2022 Q2 Deloitte CFO Express

Since this Q1, pandemic and Ukraine crisis brought uncertainties to domestic economic development. Despite stronger-than-expected Q1 GDP data of 4.8% y-o-y, Q2 GDP growth is expected to be much lower due to supply chain disruptions, a subdued housing market and the adverse impact of lockdowns on consumption and business in general. Further stimulus has become more imperative as the global economy has been reeling from a stagflationary shock from the Ukraine-Russia crisis and investors' perception that the Fed is behind the curve. For the past couple of months, the government has consistently announced new measures to boost consumption and renewed their calls for infrastructure investment, while a few cities have relaxed home purchase restrictions and the PBOC has just lowered 5-year loan prime rate ("LPR") by 15bp.

This issue of CFO Express features Deloitte's interpretations for the 2022 government work report and 2022 tech trend, and explored CFOs' role (both domestically and overseas) in promoting sustainable development and preparing for climate disclosure. It also includes discussions on trends related to Chinese companies going global, and practices associated with procurement savings and talent development under digital transformation. We hope finance executives and their colleagues find these excerpts instructive.

Leaning on the fiscal lever

Deloitte Chief Economist, Sitao Xu, shares his latest perspectives on the upcoming stimulus in light of Omicron-induced disruptions. His main takeaways are:

1. As the economy has been hit by supply chain disruptions, a subdued housing market and lockdown measures, GDP growth could still hit 4% - 4.5% in 2022 with appropriate stimulus package.
2. Given the current global economic environment, the fiscal lever ought to take on more of the heavy lifting in the post-COVID era. Policymakers shall try to avoid ramping up investments in sectors which are plagued by over-capacity, and front-load projects which were previously earmarked in 2023 and 2024 so as to boost growth while mitigating side effects.
3. China is in a relatively strong position in terms of its balance of payments, being cushioned by a healthy current account surplus and its "almost sealed" borders for travellers this year. A more flexible RMB exchange rate can provide additional space for monetary policy, thereby boosting growth.

2022 government work report: Interpretations and industry outlook

The Chinese government maintains the general principle of 'seeking progress while keeping performance stable' in its 2022 government work report ("GWR"). To promote high quality development, the GWR emphasizes more calibrated monetary and fiscal policies, focuses more on improving the efficiency of policy measures while ensuring their potency. Based on our observation of China's economy, we have summarized the following highlights:

Employment first: Projected target for urban unemployment rate is set at no more than 5.5%. An employment-first policy will be pursued with raised efforts and intensity, and will be considered in formulating policies related to tax rebates, support for key industries, and employment for key groups.

Government spending: Macro policies, including proactive fiscal policy and prudent monetary policy, should be kept consistent and made more effective and produce effects earlier. Policy tools in reserve should be deployed promptly to ensure stable economic performance. Projected annual growth rate of government spending in the broad sense (i.e., budgetary fund and government investment funds) is set to reach 12.8%, in order to support infrastructure investments and increase transfer payments from central government to local governments.

Scientific and technological innovation: To promote innovation-led development and strengthen the foundation of the real economy, the GWR outlines four key development areas, digital economy; innovation capability; incentives for innovation among enterprises and core competencies of the manufacturing sector. The digital economy will continue its rapid growth momentum of recent years, and digitalization will play a bigger role in empowering and transforming traditional industries and building smart cities.

High-quality opening-up: The Regional Comprehensive Economic Partnership (RCEP) has come into effect, and China plans to negotiate and conclude high-standard free trade agreements with more countries and regions. China will remain firm in upholding the multilateral trade and is ready to work with all countries to enhance mutually beneficial cooperation and outcomes for all.

Increase domestic demand: Promotions will be arranged and delivered for the sectors hardest hit by the pandemic, including catering, retail, tourism and leisure life. Promotion for big ticket item consumption revolving around cars, home appliances and home furnishing will continue, and potential of consumption upgrading in the rural areas will be further tapped and unleashed.

Support enterprises: The support for enterprises will take various forms, including tax and fees cuts and tax refunds to improve cash flow. Additional tax deductions for R&D costs will be granted with higher deduction coverage for small and medium "sci-tech" enterprises. A policy of refunding excess input VAT credits ahead of time this year will help alleviate liquidity crunches for enterprises.

We have also summarized the key policy measures and their implications for each strategic sector in our industry outlook. 

Tech trends 2022

Deloitte's Tech Trends 2022 report reveals automation as the emerging key to both sustaining and enhancing baseline operations, and in turn empowers workers to move up the value chain and spend their time solving problems to create ever more value.  In the latest report, Deloitte explores the most valuable tech trends in the next 18 to 24 months to help companies prepare better for the future of technology.

• Simplified Shared data mechanism can create shared opportunities and new business models. As the data-sharing trend advances, more organizations will engage in "data collaboration" to tackle common challenges and pursue mutually beneficial revenue, operational, and research opportunities.
• The vertical cloud trend is gaining momentum. Cloud giants, software vendors and system integrators are developing an array of industry-specific cloud-based solutions that enable organizations to automate manual tasks and shift their focus to competitive differentiation. Deloitte projects that value of the industry cloud market could reach US$640 billion within the next five years.
• Block-chain and DLT platforms are fundamentally changing the nature of doing business across industries and helping companies reimaging how they make and mange identity, data, brand, professional certifications, copyrights and other tangible and digital assets.
• IT organizations are modernizing their back offices, from a manual tasks-driven model to a proactive approach of self-service and engineered automation.
• Cyber AI can be a force multiplier that enables organizations to respond faster than their attackers, and anticipate these moves and react to them in advance. Although cyber AI technology and tools are in their early stages, the global market is expected to grow by US$19 billion between 2021 and 2025.
• As the range of physical devices and capabilities explodes, CIOs should rethink device governance and oversight, and reconsider how their technology workforce is organize, defined, managed, and trained. Besides, business leaders will also need to gauge the impact of physical devices on various business areas. 

Issue one of the New era for Chinese globalization White Paper series <The new era for Chinese globalization>: certainty and uncertainty of Chinese companies going global

The Covid-19 pandemic outbreak has led to suspensions of economic activities and disruptions to global supply chains since early 2020. In light of geopolitical tensions and the pandemic, the volume and value of overseas M&A by Chinese enterprises has declined. As China enters in the 14th Five-Year Plan period and embraces a new development paradigm, high quality opening-up are promoted to achieve high quality development, and the goal of becoming a world-class local enterprise is still a priority for many companies in China. With more than a decade of professional services experience in assisting Chinese companies going global and based on scenario analysis of the global macroeconomic outlook, Deloitte summarizes the new trends and characteristics of Chinese companies going global:

• Destinations for overseas M&A have become more diverse. Activities associated with Belt and Road countries and regions have gained traction, accounting for more than half of total outbound deal value in 2021. Deal value and volume related to North America and Western European countries have gradually declined
• The sectors for outbound activity have become more focused. Driven by industrial upgrade and transformation, acquisitions in the real estate and energy sectors have been more prudent. There remains a high willingness to invest in high tech sectors (e.g. digital economy, IT industry and pharmaceuticals)
• Many companies have an increasing need to strengthen their foothold in the global production chains. With energy shortages and intensification of market competition, many companies have not only had to respond and navigate the negative impact of ongoing trade protectionism, but have also looked overseas to search for new markets to export domestically-developed technologies and products. The export and replication of locally-developed new business models abroad are projected to be the short-term globalization scenario.   

The need to expand overseas requires a more comprehensive set of capabilities for companies operating abroad, including controlling risks, promoting digitalization, and developing global talent. The Deloitte Consulting team has developed a maturity model for global operations based on the best practices and guidelines observed through serving Chinese companies expanding abroad. The model has 10 dimensions of capability, ranging from strategy and operations, to talent management and infrastructure systems. The model helps companies assess the maturity of their global operations, and evaluate and clarify future goals and roadmaps to constantly improve on their capability to operate overseas. 

The sustainability imperative for CFOs

Deloitte regularly collects and tracks the perspectives of CFOs worldwide on the business environment, corporate strategy, and financial priorities. The latest Deloitte China CFO Survey includes the widely discussed topic of sustainability, examining the impact of China's "dual carbon" strategy on organizations, assessing the progress of companies' sustainability plans, and exploring the role of CFOs in driving sustainable development. The majority of respondents have begun sustainability-related works, and the survey shows that China’s dual carbon strategy is having varying levels of impact on different industries. The survey findings provide references and advice for CFOs to spearhead their companies' sustainability plans.

A large proportion of respondents are optimistic about the current economic environment in China and prospects for their businesses, but are generally more cautious about the outlook for the coming year. Tightened regulations in 2021 raised companies’ concerns about policy and regulatory issues. Changes in government policies and regulations are regarded as the biggest external risk, cited by 50% of respondents compared to a mere 27% just one year ago. CFOs see the post-pandemic recovery, inflation, geopolitical issues and commodity price fluctuations as the other top external risks. From an industry perspective, respondents from life science and healthcare consider policy and regulatory changes as a major external risk, with energy, resources and industrials more concerned about commodity price fluctuations and inflation. Cost pressures due to inflation and an inability to drive growth amid concerns about the post-pandemic recovery rank as the top two internal risks worrying CFOs. From an industry perspective, CFOs in energy, resources and industrials are most concerned about employees’ ability to respond to changes in the external environment and technology, while an inability to drive growth is top of mind for CFOs in financial services.

Most respondents recognize the positive financial impact of sustainability strategies, but the level of awareness and engagement in sustainable development have yet to improve. Implementing sustainable development will enhance revenue, according to 59.8% of respondents, while 82.4% and 65.7% think the costs of compliance and raw materials will increase respectively. About a quarter of the enterprises polled have completed a climate assessment, but the percentage of companies fully reflecting the impact of this assessment in financial statements is as low as 10.8%. The major challenges CFOs face in sustainable development include a lack of accurate data and information to assist decision-making, the absence of a clear and unified carbon emissions-reduction strategy and accountability system, and a shortage of professional talents. 

SEC climate disclosure and assurance: What should U.S.-listed companies in prepare?

The U.S. Securities and Exchange Commission ("SEC") has issued a draft on climate disclosure by listed companies, requiring them to provide disclosures on greenhouse gas emissions (GHG), climate-related financial statements, and corporate governance in their registration statements and annual reports. This proposal will be implemented in phases, and transform climate-related disclosure requirements in the U.S., which we summarize below:

• Note to financial statement disclosures: If exposure exceed 1% of a financial statement line item, disclosures shall include the financial impact of extreme weather events and other natural conditions (e.g. impairment losses), and expenses related to transition plans (e.g. change in years of useful life).
• GHG emissions disclosure: Disclosure of scope 1 and scope 2 GHG emissions should include both standalone and aggregated metrics by GHG type. Scope 3 GHG emissions are required for companies on which these have a material impact or if they are included in the registrant’s emission reduction targets or goal. Disclosures of GHG emissions should be in gross terms (excluding carbon offsets) and GHG intensity measure will also be required.
• Governance and other qualitative disclosure: Disclosures include how the company's board and management oversee climate-related risks and relevant risk management processes. Other qualitative requirements include the identification process of climate-related risks, risk assessment and management, and transition plans.
• Implementation schedule: The proposal will be implemented in phases. If the rules become effective by December 2022, large accelerated filers are required to make climate-related disclosures for the 2023 fiscal year.

Based on the proposal, we advise U.S.-listed companies to establish and strengthen corporate-level climate governance with internal and external stakeholders; identify climate-related transformation risks (including legal and regulatory, market, product, and physical risks) and opportunities, and analyze how these will impact financial statements; and  use existing financial reporting and control structure to evaluate the process for gathering and monitoring climate data, and prepare for climate information disclosures.

Targeting procurement: Why CFOs should take direct aim at indirect spend

Historically, optimizing indirect procurement is often low on the priority list of cost savings. CFOs and chief procurement officers ("CPO") have usually focused on direct materials instead of less-visible indirect categories, such as travel, logistics, IT maintenance, and repairs. This is partly because these indirect spending is managed by multiple different functions. Deloitte's 2021 Global CPO survey shows that indirect goods and services can involve up to 10% of revenue in some industries and contain great potential for more efficient allocation of funds. CFOs can consider the following actions to help optimize indirect procurement:

1. Clarify the CFO's role in cost savings.
2. Group indirect suppliers into a standalone category, organize a designated indirect-procurement team and assign procurement professionals to make indirect cost savings.
3. Combine budget setting and procurement planning and consider installing a head of indirect procurement under CFO to coordinate and manage procurement needs among different functions.
4. Apply technology to ensure visibility into indirect spend and compliance with internal control policies.

Tax transformation trends series: Talents reimagined

In this second report of the Deloitte tax transformation trends series, we look at the future of tax talent, particularly how new digital business models, sustainable transformation and hybrid working models have led the tax department to rethink the work, workforce and workplace. Based on a survey and in-depth interviews with 300+ senior tax and finance professionals in 10 geographies, we gain an understanding of how these tax leaders are reimaging their talent models.

1. Tax work: 41% of the tax leaders say that deeper automation is top priority for compliance process management. Increased automation and reliance on shared service centers (SSCs) and outsourcing providers enable team members to accelerate efficiency, focus on higher-value advisory work, and unlock the digitization of their tax operations.
2. Tax workforce: Tax leaders will upskill and diversify the roles on their teams, with data analytics (45%) and technology transformation (43%) at the top of their wish lists. At the same time, the hybrid who combines technology skills with a deep understanding of tax and finance processes and data is highly sought after. The tax leaders we surveyed identified an increasing need for tax professionals with more consultative capabilities in areas of digital business model (65%), supply-chain restructuring (49%), and sustainability (48%) are required.
3. Tax workplace: 78% of tax leaders say hybrid and remote-working models will be embedded in the long term for productivity and cost-efficiency gains. While challenges, such as skills development and career progression in a mixed workplace environment, as well as visibility and relationships with the business units in remote or hybrid work regimes must be addressed.