with high profit margins decide to cut prices, which put pressure on gasoline car makers, thus triggering a wave of price cuts across the industry.

Aside from the price war, what signals and trends should we pay attention to?

  • Sluggish income growth and weak consumer confidence. At the macro level, the slow recovery of residents' income and consumer confidence will exact a heavy toll on car sales in the short-to-midterm. During the Pandemic, offline consumption was suppressed, which seriously affected the dining and catering industry and the tourism industry. These have now recovered as demand has bounced back with a vengeance. But the demand for optional and big-ticket consumer goods such as automobiles and communication devices has slowed down significantly since the easing of movement restrictions. Retail sales of passenger vehicles decreased 13.4% year-on-year to 4.26 million in the first quarter of 2023. The recovery of sales of large ticket items depends on the recovery of individuals' income and the improvement of consumer sentiment. But in reality, there has been only a slight improvement in per capita income and consumer confidence has been stagnant since 2020.  Growth rates of individuals' disposable income have been 4.7%, 6.9%(two-year average growth) and 5.0%, respectively, significantly lower than the pre-covid level of 8.9% in 2019. At the same time, the unemployment rate has picked up again: the urban surveyed unemployment rate rose by 0.1 percentage point to 5.6% in February, and the surveyed unemployment rate of the youth aged 16-24 increased by 0.8 percentage point to 18%, significantly higher than the same period in previous years. Even if the economy resumes its healthy growth and unemployment rates improve, it will still be some time before people start to splurge again. In the short-to-mid term, automakers will face demand constraints arising from pessimistic consumer sentiment and weak willingness to spend. Therefore, until the income of consumers improves substantially, both local subsidy policies and price cuts among car makers will have a limited effect on car sales.
  • The ‘scar effect’ of the Pandemic on consumer demand.  There is a notion that the pandemic will continue to have an impact on the economy, psychology and other aspects of people's daily life, a so-called "scar effect", which not only suppresses current consumption, but also affects long-term consumer willingness to spend. In terms of psychology, consumers appear to have reduced impulsive consumption, and even for daily necessities, they also try their best to seek out brands and products with the best price to quality ratioi Chinese consumers are becoming increasingly rational when it comes to spending. This is why the large-scale promotions from car companies since March have not only failed to translate into sales but have whetted consumers' wait-and-see sentiment. In the long run, in the face of more pragmatic and rational Chinese consumers, car companies need to re-examine their pricing strategies and product competitiveness. 
  • At the industry level, price wars will further accelerate the consolidation of China's auto industry. There are about 126 brands with sales records in China. The top 15 auto companies account for 70% of the market share, which means that more than 100 companies compete for the remaining 30%, and the average potential sales volume of each company is less than 70,000 units annually, which further indicates that there is a visible risk of excessive production capacity in China. In the future, market consolidation will speed up, given the sluggish demand and fierce competition triggered by industry evolution. New energy vehicles have been competing neck-by-neck with gasoline cars in various segments.
  • Price wars test the profitability of companies, and hence there has been a shift in the evaluation criteria for the competitiveness of car companies from single product strength and technological advancement to systematic and comprehensive capabilities. China's new energy car companies have completed the initial accumulation of sales and users with the help of policy support and first-mover advantages. However, with industry scaling and technology maturing, the focus of market competition has gradually shifted to systematic capabilities. As competition intensifies across the industry, car companies will not only have to continue to maintain high capital expenditure, but they will also need to pay closer attention to investment returns and make R&D investment more targeted as well. In the meantime, they will tap into the cost reduction potential of various business processes, for instance, reducing the number of parts and sharing parts among different cars in order to reduce overall BOM (bill of material) costs, controlling the price fluctuation of key raw materials to minimize procurement costs, and improving the localization rate, automation rate, process optimization and other measures to control production costs.

To sum up, the price war epitomizes the current situation of weak demand and intensified competition in the auto industry. Although the impact of this may differ from one company to the next, across the board enterprises are reacting by going back to the basics: focusing on developing their core competencies in order to weather the hard times.

Consumer Product & Retail

Competition amongst local life businesses gets fierce

As short video giants like Douyin and Kuaishou and social e-commerce giant Pinduoduo's Kuaituantuan have continued to ramp up their investments in local life businesses, public interest in this industry has rapidly increased. ‘Local life business’ is an integrated service platform that collects information on physical stores such as catering delivery, group-buys, hotels, tourism services, beauty salons, education and so on, in the region where consumers live. There are two basic models for these platforms: home delivery service and in-store service. The home delivery model mainly focuses on goods delivery and grocery delivery, businesses which grew like weeds during the pandemic, with Meituan,, and Dada being the major players. The in-store service model refers to consumers purchasing products and services in advance at discounted prices online, and picking up the products and/or using the service in-store later on. This mode is the key deployment area of short video content platforms such as Douyin, Kuaishou. Meituan used to dominate the in-store service model in the supply chain and UGC content space before Douyin and Kuaishou showed up. According to iResearch data, the overall online penetration rate of local life services in China in 2020 was only 24.3% while the penetration rates of online shopping users overall and online delivery users reached 78.6% and 44%, respectively, in the same year. Therefore, there is still significant space for growth in the local life business platform's in-store service model.

Douyin and Kuaishou quickly expanded their market shares through low-price group-buy, relying on their huge number of users in the lower-tier cities and consumers' preference for cost effectiveness after the pandemic. Meituan's Gross Merchandise Volume of in-store business reached  RMB 236 billion in 2022 while Douyin's GMV in local life business was only RMB 77 billion, which accounted for 32% of Meituan's in-store business. In 2023, the presence of short video giants in local life business is accelerating. Data shows that in March 2023, Douyin's GMV from local life business reached RMB 15.6 billion, with a year-on-year growth of 400%. At the same time, Kuaishou and Kuaituantuan also invited catering, entertainment, and beauty merchants to come onto their platforms.

Chart: Persona of Douyin and Kuaishou livestreaming viewership in Feb, 2022

Source: Questmobile

In response to the rapid increase in the local life business market share by short video platforms, Meituan introduced a new service  -- special price for group buys – which introduced affordable catering chains into the system, aiming to shore up its share of the wallets of price-conscious users. According to a survey conducted by iiMedia, consumers are keen to consume discounted group-buying products or services such as catering packages. Catering packages are significantly more attractive to consumers in the lower-tier cities than their counterparts in tier-1 and new tier-1 cities. On the other hand, willingness to purchase group-buy products for hotels, tickets to tourist sites, and beauty salons and services is relatively low, and there is still significant room for growth there.

Table: Consumer willingness to spend in different tier cities by product category (2023)


As new entrants and traditional giants in the field accelerate their efforts to shore up their share of the wallets of price-conscious consumers, competition for local life in-store service models will intensify. Although short video platforms are performing well at this stage, the strategy of low-price subsidies is not a long-term solution. Short video platforms will still face many challenges in the local life business. On the one hand, offline merchants have insufficient power to operate short video content. Even though Douyin has introduced the content service provider system, the charges for live-streaming promotion of products and services have increased the operating costs of offline merchants. On the other hand, from a user's perspective, excessive "sowing the seed" content may affect the user experience. In future, apart from the incentive mechanisms to attract offline merchants to set up their marketing and sales channels on the short video platforms, Douyin and Kuaishou may also optimize the deployment of video content and page products, and use emerging content generation tools such as AI generated content to meet merchants' content marketing demands while ensuring good consumer experience.


1. Public data refers to the data generated and managed by government departments and public enterprises and institutions in their administrative and public services.  

2. According to the Xinhua News, in 2022, China's data output reached 8.1ZB, of which public data controlled by the government accounted for more than 80%, which is about 6ZB according to the calculation.

3. 2023 China Consumer Insight and Market Outlook, Deloitte Consulting

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