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20 January 2022

Deutsche Bank

Research

Asia

China

Cross-Discipline

China Market

Perspectives

Date

China 2022 Outlook: Invest for a

Greener Future

Key theme: Invest for a greener future: China has been shaping up its long-term

green development strategy and has introduced a number of key policies and set

specific timelines for implementation since September last year. We believe these

actions set the stage for green/ESG investment and financing as the most important

market theme in the coming decades. In 2022, we expect China will continue to

refine the “1+N” policy framework. We expect fiscal stimulus spending to focus on

green infrastructure investment in 2022, mostly in new infrastructure for clean

energy/digitalization/data centre/5G etc. Green investment will accelerate in 2022

and with favorable policy and regulatory backing, we expect robust growth in

regulation, structure and the breath of China's green finance market 2022.

Specifically, China - EU Common Ground Taxonomy likely will be finalized and

officially introduced later this year, becoming the first global common taxonomy for

green finance. We think financial regulators may consider introducing new policy

tools and favorable regulatory conditions to incentivize commercial banks to

extend credits.

Economic outlook: We think “beating upwind” also describesChina’s economy in

2022. China's previous growth model has reached its limits. The government's

pursuit of high-quality growth has set the economy in a direction full of headwinds,

slowing the economy in 2021. However, with the right policies, economic

headwinds can also be turned into supporting forces. Stabilizing growth has now

become a top priority. 2022 will be a test of how policymakers can implement

growth-enhancing reforms (such as reforms to improve efficiency, green

investment to achieve climate goals) while not going back to the old stimulus

model.

RMB FX outlook: RMB was the strongest currency in the EM complex in 2021 on

a spot return basis, and one of the strongest on total returns, appreciating not just

versus the dollar – despite the Fed’s hawkish pivot – but also on a broad trade-

weighted basis, with the CFETS basket rising to new record highs since the latter

was introduced in 2015. Into 2022, though, this dynamic we feel is most under risk

from two factors - (1) the challenge to sustaining its Zero Covid strategy posed by

a more infectious Omicron variant; and (2) the sharper contrast between policy

outlooks in China versus the rest of the world. The early part of the year is probably

where the risks are the highest from these two factors. Beyond these near-term

risks, RMB outlook for the year will be driven more by three themes - (1) China's

'Zero-Covid' strategy, and its exit strategy; (2) the homecoming of Chinese

companies listing back in China, given the tightening of listing rules by Chinese and

Linan Liu

Strategist

+852-2203 8709

Perry Kojodjojo

Strategist

+852-2203 6153

Yi Xiong, Ph.D.

Chief Economist

+852-2203 6139

Grant Feng

Research Associate

Deutsche Bank AG/Hong Kong

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 051/04/2021. UNTIL 19th MARCH

2021 INCOMPLETE DISCLOSURE INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE APPENDIX 1 FOR FURTHER

DETAILS.

Distributed on: 19/01/2022 16:46:09 GMT

7T2se3r0Ot6kwoPa

20 January 2022

China Market Perspectives

Page 2 Deutsche Bank AG/Hong Kong

US regulators; and (3) the ongoing inward FDI, driven by foreign investors'

commitment to the Chinese market. In general, the sum of the three themes should

be supportive (albeit modestly) of RMB strength. To turn the tide, China will have to

be more proactive in deploying its various FX toolkits, including: (a) loosening its

macro policies; and/or (b) widening the outflow channel to weaken the RMB.

RMB fixed income outlook: We believe China fixed income will continue to be a

solid diversification play for global investors in 2022, despite plenty of uncertainties

surrounding the global pandemic, inflation and monetary policy normalization. We

envisage three defining trends in the RMB market in 2022: de-correlation, duration

risk and global allocation. We expect both 1Y and 5Y LPR fixings to fall by 10bps on

January 20th, reflecting full pass-through of the latest MLF rate cut. We see risks

tilted towards one to two policy easing actions before the end of H1 this year and

we forecast the benchmark 7D repo rate to average 2% in H1. We expect modest

growth in fiscal financing in 2022 but financing likely will be more front-loaded. Risk

of emerging credit events and the fact that financial conditions remain constrained

for targeted sectors suggest credit pricing "polarization" will persist in H1. We

believe in the near term the balance between further policy easing, supply risk and

credit concern suggests that the downward trend of RMB interest rates will

continue. We went into 2022 with a recommendation to extend duration as we

expect monetary policy easing to be front loaded. We have recommended

extending to the 10Y part of the CGB/CDB curve, and receiving 5Y NDIRS at 2.4%.

20 January 2022

China Market Perspectives

Deutsche Bank AG/Hong Kong Page 3

Table Of Contents

Overview............................................................................4

Invest for a Greener Future.................................................5

Green investment is a multi-decade theme....................................................... 5

Economic outlook ............................................................ 12

1. Overview: beating upwind...........................................................................12

2. Policy stance shifts to supporting growth....................................................13

3. Investment: a green leap forward................................................................16

4. Covid and consumption: the Omicron question...........................................18

5. Housing market rebound is expected in H2 2022........................................20

6. Narrower CPI/PPI gap to benefit manufacturing sector...............................22

7. CNY will likely remain a strong currency......................................................24

RMB FX outlook............................................................... 27

If successful, China's 'Zero-Covid' strategy should keep the RMB .................28

A gradual financial decoupling between the US and China.............................33

Foreign corporates remain committed to China..............................................36

Policy change is necessary to turn the tides against the RMB.........................38

RMB fixed income outlook...............................................42

/56

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20January2022DeutscheBankResearchAsiaChinaCross-DisciplineChinaMarketPerspectivesDateChina2022Outlook:InvestforaGreenerFutureKeytheme:Investforagreenerfuture:Chinahasbeenshapingupitslong-termgreendevelopmentstrategyandhasintroducedanumberofkeypoliciesandsetspecifictimelinesforimplementationsinceSeptemberlastyear.Webelievetheseactionssetthestageforgreen/ESGinvestmentandfinancingasthemostimportantmarketthemeinthecomingdecades.In2022,weexpectChinawillcontinuetorefinethe“1+N”policyframework.Weexpectfiscalstimulusspendingtofocusongreeninfrastructureinvestmentin2022,mostlyinnewinfrastructureforcleanenergy/digitalization/datacentre/5Getc.Greeninvestmentwillacceleratein2022andwithfavorablepolicyandregulatorybacking,weexpectrobustgrowthinregulation,structureandthebreathofChina'sgreenfinancemarket2022.Specifically,China-EUCommonGroundTaxonomylikelywillbefinalizedandofficiallyintroducedlaterthisyear,becomingthefirstglobalcommontaxonomyforgreenfinance.Wethinkfinancialregulatorsmayconsiderintroducingnewpolicytoolsandfavorableregulatoryconditionstoincentivizecommercialbankstoextendcredits.Economicoutlook:Wethink“beatingupwind”alsodescribesChina’seconomyin2022.China'spreviousgrowthmodelhasreacheditslimits.Thegovernment'spursuitofhigh-qualitygrowthhassettheeconomyinadirectionfullofheadwinds,slowingtheeconomyin2021.However,withtherightpolicies,economicheadwindscanalsobeturnedintosupportingforces.Stabilizinggrowthhasnowbecomeatoppriority.2022willbeatestofhowpolicymakerscanimplementgrowth-enhancingreforms(suchasreformstoimproveefficiency,greeninvestmenttoachieveclimategoals)whilenotgoingbacktotheoldstimulusmodel.RMBFXoutlook:RMBwasthestrongestcurrencyintheEMcomplexin2021onaspotreturnbasis,andoneofthestrongestontotalreturns,appreciatingnotjustversusthedollar–despitetheFed’shawkishpivot–butalsoonabroadtrade-weightedbasis,withtheCFETSbasketrisingtonewrecordhighssincethelatterwasintroducedin2015.Into2022,though,thisdynamicwefeelismostunderriskfromtwofactors-(1)thechallengetosustainingitsZeroCovidstrategyposedbyamoreinfectiousOmicronvariant;and(2)thesharpercontrastbetweenpolicyoutlooksinChinaversustherestoftheworld.Theearlypartoftheyearisprobablywheretherisksarethehighestfromthesetwofactors.Beyondthesenear-termrisks,RMBoutlookfortheyearwillbedrivenmorebythreethemes-(1)China's'Zero-Covid'strategy,anditsexitstrategy;(2)thehomecomingofChinesecompanieslistingbackinChina,giventhetighteningoflistingrulesbyChineseandLinanLiuStrategist+852-22038709PerryKojodjojoStrategist+852-22036153YiXiong,Ph.D.ChiefEconomist+852-22036139GrantFengResearchAssociateDeutscheBankAG/HongKongDISCLOSURESANDANALYSTCERTIFICATIONSARELOCATEDINAPPENDIX1.MCI(P)051/04/2021.UNTIL19thMARCH2021INCOMPLETEDISCLOSUREINFORMATIONMAYHAVEBEENDISPLAYED,PLEASESEEAPPENDIX1FORFURTHERDETAILS.Distributedon:19/01/202216:46:09GMT7T2se3r0Ot6kwoPa20January2022ChinaMarketPerspectivesPage2DeutscheBankAG/HongKongUSregulators;and(3)theongoinginwardFDI,drivenbyforeigninvestors'commitmenttotheChinesemarket.Ingeneral,thesumofthethreethemesshouldbesupportive(albeitmodestly)ofRMBstrength.Toturnthetide,ChinawillhavetobemoreproactiveindeployingitsvariousFXtoolkits,including:(a)looseningitsmacropolicies;and/or(b)wideningtheoutflowchanneltoweakentheRMB.RMBfixedincomeoutlook:WebelieveChinafixedincomewillcontinuetobeasoliddiversificationplayforglobalinvestorsin2022,despiteplentyofuncertaintiessurroundingtheglobalpandemic,inflationandmonetarypolicynormalization.WeenvisagethreedefiningtrendsintheRMBmarketin2022:de-correlation,durationriskandglobalallocation.Weexpectboth1Yand5YLPRfixingstofallby10bpsonJanuary20th,reflectingfullpass-throughofthelatestMLFratecut.WeseeriskstiltedtowardsonetotwopolicyeasingactionsbeforetheendofH1thisyearandweforecastthebenchmark7Dreporatetoaverage2%inH1.Weexpectmodestgrowthinfiscalfinancingin2022butfinancinglikelywillbemorefront-loaded.Riskofemergingcrediteventsandthefactthatfinancialconditionsremainconstrainedfortargetedsectorssuggestcreditpricing"polarization"willpersistinH1.Webelieveintheneartermthebalancebetweenfurtherpolicyeasing,supplyriskandcreditconcernsuggeststhatthedownwardtrendofRMBinterestrateswillcontinue.Wewentinto2022witharecommendationtoextenddurationasweexpectmonetarypolicyeasingtobefrontloaded.Wehaverecommendedextendingtothe10YpartoftheCGB/CDBcurve,andreceiving5YNDIRSat2.4%.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage3TableOfContentsOverview............................................................................4InvestforaGreenerFuture.................................................5Greeninvestmentisamulti-decadetheme.......................................................5Economicoutlook............................................................121.Overview:beatingupwind...........................................................................122.Policystanceshiftstosupportinggrowth....................................................133.Investment:agreenleapforward................................................................164.Covidandconsumption:theOmicronquestion...........................................185.HousingmarketreboundisexpectedinH22022........................................206.NarrowerCPI/PPIgaptobenefitmanufacturingsector...............................227.CNYwilllikelyremainastrongcurrency......................................................24RMBFXoutlook...............................................................27Ifsuccessful,China's'Zero-Covid'strategyshouldkeeptheRMB.................28AgradualfinancialdecouplingbetweentheUSandChina.............................33ForeigncorporatesremaincommittedtoChina..............................................36PolicychangeisnecessarytoturnthetidesagainsttheRMB.........................38RMBfixedincomeoutlook...............................................4220January2022ChinaMarketPerspectivesPage4DeutscheBankAG/HongKongOverviewnKeytheme:Investforagreenerfuture:Chinahasbeenshapingupitslong-termgreendevelopmentstrategyandhasintroducedanumberofkeypoliciesandsetspecifictimelinesforimplementationsinceSeptemberlastyear.Webelievetheseactionssetthestageforgreen/ESGinvestmentandfinancingasthemostimportantmarketthemeinthecomingdecades.In2022,weexpectChinawillcontinuetorefinethe“1+N”policyframework.Weexpectfiscalstimulusspendingtofocusongreeninfrastructureinvestmentin2022,mostlyinnewinfrastructureforcleanenergy/digitalization/datacentre/5Getc.Greeninvestmentwillacceleratein2022andwithfavorablepolicyandregulatorybacking,weexpectrobustgrowthinregulation,structureandthebreathofChina'sgreenfinancemarket2022.Specifically,China-EUCommonGroundTaxonomylikelywillbefinalizedandofficiallyintroducedlaterthisyear,becomingthefirstglobalcommontaxonomyforgreenfinance.Wethinkfinancialregulatorsmayconsiderintroducingnewpolicytoolsandfavorableregulatoryconditionstoincentivizecommercialbankstoextendcredits.nEconomicoutlook:Wethink“beatingupwind”alsodescribesChina’seconomyin2022.China'spreviousgrowthmodelhasreacheditslimits.Thegovernment'spursuitofhigh-qualitygrowthhassettheeconomyinadirectionfullofheadwinds,slowingtheeconomyin2021.However,withtherightpolicies,economicheadwindscanalsobeturnedintosupportingforces.Stabilizinggrowthhasnowbecomeatoppriority.2022willbeatestofhowpolicymakerscanimplementgrowth-enhancingreforms(suchasreformstoimproveefficiency,greeninvestmenttoachieveclimategoals)whilenotgoingbacktotheoldstimulusmodel.nRMBFXoutlook:RMBwasthestrongestcurrencyintheEMcomplexin2021onaspotreturnbasis,andoneofthestrongestontotalreturns,appreciatingnotjustversusthedollar–despitetheFed’shawkishpivot–butalsoonabroadtrade-weightedbasis,withtheCFETSbasketrisingtonewrecordhighssincethelatterwasintroducedin2015.Into2022,though,thisdynamicwefeelismostunderriskfromtwofactors-(1)thechallengetosustainingitsZeroCovidstrategyposedbyamoreinfectiousOmicronvariant;and(2)thesharpercontrastbetweenpolicyoutlooksinChinaversustherestoftheworld.Theearlypartoftheyearisprobablywheretherisksarethehighestfromthesetwofactors.Beyondthesenear-termrisks,RMBoutlookfortheyearwillbedrivenmorebythreethemes-(1)China's'Zero-Covid'strategy,anditsexitstrategy;(2)thehomecomingofChinesecompanieslistingbackinChina,giventhetighteningoflistingrulesbyChineseandUSregulators;and(3)theongoinginwardFDI,drivenbyforeigninvestors'commitmenttotheChinesemarket.Ingeneral,thesumofthethreethemesshouldbesupportive(albeitmodestly)ofRMBstrength.Toturnthetide,ChinawillhavetobemoreproactiveindeployingitsvariousFXtoolkits,including:(a)looseningitsmacropolicies;and/or(b)wideningtheoutflowchanneltoweakentheRMB.nRMBfixedincomeoutlook:WebelieveChinafixedincomewillcontinuetobeasoliddiversificationplayforglobalinvestorsin2022,despiteplentyofuncertaintiessurroundingtheglobalpandemic,inflationandmonetarypolicynormalization.WeenvisagethreedefiningtrendsintheRMBmarketin2022:de-correlation,durationriskandglobalallocation.Wewentinto2022witharecommendationtoextenddurationasweexpectmonetarypolicyeasingtobefrontloaded.Werecommendextendingtothe10YpartoftheCGB/CDBcurve,andreceiving5YNDIRSat2.4%.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage5InvestforaGreenerFutureGreeninvestmentisamulti-decadethemeLastyear,Chinabegantoimplementits14thFive-Year-Plan(2021-2025)withoverallgreentransitionofeconomicandsocialdevelopmentasoneofthekeydevelopmentthemes.In2021,Chinagrewby8.1%YoYinrealGDPbutnotably"greener"comparedwith2020.First,energyintensity(energyconsumptionperunitofGDP)fellby2.7%YoY;second,cleanenergyconsumption(naturalgas,hydropower/nuclearpower/windpower/solarpoweraccountedfor25.3%oftotalenergyconsumption,upby1pptfrom2020;andthird,outputofnewenergycarsandsolarpoweredbatteriesroseby145.6%YoYand42.1%YoY.SinceSeptember2020whenChinaannounceditsambitioustargetstoreachpeakcarbondioxideemissionsbefore2030andachievecarbonneutralitybefore2060,thenationhasbeenshapingupitslong-termgreendevelopmentstrategyandhasintroducedanumberofkeypoliciesandsetspecifictimelinesforimplementation.Webelievetheseactionssetthestageforgreen/ESGinvestmentandfinancingasthemostimportantmarketthemeinthecomingdecades.WepresentouroutlookonChina’sgreendevelopmentandgreenfinancingmarketin2022.Figure1:DownwardtrendinChina'senergyintensitywillcontinue-8%-6%-4%-2%0%2%4%6%8%YoYchginenergyintensitySource:DeutscheBank,ChinaStatisticsBureauFormalizingChina'sGreenDevelopmentRoadmapLessonsfromH1-Chinaneedstoachievecarbonreductioninacoordinatedandorderlymanner:AttheNationalPeople’sCongressinMarchlastyear,thedualcarbongoalswereofficiallyincorporatedintotheGovernmentWorkReportandChinaplannedtodraftanactionplanforachievingdualcarbongoalsandoptimizingindustrialstructureandenergystructure.Manylocalgovernmentsbegantosetandimplementlocaldualcarbongoalswhichwereeithertooaggressivetoachieveorrushedout“highenergyconsumptionandhighpollution”projects,whichresultedinrisingcarbonemissionandcarbonintensityinnineprovincesandpowercrunchinanumberofcoastalprovincesduringthesummer.LinanLiu,HongKong+85222038709Chinahasbeenshapingupitslong-termgreendevelopmentstrategyandhasintroducedanumberofkeypoliciesandsetspecifictimelinesforimplementationsinceSeptemberlastyear.Webelievetheseactionssetthestageforgreen/ESGinvestmentandfinancingasthemostimportantmarketthemeinthecomingdecades.In2022,weexpectChinawillcontinuetorefinethe“1+N”policyframework.Weexpectfiscalstimulusspendingtofocusongreeninfrastructureinvestmentin2022,mostlyinnewinfrastructureforcleanenergy/digitalization/datacentre/5Getc.Greeninvestmentwillacceleratein2022andwithfavorablepolicyandregulatorybacking,weexpectrobustgrowthinregulation,structureandthebreathofChina'sgreenfinancemarket2022.Specifically,China-EUCommonGroundTaxonomylikelywillbefinalizedandofficiallyintroducedlaterthisyear,becomingthefirstglobalcommontaxonomyforgreenfinance.Wethinkfinancialregulatorsmayconsiderintroducingnewpolicytoolsandfavorableregulatoryconditionstoincentivizecommercialbankstoextendcredits.20January2022ChinaMarketPerspectivesPage6DeutscheBankAG/HongKongTheJulyPoliburomeetingstressedthreepoints:(a)theneedtocorrect“movement-style”carbonreductiontargets;(b)Chinashouldachieveitscarbonemissionsreductiongoalsinacoordinatedandorderlymanner;(c)Chinawillforgeastrongerenergysupplysystem,whichisapriorityforreductionoflarge-scalecarbonemissions;and(d)urgedafasterrolloutofanationalactionplantofulfillthedualcarbongoals.Formalizingthecarbonpeakingandcarbonneutrality“1+N”policyframework:Chinaformalizedthe“1+N”policyframeworkfordualcarbongoalsinOctoberlastyear.The“1”referstothegeneralguidelineorthemasterplan,thesetofnationalpoliciesandregulatorybasisforanyfurtheractionplansaswellaspoliciesinkeysectorsorindustries.TheMasterPlansetsthemainobjectives,theroadmapofcarbonreductionandrelevantsupportingpolicies.OnOctober15th,attheCOP15UNConventionofBiologicalDiversityinKunming,YunanProvince,PresidentXiannouncedthat(a)Chinawillreleaseimplementationplansandsupportivemeasurestocutcarbondioxideemissionsinkeysectors,andputinplacearelatedpolicyframework(“1+N”policyframework);(b)Chinawillcontinuetoadjustitsindustrialstructureandenergymix,vigorouslydeveloprenewableenergy,andmakefasterprogressonplanninganddevelopinglargewind-powerandphotovoltaicbasesinsandyareas,rockyareasanddeserts;(c)Chinawillinvest1.5billionyuan($233million)toestablishaKunmingBiodiversityFundtosupportbiodiversityprotectionindevelopingcountries.TheWorkingGuidelineofChina’sgreentransitionwasreleasedinOctober.OnOctober24th,theCentralCommitteeoftheCommunistParty,theStateCouncilandtheNDRCjointlyannouncedthe“WorkingGuidanceforCarbonDioxidePeakingandCarbonNeutralityinFullandFaithfulImplementationoftheNewDevelopmentPhilosophy”.ThisisthemasterworkingGuidance,the“1”inthe“1+N”policyframeworkandthemostimportantplanforChina’sgreentransition.TheWorkingGuidancesuggeststhatChinamustfollowfiveprinciplesofexercisingnationwideplanning,prioritizingconservation,leveragingthestrengthsofthegovernmentandthemarket,coordinatingeffortsonthedomesticandinternationalfronts,andguardingagainstrisks.TheWorkingGuidanceshowsthatChinapromotesacomprehensivegreentransitionineconomicandsocialdevelopmentinordertoeventuallyreachnetzerocarbonemissioninthreestages:(a)by2025,EnergyconsumptionperunitofGDPwillbeloweredby13.5%fromthe2020level;carbondioxide(CO2)emissionsperunitofGDPwillbeloweredby18%fromthe2020level;theshareofnon-fossilenergyconsumptionwillhavereachedaround20%;theforestcoverageratewillhavereached24.1%,andtheforeststockvolumewillhaverisento18billioncubicmeters.(b)by2030,ChinawillseeCO2emissionsperunitofGDPwillhavedroppedbymorethan65%comparedwiththe2005level;theshareofnon-fossilenergyconsumptionwillhavereachedaround25%,withthetotalinstalledcapacityofwindpowerandsolarpowerreachingover1200gigawatts;theforestcoverageratewillhavereachedabout25%,andtheforeststockvolumewillhavereached19billioncubicmeters.CO2emissionswillreachpeakandstabilization,thendecline.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage7(c)by2060,Chinaintendstohavefullyestablishedagreen,low-carbonandcirculareconomyandaclean,low-carbon,safeandefficientenergysystem.Energyefficiencywillbeattheadvancedinternationallevel,andtheshareofnon-fossilenergyconsumptionwillbeover80%.Chinawillbecarbonneutral,anditwillhaveachievedfruitfulresultsinecologicalcivilizationandreachedanewlevelofharmonybetweenhumanityandnature.TheWorkingGuidancelaysoutspecificplansintensessionsandthirty-onemeasures,includingoptimizingplansforregionaldecarbonizationdevelopmentaswellaspromotingthedevelopmentofgreenBeltandRoadandacommitmenttostrengtheninginternationalcollaborationandtakinganactiveroleinglobalclimateandenvironmentalgovernance.TheActionPlanfocusesontakingtenactionstobeimplementedduringthe14thand15thFive-YearPlanperiod.OnOctober26th,theStateCouncilannouncedtheActionPlanofCarbonDioxidePeakingBefore2030.Itisthefirstofthe“N”policies(Nreferstospecificactionsplansfordifferentsectoranddifferentindustries)inthe“1+N”framework.TheActionPlansetsspecificnon-fossilfuelconsumption,energyutilizationanddecarbonizationobjectivesduringthe14thand15thFive-YearPlanaswellasgivesdetailsofthetenmajorpeakingcarbondioxideemissionsactions-namelytheactionforgreenandlow-carbonenergytransition,theactionforenergysaving,carbonemissionmitigationandefficiencyimprovement,theactionforpeakingcarbondioxideemissionsintheindustrysector,theactionforpeakingcarbondioxideemissionsintheurban-ruraldevelopmentarea,theactionforpromotinggreenandlow-carbontransportation,theactionforpromotingcirculareconomyincarbonmitigationpurpose,theactionforadvancinggreenandlow-carbontechnologyinnovation,theactionforconsolidatingandenhancingcarbonsink,theactionforgreenandlow-carbonsociety,theactionforpromotingallregionspeakingcarbondioxideemissionshierarchicallyandorderly.TheDecemberCentralEconomicWorkConferencereiteratednationalcoordinationandriskmanagementasChinaforgesaheadwithgreentransition.InDecemberattheCentralEconomicWorkConference,policymakersreiteratedthatitisimportanttoproperlyunderstandthatChinawillnotattempttoachievethesegoals“inonebattle”andChinawillsticktotheprincipalofnationalcoordination,prioritizingenergyconservation,andpreventrisks.Asafeandreliablesupplyofnewenergyalternativesisapreconditionforthecountrytograduallyreplacetheuseoftraditionalenergy.GiventhefactthatChinaisrichincoalresources(about90%ofChina’sprovenreservesoffossilfuelresources),itshouldstrengthenthecleanandefficientuseofcoal,increasetheabsorptivecapacityofnewenergy,andoptimizetheuseofcoalandnewenergy.Chinashouldstrivetomakekeybreakthroughsingreen/lowcarbontechnology.Renewableenergyandenergyusedasrawmaterialswouldbeexcludedfromthecapontotalenergyconsumption;Chinashouldmakeanearlyshiftfromcontrollingenergyconsumptionvolumeandintensitytocontrollingtheamountandintensityofcarbonemissions,aswellasestablishinganincentiveandconstraintmechanismforpollutioncontrolanddecarbonization.In2022,weexpectChinawillcontinuetorefinethe“1+N”policyframework.Weexpectmorepoliciestobeintroducedtosmoothyconnecttothe“1+N”policyframeworkwithcleartargetsandeffectivemeasures,includingspecificgreentransitionplansforenergy,industry,transportation,agricultureandurbanandruralconstruction,andimplementationplansfordifferentsectorsandregions.Wealsoexpectsupportingpolicieswithregardtopromotinggreentechnology/innovation,20January2022ChinaMarketPerspectivesPage8DeutscheBankAG/HongKongcarboncalculation,carbonstatisticsreportingandmonitoring,aswellasfiscal,financialandpricingpolicies.MeanwhileweexpectChinacontinuestoadjustindustrystructureandoptimizeenergystructure.Weexpectfiscalstimulusspendingtofocusongreeninfrastructureinvestmentin2022,mostlyinnewinfrastructureforcleanenergy/digitalization/datacentre/5Getc.Figure2:China's"1+N"policysystemofdecarbonizationSource:DeutscheBank,NDRCpolicydocumentsGreenFinanceMarketItiswidelyrecognizedthatgreenfinanceiscriticalfortheimplementationofChina'sgreentransitionandalongwithshapingupitsZeroCarbonStrategy,Chinamadesignificantprogressinestablishingkeypillarsgoverningitsgreenfinancialmarketlastyear.GreentaxonomynUnifieddomesticgreentaxonomy:InApril2021,thePBoCreleasedtheGreenBondEndorsedProjectCatalogue,asetoffundamentalstandardsforselectinginvestmenttargetsofgreenbonds;TheCatalogueconsidersissuessuchasclimatechanges,pollutioncontrolandenergyconservationbyremovingfossilfuelprojectsanditisconvergingtoglobalgreenbondstandards.nStandardsforEnvironmentalRightsFinancingInstruments.OnJuly22nd,thePBoCreleasedStandardsforEnvironmentalRightsFinancingInstruments,whichdefinesdifferenttypesofenvironmentalrights,providesguidanceaboutthepricing,riskassessmentandfinancingprocessoftheseinstruments.ThiswillserveasthebasisforcorporateandfinancialinstitutionstousethesetoolsforcuttingcarbonemissionandfacilitatethedevelopmentofemissiontradingsysteminChina.nChinaandtheEUareworkingonacommongroundtaxonomy:InNovember2021,theEUandChinareleasedareportlookingtoidentifycommonalitiesanddifferencesbetweentheEU’sandChina’sgreentaxonomy.The“commongroundtaxonomy”compared55activities(outof79)acrosssixsectors,includingagriculture,forestryandfishing;20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage9manufacturing;andelectricity,gas,steamandairconditioningsupply.Atthattime,thereremained24activitiespendingforcomparisonandtheIPSF(InternationalPlatformonSustainableFinance)wasseekingfeedbackonthecommongroundtaxonomywithadeadlineofJanuary4,2022.GreendisclosurenMandatorydisclosurebyfinancialinstitutions.InOctober,thePBoCreleasedguidelinesofenvironmentalinformationdisclosurebyfinancialinstitutions.Theguidelinesaimtostreamlineclimate-relatedinformationdisclosurestandardsforfinancialinstitutions.Weexpectmorespecificstandardsforcommercialbanks,assetmanagementandtrustfundcompaniesandinsurancecompanieswillbeissuedinduecourse.GreenincentivesnEnhancementtomacroprudentialpolicies:InJune,thePBoCrefineditsmacroprudentialassessmentframeworktoincorporategreenfinanceperformanceforfinancialinstitutions.Therefinementlookstostrengthenthesustainabilityincentivesforfinancialinstitutions,guidefinancialallocationintogreenassetsandtightenenvironmentalriskmanagement.RecentlythePBoCasked21majorbankstoconductaclimatestresstestontheirfinancingexposuretocoal-firedpowergeneration,steelandcementsectors,indicatingimprovingsystemicefforttomanageandmeasureclimaterisks.nGreenlendingfacilities:InNovember,thePBoClaunchedacarbonemissionreductionfacilitytooffercheaploanstofinancialinstitutionsthathelpfirmscutemissions.Underthenewfacility,thePBoCwillprovide60%ofloanprincipalmadebyfinancialinstitutionsforcarbonemissionreductionsat1Ylendingrateof1.75%.ThePBoChasissuedRMB95.5bnoffundsunderthefacilityinsupportofRMB142.5bngreenloans.AccordingtothePBoC,itisestimatedtheloanswillhelpabout2,817companiestocutcarbonemissionby28.76mnmetrictons.InNovember,theStateCouncilannouncedaRMB200bndedicatedrelendingquotatosupportlendingtocleanenergy.GreenproductsnChinalauncheditsCarbonTradingMarketonJuly16th2021inBeijing,ShanghaiandWuhan.China’sEmissionTradingSystem(ETS)aimstocutcarbondioxideemissionsbyrequiringcoveredentitiestopayforemissions,andinvestintechnologiesthatwillenhancefuelefficiencyandreducepollution.Intheinitialstage,thenationalETSregulated2,225poweroperatorsandrelatedentitiesfortheyear2019-20whichaccountfor40percentofthenation'scarbondioxideemissionsand20percentoftheglobalcarbondioxideoutput.TheETSisexpectedtoexpandtocoversevenotheremissionintensivesectors:petrochemical,chemical,buildingmaterials,steel,nonferrousmetal,paperanddomesticaviation.nRapidgrowthingreencredits:China’sgreenfinancingmarketsawrapiddevelopmentin2021.AccordingtothePBoC,greenloansroseby28%YoYasofSeptember,andtheoutstandingamountofgreenloansreachedRMB15trn.Greenbondissuanceroseby146%YoYin2021,takingthecumulativegreenbondsupplyduring2016-2021toRMB2.44n.20January2022ChinaMarketPerspectivesPage10DeutscheBankAG/HongKongMarketOutlookGreeninvestmentisamulti-decadethemeandChina'sannualgreenfinancingdemandisestimatedatRMB2.5trntoRMB16trnonaveragebefore2060byindustryexperts.Greeninvestmentwillacceleratein2022andwithfavorablepolicyandregulatorybacking,weexpectrobustgrowthinregulation,structureandthebreathofChina'sgreenfinancemarket2022.Specifically,nTaxonomy:China-EUCommonGroundTaxonomylikelywillbefinalizedandofficiallyintroducedlaterthisyear,becomingthefirstglobalcommontaxonomyforgreenfinance.Webelieveitwillgreatlyimprovethefungibilityofglobalcapitalindifferentregionalmarkets,inparticularcross-bordercapitalbetweentheEuroareaandChina,forsustainablefinancingandinvestmentbycorporateandinstitutionalinvestors.Thiswillsignificantlyboostthemarketsize,liquidityandvarietyofproductsofsustainablefinancingintheglobalgreendebtmarket.nIncentives:Wethinkfinancialregulatorsmayconsidertwooptions(a)introducenewtargetedmonetarypolicyfacilitiestosupportdecarbonizationandcleanenergy,especiallylow-cost,long-datedfacilities,forexamplea5Yorlongergreenlong-termfacilityLLF;(b)introducefavorableregulatorycondition,suchasrelaxingtheriskcapitalrequirementongreenloans/assets/greenderivatives,inordertoincentivizebankstoextendgreencreditsandbettermanagerisks.nProducts:(a)China'sETSmarketconcludedYear2021withcumulatively179mntonsofCEAtraded,equivalenttoRMB7.66bn.TheclosingpriceofCEAbytheyearendwasRMB54.22/tonne,upby13%fromitsdebutinJulylastyear.China'scarbonpricingismuchlowerthanglobalcounterparts,forexamplethepriceofcarboninEUETSmarket(accountedforabout90%ofglobalcarbontrading)closedatEUR90/tonnelastyear,vs.EUR33/tonneatthebeginningof2021.MoreoverChinahasonlyonetradableproductintheETSmarket-thespotCEA(carbonemissionabatement).Webelievetradingvolume,CEAmarketliquidity,andCEApricingneedtorisetobetterincentivizecorporationstocutemission.WethinkmoreefficientpricingandgrowingmarketliquiditywillallowCEAderivativesproducts(forwards/futures/options)productstobedevelopedovertime.(b)Financingandinvestmenttoaddressclimatechanges,improvebiologicaldiversityandothersustainabilityissueswillbeginin2022,followingthereleaseofWorkingPlanofClimateInvestmentandFinancingonDecember212021bytheMinistryofEcologyandEnvironmentjointedwithothernineMinistries.(c)Weexpectfinancinginthegreendebtmarkettoacceleratein2022withnetgreencredits(greenloansandgreenbonds)likelywillgrowat30%YoY.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage11Figure3:Greenbondsupplyroseby147%YoYin2021(RMBbn)02004006008001000202120202019201820172016201520142013GrossgreenbondissuanceRMBbnSource:DeutscheBank,WindFigure4:WeforecastRMBgreenbondmarkettogrowby30%YoYin2022050010001500200025002022F202120202019201820172016201520142013SizeofgreenbondmarketRMBbnSource:DeutscheBank,Wind20January2022ChinaMarketPerspectivesPage12DeutscheBankAG/HongKongEconomicoutlook1.Overview:beatingupwindChina’seconomyfacedmanyheadwindsin2021.Someheadwindswereexogenous,suchasrecurringCovidoutbreaksandchipshortages.Othersfollowedthegovernment’sdecisiontopushforwardcriticalreformsinpursuitofanewgrowthmodel,recognizingthatpreviousgrowthdriverssuchasbuildingmoreroadsandhousingunitshavereachedtheirlimits.Fiscaltightening,propertysectorreforms,aregulatorycrackdown,andcarbonemissionscontrolallhelpachievethegovernment’slong-termobjectives,buttheyalsoputdownwardpressureonChina’sshort-termgrowth.Itappearstousthat“beatingupwind”bestdescribesChina’seconomyin2022.Theshiphasnotchangeditsdirection–Chinacontinuestopursuehigh-qualitygrowthandbreakawayfrompreviousgrowthdrivers–andthusheadwindswillremain.However,justasaskillfulsailorcanmovetheboatupwindbypositioningthesailatanoptimalangle,economicheadwindscanbeturnedintosupportingforcesundertherightpolicies.China’sclimatepolicyisagoodcaseinpoint.Environmentalconstraints,powershortagesandproductionrestrictionshavebeendisruptivetogrowthin2021.Butdisruptionshavealsopromptednecessaryreforms.Electricitypricinghasbecomemoreflexibleandmarket-oriented,whichwillstrengthentheenergysector’sgrowthprospects.Moreimportantly,ithelpedbuildaconsensusthatChinaneedstoinvestalotmoreinitsgreeninfrastructure.Itseemstousthatgreeninvestment–solarandwindpower,powergridupgrades,powerstorage,efficiencyupgradesinvariousindustries,andsoon–willlikelybecomeanewgrowthdriverin2022andbeyond.Morebroadly,wethinkthegovernmentwillfocusongrowth-enhancingreformsgoingforward.In2022,itwill“activelyintroducepoliciesthatareconducivetoeconomicstabilityandcautionagainstpoliciesthathaveacontractionaryeffect”(HanWenxiu,speechon12Dec2021).Hence,weareoptimisticthatChina’sgrowthwillbottomoutandenteranupwardtrendin2022.WeforecastChina'srealGDPwillgrowby5.1%in2022,lowerinthefirsthalfandhigherinthesecondhalf.Byourforecast,quarterlygrowthwillimprovegraduallyfromaround4%inQ1tocloseto6%inQ42022(Figure1).Thisgrowthpathwillbeconsistentwithalong-termgrowthrateofabout5%(Figure2).Notethatthegovernmenthasalong-termgoalofdoublingnationalincomeby2035,whichrequirestheeconomytogrowbyatleast4.7%peryear.Toachievethislong-termgoal,wethinkthegovernmentwillsetitsgrowthtargetat5%orabovefor2022.YiXiong,HongKong+85222036139GrantFeng,HongKong"Beatingupwind"isasailingterm.Ifasailorpositionstheboatandthesailatoptimalangles,theycanmovetheboatagainstthedirectionofthewind.Itisnoteasy,theboatwon'ttravelasfastasdownwind,butbeatingupwindissometimesnecessary,otherwisetheboatwillnevergettoitsdestination.Wethink“beatingupwind”alsodescribesChina’seconomyin2022.China'spreviousgrowthmodelhasreacheditslimits.Thegovernment'spursuitofhigh-qualitygrowthhassettheeconomyinadirectionfullofheadwinds,slowingtheeconomyin2021.However,withtherightpolicies,economicheadwindscanalsobeturnedintosupportingforces.Stabilizinggrowthhasnowbecomeatoppriority.2022willbeatestofhowpolicymakerscanimplementgrowth-enhancingreforms(suchasreformstoimproveefficiency,greeninvestmenttoachieveclimategoals)whilenotgoingbacktotheoldstimulusmodel.1.Weforecast5.1%GDPgrowthin2022,improvinggraduallyfromaround4%inQ1tocloseto6%inQ4.2.Thepolicystanceshifttowardssupportinggrowthiscriticalforthe2022outlook.Fiscalpolicywillexitfromitsverycontractionarystance,whilemonetarypolicywillboostgreenlendingandrestorehousingcredit.Structuralreformswillbecomemoregrowth-friendly.3.Greeninvestmentwillbecomeagrowthdriver.Thegovernmentisdeterminedtofillthelargeinvestmentneedsandinfrastructuregapstoachieveitslong-termclimategoals.4.ConsumptionrecoverycanbeexpectedifChina'szero-CovidstrategyproveseffectiveincontainingOmicron.IfOmicronbecomeswidespread,theimpactonconsumptionwilllikelybelargebuttransitory,whiledisruptionstoproductionandsupplychainswilllikelybesmallerandmanageable.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage13Figure5:WeforecastChina'sGDPgrowthwillbottomoutwithgrowthof5.1%in2022...-15-10-5051015202019202020212022RealGDPgrowth,QoQForecast,QoQRealGDPGrowth,YoYForecast,YoY%Source:DeutscheBankResearch,NBS,WINDFigure6:...consistentwitha5%longtermannualgrowthtarget909510010511011512020192020202120226%growthCurrentforecast5%growth4%growthRealGDP,s.a.2019Q4=100RealGDP,s.a.2019Q4=100Source:DeutscheBankResearch,NBS,WIND2.PolicystanceshiftstosupportinggrowthEversinceChina'seconomyenteredadownwardtrendearlythisyear,marketparticipantshavebeenawaitingadecisivepolicystanceshifttowardssupportinggrowth.ThatpolicyshiftfinallycameattheCentralEconomicWorkConference(CEWC),China'skeyannualpolicyplanningmeetingheldinDecember.Stabilizingtheeconomywillbethetopandoverwhelmingpriorityfor2022.ThelatestassessmentfromtheCEWCplacedmoreemphasisonshort-termchallengesthanatanyothertimesinceChina'spost-Covidrecovery:"China'seconomyfacestripledownwardpressuresfromdemandcontraction,supplyshocks,andweakeningexpectations".Theword"stability"appeared25timesintheCEWCpressrelease."Allregionsanddepartmentsshouldtakeuptheresponsibilitytostabilizetheeconomy",and"activelyintroducepoliciesthatareconducivetoeconomicstability".FiscalstanceturnseasingAfteraverycontractionary2021,China'sfiscalstancewilllikelyturnsupportivein2022.Byourestimate,China'sactualfiscaldeficitwasreducedbyalmost3%ofGDPin2021to5.8%ofGDPfrom8.6%in2020.Thissharptighteningwasunexpectedandmuchbiggerthantheofficialdeficitreductionofonly0.4%ofGDP(from3.6%in2020to3.2%in2021).Fiscalpolicywilllikelyturntoeasingagainin2022accordingtorecentpolicymessages.Weforecasta1pptfiscaldeficitincreaseto6.8%in2022(Figure3).Thedeficitincreasewon'tcomefromanofficialdeficittarget,whichwilllikelybefixedatlastyear'slevelof3.2%ofGDP.Weexpectmostofthedeficitincreasewillcomefromutilizingsavingsinthebudgetstabilizationfundandfromcarry-oversfromunspentlocalgovernmentbondproceeds(Figure4).Fiscaleasingwillfocusonnewtaxcutsandmoderatelyincreasinginfrastructureinvestment.Temporarypersonalincometaxbenefitsamountingtoabout0.1%ofGDPperyearhavebeenextendedbyanother2years.ThegovernmentwilllikelyintroduceadditionaltaxbenefitsforSMEs,innovativemanufacturingcompanies,andthegreensector.Thegovernmenthasnotsignaledanybroad-basedtaxcuts;ifitwantstogoforit,itwillmostlikelymakeanothercuttotheVATrate,whichwaslastcutfrom16%to13%in2019.Infrastructureinvestmentwilllikelyfocuson"greeninfrastructure"suchaspublictransportation,environmentalandelectricitysectors.Bycontrast,traditionalinfrastructureinvestment,especiallythosecarried5.HousingmarketwilllikelyrecoverinH22022,judgingfrompastexperienceaswellasrecentpolicychanges.Thenear-termoutlookremainschallenging,though,especiallyforhighly-leverageddevelopers.6.ManufacturerswillbenefitfromanarrowingCPI/PPIgap,theirprofitmarginswilllikelyrecover.7.WeforecastCNYwillbestableagainstUSDandappreciateagainstthecurrencybasket,supportedbyasustainedcurrentaccountsurplusandcapitalinflows.20January2022ChinaMarketPerspectivesPage14DeutscheBankAG/HongKongoutbylocalgovernmentfinancingvehicles(LGFVs),willlikelystillfacepolicyandfinancingconstraints.Figure7:Afteracontractionary2021,thefiscalstancewilllikelyturnsupportivein2022-10-9-8-7-6-5-4-3-2-102015201620172018201920202021202212mrollingfiscalbalance,%ofGDPSource:DeutscheBankResearch,MOF,WINDFigure8:LocalgovernmentsissuedCNY1.3trofspecialbondsinQ42021–muchwillbecarriedovertospendin20220.00.10.20.30.40.50.60.7JanFebMarAprMayJunJulAugSepOctNovDec2021average2018-2020Localgovernmentspecialbondissued,CNYtrSource:DeutscheBankResearch,MOF,WINDMonetarypolicytoboostcreditgrowthPBOCliquidityinjectionsin2021didnotleadtohighercreditgrowth.ThePBOCcutRRRtwicelastyearamidthegrowthslowdown,whichonanetbasisinjectedRMB1.6trofliquidityintothebankingsystem.Liquidityinjectionshelpedlowermarketinterestrates(3mShiborand10yCGByieldsdroppedby26and36bps,respectively,in2021)butdidnotleadtohighercreditintheeconomy.Totalsocialfinancinggrowthdroppedfrom13.3%in2020toaround10%inNov2021.In2022,monetarypolicywillfocusprimarilyonboostingcreditgrowth.ThePBOCvowsto"enhancethestabilityoftotalcreditgrowthandincreasesupporttotherealeconomy".ThePBOCwilluseitsvariouslendingfacilitiestoprovidelow-costfundingtobanks.BankswhomadeeligibleSMEloanscouldtapintoPBOC'sSMEfacilitywitha2%interestrate,andthosewhomadeeligiblegreenlendingcouldtapintothegreenfacilitiesata1.75%interestrate.PBOCisalsoprovidinga1%subsidytoallSMEloansbylocalbanks.TheroomforfurtherRRRcutsisverylimitedin2022.TheweightedaverageRRRhasbeenreducedto8.4%after100bpscutin2021.Asthesixbiggestbanksarestillsubjectto11.5%RRR(or10%iftheymeetSMEloanrequirements),averageRRRisalreadyat7%orlessfortherestofthebankingsector.RRRisalreadyat5%formanysmallbanks,whichappearstobealowerboundaryforthePBOC.Thechallengehereisthatbigbanksusuallyhaveampleliquidity,whilesmallerbanksarealreadyatorapproachingthe5%floor.Wethinktheremaybescopeforatmostone50bpsRRRcutinQ32022toaccommodategovernmentbondissuances,ornoRRRcutatallifgrowthrecoveryisalreadyontrackbythen.WethinkPBOCwillbemoreopentoMLFratecutsifsupplyconstraintsease.We'vearguedbeforethatcuttingtheMLFrateistheappropriatepolicytoolachievePBOC'sgoalsofboostingcreditdemandandloweringborrowingcosts.However,nowisanotagoodtimetocuttheMLFratebecausetheeconomycontinuestofacesupplyconstraintsandhighproducerprices.PBOChencepreferstargetedeasingtoselectedsectorswherecapacityconstraintsarelesssevere.If,bysomepointin20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage152022,supplyconstraintsease,producerpricesfall,butGDPandcreditgrowthstaylow,thatwouldbeappropriatetimeforthePBOCtoconsider1or2MLFratecutsforatotalof10-25bps.WeforecastTSFgrowthwillimproveto11%in2022from10%currently.Thecreditimpulsereboundedfromverynegativeinmid-2021toalmostneutralinrecentmonths,inpartthankstoarecoveryinmortgagelending(Figure5).Lookingforward,withthehelpofPBOClendingfacilitiesandincreasedgovernmentborrowing,wethinknewTSFcouldincreasetoaroundCNY35trin2022fromCNY30trthisyear,andTSFgrowthwillincreaseto11%from10%currently(Figure6).Figure9:Creditimpulsehasimprovedinrecentmonths-2-1012-0.2-0.10.00.10.2'12'13'14'15'16'17'18'19'20'2112-monthchangeinnewcredit12-monthchangeinFinancialConditions(rhs)Source:DeutscheBankResearch,PBOC,WINDFigure10:Weforecasttotalsocialfinancingwillimprovein20220510152025303540201420152016201720182019202020212022Newtotalsocialfinancing,CNYtrSource:DeutscheBankResearch,PBOC,WINDGrowth-enhancingstructuralreformsRegulatorytighteningwasanimportantdriverforgrowthslowdownin2021.Capacityconstraintsandpoweroutageswereinpartcausedbyenforcingclimatetargets.Antimonopolyactionsandregulatorytighteningagainstinternetplatforms,tutoring,andothersectorsnegativelyimpactedtheirbusinessesoperationsandresultingindownsizingandclosureinsomesectors.Amongalltighteningpolicies,propertysectortighteningprobablyhadthelargestimpactongrowth,whichhasledtoahousingmarketdownturn.In2022,thegovernmentwillimplementgrowth-enhancingreformswhilecautioningagainstreformsthatmayhampernear-termgrowth.Theend-yearpolicymeetingspentalotofeffortemphasizingthatgovernmentofficialsneedto"correctlyunderstand"recentreformdirectionsandpolicyinitiatives,andcallsfor"strengtheninginvestigationandresearch"forpolicymakingand"carefuldecisionmakinganduseofpower".ThisisunusualforCEWCandwasnotseeninrecentyears.Clearly,theleadershiprecognizesthatsomerecentmeasureshavehamperedgrowthprospectsandhurtbusinessconfidence.Wethinkthegovernmentwillbemuchmorecautiousincarryingoutharshreformsin2022,nowthateconomicstabilityhasbecomethetoppriority.Weseeanumberofareaswherereformswilllikelybecomemoregrowthfriendly:(1)better,longer-termplanningforimplementingclimatetargetstoreducenear-termdisruptionsandpromotegreeninvestment,especiallyintheenergysector;(2)supportingadequatefinancingintothehousingsectorandexploring"newdevelopmentmodels"suchassocialhousingandlong-termrentals;(3)amorefriendlyregulatoryenvironmentforinternetplatforms,whostruggledtoadaptto20January2022ChinaMarketPerspectivesPage16DeutscheBankAG/HongKongrecenttighteningregulations;and(4)capitalmarketreforms,suchasfullyswitchingtoregistration-basedIPOlistings,willbenefitfast-growingstart-ups.3.Investment:agreenleapforwardChinastillneedsinvestmentasanimportantgrowthdriver…Chinahasbeenmovingawayfromitsinvestment-drivengrowthmodel.Nevertheless,Investmentisstillmorethan40%ofChina'sfinaldemand,andcontributed,onaverage,2½percentagepointstoChina'sannualGDPgrowthin2016-2020.Hadinvestmentstoppedgrowing,China'sannualgrowthwouldhavealreadydroppedbelow4%.Absentinvestmentgrowth,thegovernment'sgoalofdoublingnationalincomeby2035,whichrequires4.7%growthannually,wouldbeimpossibletoachieve....andthatgrowth,aspolicymakersseeit,willcomefromgreeninvestment.Inarecenthigh-profilePeople'sDailyarticle,1VicePrimerLiuHecalledfordeepeningsupply-sidestructuralreformstoimprovemacroeconomicstability.Howcansupply-sidereformshelpstabilizegrowth?Supply-sidereformsarenotjustaboutdeleveragingandcurbingexcesscapacity;italsocallsformoreinvestmentinareaswheresupplyisinsufficient.2GivenChina'sambitiousclimategoalstoreachcarbonpeakbefore2030andreachnet-zeroby2060,thesupplyofcleanenergyandgreenproductsisclearlyinshortage.Hencenotonlycangreeninvestmentboostnear-termgrowth,italsohelpstoaddresstheeconomy'slonger-termconstraints.Chinahaslargegreeninvestmentneeds.TheIEArecentlyestimatedthattheworldneedstoinvestUSD5trperyearbefore2030toachievenet-zeroemissionsby2050(Figure7).There'sroomforChinatoinvestalotmore.Takeelectricitygenerationforexample:ChinacurrentlyinvestsaboutUSD150bneachyearincleanpowergeneration.Meanwhile,theIEAestimatesthattheworldneedstoinvestUSD1.6trperyearinpowergeneration.China'sconsumesabout1/4oftheworld'senergy.Proportionatelyspeaking,ChinawillneedtomorethandoubleitscleanenergyinvestmentfromcurrentlevelstoUSD400bneachyear(Figure8).What'smore,powergenerationaccountsforonly30%ofallinvestmentneedsestimatedbytheIEA.Totalinvestmentneededinallrelevantsectorscouldreachasmuchas8%ofChina'sGDPannually.1LiuHe,"(China)MustAchieveHighQualityDevelopment",People'sDaily,November24,2014.2China'ssupply-sidestructuralreformscoverfiveareas:reducingexcesscapacity,reducinginventory,reducingleverage,loweringcosts,andfixing/strengtheningshortcomings.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage17Figure11:TheworldneedstoinvestUSD5tr/yeartoreachnetzeroby2050110001234562016-2020203020402050FuelproductionElectricitygenerationInfrastructureIndustryTrillionUSD(2019)Source:InternationalEnergyAgency(2021):NetZeroby2050Figure12:ChinastillneedstoinvestalotmoreincleanenergyOtherpowerHydro,wind,solar,nuclearpowerInvestmentneedinelectricitygeneration00.511.522.53050100150200250300350400450China(2020)Investmentneedfornet-zero(IEA)USDbn%ofGDPSource:DeutscheBankResearch,InternationalEnergyAgency(2021):NetZeroby2050Energyshortagesandhigherfossilfuelpriceshavemadecleanenergymoreattractivethanbefore.Somegoodnewsforgreenenergyiselectricitytariffreformhasfinallybeensetinmotion,allowingformoreflexiblepricingdependingoncost,end-user(e.g.carbonintensiveindustriesmayneedtopayhighertariff),andtimeofuse(e.g.highertariffsduringpeakhours).Thisingeneralwillmakenewsolarandwindpowerprojectsmoreattractive.Policyandfinancingsupportforgreeninvestmenthasbeenputinplace.Thegovernment's2030climateactionplanhassetmanysectoraltargetsforthenextdecade.Asignificantpolicychangein2022isthatthegovernment'scaponenergyconsumptionandenergyintensitywillnotapplytonewly-addedrenewableenergysupply.Thiswillimmediatelybenefitnewsolarandwindpowerprojects.Inthelongerterm,thegovernmentplanstoswitchfromenergytargetstocarbonemissionstargets,whichshouldbenefitthewidergreeneconomy.Financially,greenloans'shareinnewloanshaveincreasedto22%latelyfrom11-13%ayearago,andwilllikelyincreasefurtherin2022.AkeynewinitiativeisthePBOC'sintroductionofagreenlendingfacilityinNovember,whichprovideslow-costfundingtobankswholendtoeligibleprojectssuchascleanenergy,powergrid,andCCUS.WeestimateitssizecouldreachCNY1trperyear.WhichgreensectorswillChinainvestin?Cleanenergycomesoutontop,whichincludesnotonlysolarandwindpowerbutalsohydroandnuclearpower.Thegovernmentisalsoexploringhydrogenfuel,andwillcontinuetoexpandtheuseofnaturalgasandcleancoaltechnology.Chinaalsoneedstoupgradeitspowergridandbuildmoretransmissionlinesandpowerstoragetoaccommodatethehighershareofsolarandwindpower.Tomaketravelgreener,itneedstonotonlybuildmorechargingstationsforEVs,butalsobuildmoreinter-cityandcommuterraillinesasacleanmeansofpublictransportation.Lastbutnottheleast,there'sgreatpotentialtoapplycarboncapture,utilizationandstorage(CCUS)technologytoChina'scarbon-intensiveindustries,thoughChina'scurrentcarbonpriceofaround$8USD/tonappearstoolowforcommerciallyviableCCUSapplications.We'reoptimisticthatinvestmentwillcontributemoretogrowthin2022.Weestimateinvestment'scontributiontoheadlineGDPgrowthwilllikelybe1.2pptsthisyear,thelowestinhistory.For2022,propertyinvestmentwillremainadrag,butgreeninvestmentandpublicinvestmentshouldturnmuchstronger.Manufacturinginvestmentshouldalsoimproveifupstreampricesfallanddownstreamprofitsincrease.WeexpecttheinvestmentcontributiontorealGDP20January2022ChinaMarketPerspectivesPage18DeutscheBankAG/HongKonggrowthtoreboundto1.5pptin2022,0.3pptmorethanin2021(Figure9).Figure13:InvestmentcontributiontoGDPgrowthwilllikelyreboundin20227.08.97.23.57.26.16.54.35.02.83.73.34.13.31.63.12.62.81.92.21.21.50123456789100123456789102012201320142015201620172018201920202021F2022FInvestmentcontributiontoGDPgrowthInvestmentrealgrowth,YoY%%Source:DeutscheBankResearch,NBS4.Covidandconsumption:theOmicronquestionChina'shasbeenhitbydomesticOmicronoutbreak,andthesituationremainschallenging.China'sfirstOmicronlocaltransmissioncaseswereconfirmedinTianjinovertheweekend.Soonafter,caseswiththesameOmicronstrainwerefoundinAnyang,HenanowingtoatravelerwhohadleftTianjinalmost2weeksago.ThispointstotheriskthatOmicronmightbecomemorewidespreadgoingforward.BothTianjinandAnyangarenowinlockdown,andmasstestingisbeingconducted.TherealtestwillcomeonwhetherChina'szero-CovidstrategyprovessuccessfulincontainingtheOmicronvarianttolocalizedoutbreaksandpreventingitfromwiderspreading.Asourbasecase,ifChina'szero-CovidstrategycansuccessfullycontainOmicron,weareoptimisticonadomesticconsumptionrecoveryin2022.WhilerecurringCovidoutbreakswilllikelycontinuetocausedisruptiontosocialactivities,itseemsthatbusinessesandconsumersaregraduallyadapting.AclearpatternisthattheimpactofCovidoutbreaksonin-citymobilityseemstohavediminished:thenumberofmetropassengersdroppedalotinthefirstfewoutbreaks,butthedropwasmuchmilderinrecentoutbreaks(Figure10).Themostrecentoutbreak,forexample,hasledtoasuspensionofmetrotrafficinXi'an,butitsimpactonmetrotrafficinothercitieswasnegligible.Consumercarpurchaseshavealsoreboundedinrecentmonths,whichisapositivesignfortravelappetiteandconsumerconfidenceingeneral(Figure11).Thehouseholdsavingsratehaslargelyreturnedtonormal,theirconsumptionspendinggrowthhasalmostcaughtupwithincomegrowth.WhenCovidfirsthitChina'seconomyinearly2020,consumptionspendingdroppedmuchmorethanincome.Thisisbecausehouseholdsincreasedtheirsavingswhenfacingeconomicuncertainties.ThegapbetweenincomeandspendinggrowthgraduallynarrowedfromQ22020onwards.LatestnumbersinQ3suggestthegaphasalmostclosed(Figure12).Thehouseholdsavingsratehaslargelyreturnedtoitspre-Covidlevelofaround30%(Figure13).20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage19Recentjobmarketdevelopmentsarealsosupportiveofconsumerconfidence.Theunemploymentrateinurbanareashasfallenbelow5.0%forthefirsttimesince2019,whileaverageworkinghoursincreasedwellabove47hours/weeksinceMay(Figure14).Totalmigrantworkeremploymentincreasedbyalmostamillionto183million,andthenumberofruralmigrantworkersisclosetothehighestlevelbeforeCovid.PerhapsthemostencouragingindicatorisstrongmigrantworkerincomegrowthinQ3:averagemigrantworkerincomeincreasedby3.8%QoQand10.4%YoY(Figure15).ThisseemstosuggestthattheCovidoutbreakswerenotdisruptivetothelabormarket.Employerslikelylookedthroughtheimpactandkepttheiremployees,evenraisingtheirsalaries.Figure14:Covidoutbreakimpactonin-citymobilitydiminished020406080100120140051015202530Jan-'20Apr-'20Jul-'20Oct-'20Jan-'21Apr-'21Jul-'21Oct-'21No.ofprovincesreportednewlocaltransmissioncovidcasesinthepast2weeksAvgmetropassengersin8bigcities(rhs)#ofprovincesDec2019=100Source:DeutscheBankResearch,NHC,WINDFigure15:Autosalesimprovedrecently1.01.52.02.53.0'18'19'20'21Autoproduction,seasonallyadjustedAutosales,seasonallyadjustedmillionunitsSource:DeutscheBankResearch,CAAM,WINDFigure16:Householdincome/spendinggaphasalmostclosed-202468101220172018201920202021Householdincome,2yavggrowthHouseholdspending,2yavggrowth2-yearaveragegrowth,%Source:DeutscheBankResearch,NBS,WINDFigure17:Householdsavingsrateislargelybacktonormal20%25%30%35%40%45%20172018201920202021HouseholdsavingsrateHHsavingsrate,seasonallyadjustedSource:DeutscheBankResearch,NBS,WIND20January2022ChinaMarketPerspectivesPage20DeutscheBankAG/HongKongFigure18:Unemploymentratedropped,workinghoursincreased4042444648504.54.74.95.15.35.55.75.96.16.3'18'19'20'21UrbanunemploymentrateWeeklyhoursworked(rhs)%hrs/weekSource:DeutscheBankResearch,NBS,WINDFigure19:MigrantworkerincomeraisewasstronginQ3-20246810100120140160180200'17'18'19'20'21Activemigrantworkers,millionmigrantworkermonthlyincome,2yavggrowth(%)Source:DeutscheBankResearch,NBS,WINDWhatwillhappenifOmicronbecomeswidespreadinChina?Weexpectthegovernmentwillrespondwithlockdownsandquarantines.Theimpactonconsumptionwillbelarge,butlikelynotaslargeaswhathappenedin2020,andtheimpactonproductionandsupplychainswillbemuchsmaller.nThegovernmentwillimposelockdownsandquarantines,ratherthan"livingwithCovid".WhileOmicronseemstobelessdeadlythanotherCovidvariants,itisstilldeadlyenoughtocausehealthcareserviceshortagesinChina,atleastinsomeregions.VaccinationappearsineffectivetopreventOmicronspreading,andwhileitoffersprotectionagainsthospitalization,the20%Chinesepopulationwhoarenotvaccinatedwillbeatserioushealthrisks.Hencethegovernment'sresponsewilllikelybesimilartowhathappenedinQ12020:haltinter-citytravelandtaskeachcity/regiontocurbthevirus'sspreadthroughlockdowns,large-scaletesting,contacttracing,andquarantines.nConsumptionwilllikelybeseverelyimpactedduringlockdownsandrecoverrapidlyoncelockdownsarelifted.Manyservicesbusinessessuchasrestaurants,travels,andleisure&entertainmentwillsufferfromsharprevenuereductionsoreventemporaryshutdowns.Thiswillalsocausetemporaryjobandincomelossesandnegativelyimpactconsumergoodspurchases.Butsimilartowhathappenedin2020,suchnegativeshockswilllikelybetransitoryandwillbefollowedbystrongrecoveryoncelockdownsareliftedandbusinessesreopen.nTheimpactonproductionandsupplychainswilllikelybemanageable.ThelockdowninQ12020wasverydisruptivetoproduction,butwethinksuchdisruptionswillunlikelyberepeatedevenifChinaentersanotherroundoflockdown.Thisisbecause(1)unlikein2020whenmanypeoplereturnedhometocelebrateChineseNewYearandcouldnotgobacktowork,thistimemanyworkerswilllikelyavoidtravelsduringtheChineseNewYear;and(2)vaccineswillalsomakeabigdifferenceastheyoffergoodprotectionforpeopletocontinuetowork.5.HousingmarketreboundisexpectedinH22022HousingsectorperformanceiscrucialforChina'seconomicoutlookin2022.Thehousingsectorcontributedabout11%ofChina'seconomicvalue-added,andhousingdemandaccountedforabout20%ofChina'sdomesticfinaldemand.Asmuchas40%-45%ofChina'sinvestmentisdirectlyorindirectlylinkedtothehousingsector.Thehousingdowncyclethatstartedinmid-2021hasalreadyledto20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage21asharpslowdowninpropertyinvestmentaswellasabigdropingovernmentlandsalesrevenue.Thehousingmarketoutlookremainsunfavorableinthenearterm.Theimprovementinmortgageapprovalsandpolicyrelaxationbylocalgovernmentsdonotseemtohaveliftedhousingmarketsentimentmuch.Therecentannouncementontheexpansionofrealestatetaxpilotprogramstomorecitiesmayhavealsodentednear-terminvestmentdemand.Thebiggestproblemiswithintransparentnon-bankfinancing:itisincreasinglydifficultfordeveloperstogetmarketfinancingasinvestorshavebecomeveryriskaverseandselectiveontheirexposuretodevelopers.Inaddition,overlytightenedescrowmoneyrequirementsandpotentialaccelerationofrepaymentaddedtodeveloperliquidityrisks.Recentpoliciesdonotseemtobesufficienttorestoremarketfinancingtodevelopers.Unlessnewpolicymeasuresareintroducedtohelpsustainmarketfinancing,manydevelopersaresetforadifficultwinterinthecomingmonths.HistoricallyapropertydowncycleinChinatypicallylasts3-4quarters.China'spropertysectorhashadfourdownturnsoverthepast15years.Itnormallytakes4quartersonaverage,forpropertysalestogofrompeaktotrough.Oncepropertysalesgrowthdropsbelowzero,onaverageitstaysnegativefor3quarters(Figure16).PropertysalespeakedinQ12021andturnednegativeinQ32021.Simplyapplyingaveragelengthsofhistoricaldownturnssuggeststhatpropertysalesshouldreachtheirtroughbyend-2021toearly2022,andshouldturnpositivebymid-2022.Therearereasonstobelieve,though,thatthisdowncyclemightlastsomewhatlonger:(1)propertysalesgrowthdroppedfasterthistimethaninmostpreviousdowncycles;and(2)creditconditions,especiallymarketfinancing,arestillunfavorableforpropertydevelopers.Figure20:LengthofpropertydowncyclesinChinaMonthsMonthspeaktroughFirstmonth<0SalespeaktotroughYoYsales<02007-092008-102008-0513102009-112010-082010-07922011-072012-032011-12872013-032014-092014-021814Average82021-02?2021-08??PropertysalesdowncyclesSource:DeutscheBankResearchWhilehousingdowncycleshittheeconomy,policyeasingusuallycomesinthefollowingyear.Figure17showsthatforthepast4propertydowncycles,thefiscalstance,onaverage,tightenedby2.1%ofGDP,andtotalcreditgrowthslowedby5%,inthefirstyearofthepropertydowncycle.Inthenextyear,however,thefiscalstanceonaverageeasedby3.4%ofGDP,andcreditgrowthalsoimproved.Moreover,policymakershavestartedtakingstepstorelaxregulatoryconstraintsonmortgagelendingandborrowingbypropertydevelopers.Newhouseholdlong-termborrowingpickedupnotablytoCNY582bninNovember,representinga15%increaseYoYand38%MoM.Takingintoaccountappropriategovernmentpolicyresponses,propertysaleswilllikelyturnpositivebyQ32022andpropertyinvestmentrecoverywillfollow.Weforecastpropertysalesvolumegrowthwilldropfurtherandreachitstroughat-25%YoYinQ12022,beforereboundinginQ22022.ByQ32022,propertysaleswill20January2022ChinaMarketPerspectivesPage22DeutscheBankAG/HongKonghavereturnedtotheiraveragelevelsof2019-2020,andYoYgrowthwillturnpositiveagain.Propertyinvestmentrecoverywilllagpropertysalesbyonequarter.Underthisscenario,annualpropertysalesgrowthwilldropto-5%in2022from1.5%in2021,andinvestmentgrowthwilldropto-3%in2022from5%in2021(Figure18).Figure21:Inhousingdowncycles,policyeasingusuallycomesinthefollowingyearPropertyΔRGDPgrowthdowncyclesovertheperiodsales<0yearthenextyearsales<0yearthenextyear2008-4.80.77.8-1.014.32010-2.0-5.9-1.2-7.8-8.82011-1.3-1.23.4-8.80.92014-0.7-2.03.6-3.2-1.9Average2021[-4][-3]ΔAugmenteddeficit/GDPΔTSFgrowthSource:DeutscheBankResearch,NBS,WINDFigure22:Propertysalesandinvestmentforecasts-30-20-100102030405060200720092011201320152017201920212023Propertyinvestment,YoYPropertysalesvolume,YoY%Source:DeutscheBankResearch,NBS,WIND6.NarrowerCPI/PPIgaptobenefitmanufacturingsectorSupplyconstraintshaveledtoawidegapbetweenproducerpriceinflation(PPI)andconsumerpriceinflation(CPI).WiththemoderateCPIinflation,thewideningPPI/CPIgapismainlydrivenbythesurgingPPI(Figure19).ThislargelyreflectstemporarydisruptioninahandfulofindustriesasaresultofChina'stighteningofenvironmentalstandardsandnewrestrictionsontheproductionofcertainbasicindustrialproductsthisyear.Besides,surgingglobalcommodityprices,inparticularthepricesofcrudeoil,copper,andironore,ofwhichChinaimportsalot,havealsocontributedtohigherproducerprices.Wethinkthatdemandislikelythemainreasonbehindtheverylimitedpass-throughfromPPItoCPIinflation.ThisroundofsurgingPPIismainlydrivenbysupplyshock,andisalmostentirelyconcentratedinsomeupstreamindustries.Also,theincreaseinproductioninputcostshavenottransmittedtoend-prices(Figure20).Historically,pass-throughfromPPItoCPIinflationhappensonlywhendomesticdemandisstrong,andespeciallywhenhouseholdincomeisfast-rising(seeourthematicnoteChinaMacro:Inflationpass-through).Intheabsenceofstrongconsumerdemand,onlyafewindustries(namely,vehiclefuelandutilities,whichaccountforabout10%oftheconsumerbasketcombined)areabletopassontheirhighercoststoconsumers,whiletheother90%ofthebasketisalmostunaffectedbyPPI.Andhouseholdincomehasnotfullyrecoveredtoitspreviousgrowthpathyet,soasaresult,thesurgingPPIdrivenbyasupplyshockcanonlypassverylimitedinflationtoCPI.Andlackingpricepass-throughtoconsumers,thechiefimpactofhigherproducerpricesislargelyaredistributionofprofitsbetweenupstreamanddownstreamindustries.WeforecastPPIandCPIwillconvergein2022.PPIwilldropbelow3%bytheendof2022,andCPIwillriseto2.5%bythen(Figure21).Thesharpincreasesofcommoditypriceshavealarmedthegovernment,andsomehavestartedtodeclinelately.Withthesupplyconstraintlooseningandthelow-baseeffectfadingaway,ChinaPPIinflationshouldstarttocomedowngraduallygoingforward.PPIpass-20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage23throughwilllikelydriveupheadlineCPIinflationbynomorethanonepercentagepoint.TherestoftheCPIinflationincreasewillbefromthenormalizationofotherprices.Ashouseholdincomerecovers,weexpectfoodinflationtoreturntoitshistoricalaveragelevel.Similarly,weexpectcoreCPIinflationtocontinuetorise.Thisforecastisbasedontheassumptionthathouseholdincomeandspendingwillcontinuetorecover,approachingitspre-Covidtrendfrombelow.Asanimportantdeterminantforconsumerprices,weexpectporkpricedeflationwillpersistuntilQ22022.ThenumberofpigsisnowgreaterthanitwaswhenAfricanSwineFevertookholdin2018andporkpricesarenowathirdoftheirlevelatthestartofthisyear.Currently,thesowinventoryisrelativelyhigh,suppressingtheincreaseintheporkprice.Sowinventoryusuallyleadstheporkpriceby10-12months(Figure22).Accordingtothehistoricalcycleofsowinventoryandporkprice,wethinkthepigcyclemayreachthetroughinQ22022,andporkpricesareexpectedtostartanupwardtrendbythen.Figure23:DomesticdemanddeterminestheextenttowhichPPIwillpassthroughtoCPI-10-505101520'03'06'09'12'15'18'21UrbanhouseholdaverageincomeCPIPPI%y/yDemandshockSupplyshockDemandshockSup.shockSource:DeutscheBankResearch,NBS,WIND.Note:householdincomegrowthin2021areannualizedgrowthratesusing2019asbaseyeartoremovethelowbaseeffectof2020.Figure24:PPIinflationisconcentratedinupstreamproducts,notpassingtodownstream-3-2-10123456-15-10-50510152020072009201120132015201720192021PPI:productionmaterialsPPI:livingmaterials,rhsyoy%yoy%Source:DeutscheBankResearch,NBS,WINDFigure25:WeforecastPPIwilldropbelow3%,andCPIrisesto2.5%byend-20221.81.71.92.42.512.09.35.84.52.8-6-4-202468101214201720182019202020212022CPI,averagePPI,averageyoy%Source:DeutscheBankResearch,NBS,WINDFigure26:PorkpricesareexpectedtostartanupwardtrendbyQ22022-50-40-30-20-1001020304050-100-5005010015020122014201620182020CPI:porksowinventory,rhsyoy%yoy%Source:DeutscheBankResearch,NBS,WIND20January2022ChinaMarketPerspectivesPage24DeutscheBankAG/HongKong7.CNYwilllikelyremainastrongcurrencyDespitesofteningdomesticgrowth,CNYwasverystrongin2021.CNYappreciatedby2.3%againsttheUSD,reaching6.37/USDbyend-2021.CNYappreciationislargeragainstothercurrencies:accordingtotheofficialCFETSeffectiveexchangerateindex,CNYappreciatedby8%againstabasketoftrade-weightedcurrencies(Figure23).CNYstrengthresultedfromawideningtradesurplusandsustainedcapitalinflows.China'sgoodsandservicestradesurplusreachedUSD502bninthefirst11monthsof2021,aUSD188bnincreaseover2020(Figure24).FDInetinflowsalsoincreasedtoUSD58bn,whileforeignholdingsofonshorefinancialassetsincreasedbyUSD180bninthefirst3quarters.ThePBOCdidnotintervenemuchforthemostpart,otherthanhikingtheFXreserverequirementinDecember.IthaskeptitsFXreservesunchangedandhasallowedthecurrencytoappreciate.China'scurrentaccountsurpluswilllikelybemaintained.ItappearstousthatChina'srecentgaininglobaltradesharewasnotjustowingtoCovid-19impactonsupplychainselsewhere,butalsoreflectedChina'sowncompetitivenessgains.Whiletimelymeasuringofcompetitivenessisdifficult,asproductivitydatausuallycomewithlonglags,wedidseethatChina'smanufacturingsectorincreasedindustrialrobotusefasterthanelsewhereintheworldinthepastfewyears:China'sindustrialrobotdensityisnowdoubletheworldaverageandisnotfarbehindindustrializedcountries(Figure15).ThesurgeinChina'sautoexportsin2021isalsoasignthatthemanufacturingsectorisgainingcompetitiveness(Figure16),whichinpartbenefitedfromChina'sopeningupofitspreviously-restrictedsectorstoforeigninvestorsinrecentyears.Meanwhile,China'szero-Covidstrategylikelyimpliestravelrestrictionswillremainintheforeseeablefuture,whichreducesChina'sservicesdeficitfromtourismspending.WeforecastthecurrentaccountsurpluswillbemaintainedatUSD380bnperyearinboth2022and2023(Figure27).CapitalinflowsintoChinawilllikelycontinuein2022.China'simplementationoftradeagreementsandopeninguptoforeigninvestorscouldbringsustainedFDIinflows.China'sbondmarketremainsattractivetoforeigninvestors,thankstothehigheryields.China'sbondmarketsizegrowsbymorethan10%eachyearandcancertainlyaccommodatemoreforeigndemand,withforeignersholdingonly5%ofoutstandingonshorebondsasoftoday.Equitymarketflowsaremoredifficulttopredict,butwedrawoptimismfromthefactthatlastyear'sgrowthunderperformanceandmarketturmoilhavenotledtobigequityoutflowsfromChina.IfChina'sgrowthbottomsoutin2022aswehaveexpected,China'sequitymarketwilllikelybecomemoreattractivetoinvestorsin2022comparedto2021.WethinktheCNYwillremainastrongcurrencygoingforward.WeforecastCNYat6.35/USDbyend-2022and6.1/USDbyend-2023.Thisrepresents3%and2.5%appreciationagainstthecurrencybasket,respectively,in2022and2023(Figure28).TheCNYwilllikelyperformmoreweaklyinthefirsthalfof2022whenChina'sgrowthisexpectedtostaybelow5%andUSDisexpectedtobestrong.AsChina'sgrowthmomentumpicksupinthesecondhalf,weexpectCNYwillresumeitsappreciationagainstboththeUSDandthetrade-weightedcurrencybasket.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage25Figure27:CNYwasstrongin2021,appreciatingby2%againstUSDand8%againstthetrade-weightedcurrencybasket5.65.86.06.26.46.66.87.07.27.49095100105110115120125130135201020112012201320142015201620172018201920202021CNYEffectiveExchangeRateUSDCNY(rhs)2010=100Source:DeutscheBankResearch,ChinaCustoms,WINDFigure28:CNYwassupportedbystrongtradeflows-400-300-200-100010020030040050060070020112012201320142015201620172018201920202021YTDgoodstradebalanceYTDservicestradebalanceBil.USDSource:DeutscheBankResearch,ChinaCustoms,WINDFigure29:Chinesemanufacturersrapidlyexpandedtheuseofindustrialrobots332716613632259113937291325051015202530354045JapanGermanySwedenWorldChina201220172020Industrialrobotsper1,000workersSource:DeutscheBankResearch,WINDFigure30:China'sautoexportsmorethandoubledin202105001,0001,5002,0002,5003,0003,5004,000050100150200250300201120132015201720192021Autoexports,unitsAutoexports,valuethousandunitsUSDmnSource:DeutscheBankResearch,ChinaCustoms,WINDFigure31:China’scurrentaccountsurpluswilllikelybemaintainedin2022-23-400-20002004006008002011201320152017201920212023FGoodstradebalanceServicestradebalanceCurrentaccountbalanceUSDbnSource:DeutscheBankResearch,SAFE,WINDFigure32:WeforecastCNYwillstaystrongin2022-20236.356.15.65.866.26.46.66.877.2909510010511011512012513013514020102011201220132014201520162017201820192020202120222023CNYeffectiveexchangerateUSD/CNYSource:DeutscheBankResearch,PBOC,WIND20January2022ChinaMarketPerspectivesPage26DeutscheBankAG/HongKongFigure33:Chinaeconomicforecasts,2022-2320192020202120222023ActivitiesGDP,real%YoY6.02.27.95.15.5GDP,nominal%YoY7.32.711.79.37.7CPIinflation,p.a.%YoY2.90.01.02.32.3Retailsales%YoY8.0-3.913.09.08.0Fixedassetinvestment%YoY5.42.95.06.06.0Industrialproduction%YoY5.72.89.55.56.0FiscalFiscalbalance%ofGDP-5.6-8.6-5.8-6.8-6.0Augmentedbalance%ofGDP-8.2-14.1-8.8-10.0-8.5Augmentedpublicdebt%ofGDP74.884.284.788.090.7ExternalExportsgrowth%YoY-0.84.130.05.07.0Importsgrowth%YoY-2.40.430.08.07.0Goodsbalance%ofGDP3.03.53.83.23.1Currentaccountbalance%ofGDP1.01.92.22.01.8USDCNY,eop6.976.546.376.356.10FXreservesUSDbn3,1083,2173,2003,2503,300MonetaryTSFgrowth,eop%YoY10.713.310.011.010.0RRR%13.012.511.511.511.51-yearMLFRate%3.252.952.952.952.95Source:DeutscheBankResearch20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage27RMBFXoutlookRMBwasthestrongestcurrencyintheEMcomplexin2021onspotreturnbasis,andoneofthestrongestontotalreturns,appreciatingnotjustversusthedollar–inspiteoftheFed’shawkishpivot–butalsoonbroadtradeweightedbasis,withtheCFETSbasketrisingtonewrecordhighsfromsincethelatterwasintroducedin2015.Into2022,though,thisdynamicwefeelismostunderriskfromtwofactors.One,thechallengetosustainingitsZeroCovidstrategyposedbyamoreinfectiousOmicronvariant.Two,thesharpercontrastbetweenpolicyoutlooksinChinaversusrestoftheworld.Theearlypartoftheyearisprobablywheretherisksarethehighestfromthesetwofactors;givena)prolongedlockdownscouldexacerbateslowdowninexportsduringaseasonallypoorerpartoftheyear;and/or(b)worseninggrowthoutlookcouldriskportfoliooutflows.Beyondtheseneartermrisks,RMBoutlookfortheyearwillbedrivenmorebythreethemes;nChina'sexitfromthe'Zero-Covid'strategy.OurbasecaseisforChinatoperseverewithitscurrent'Zero-Covid'strategyformuchoftheyear.ForChinatoopenupwillingly,webelieveafewconditionswillhavetobemet:(1)theproductionofamoreeffectivevaccine;(2)herdimmunityof85%ormore;(3)furtherstrengtheningofChina'shealthcareinfrastructure;and(4)publicsupportforthetransitiontowards'livingwiththevirus'.nThehomecomingofChinesecompanieslistingbackinChina,giventhetighteningoflistingrulesbyChineseandUSregulators.AsofDecember,therewere~380ChinesecompanieslistedoutsideofChinaandHongKong,281ofwhichwereintheUS.Althoughitisunclearhowmanywillre-listinChina/HongKong,ourbiaswouldbetothinkthemoreestablishedtechnologyfirmswill.Traditionally,thepreferenceofthesefirmshasbeentolistinHongKong,resultinginequityoutflowsfromChina.However,twofactorscouldshifttheflowdynamics:(a)China'sdesireformoreofitsestablishedcompaniestolistonshore;and(b)forthemtolistinRMBevenifinHongKong,topromoteRMBinternationalization.nTheongoinginwardFDI,drivenbyforeigninvestors'commitmenttotheChinesemarket.Ourbaselineisthatthesumofthethreedynamicsshouldbesupportive(albeitmodestly)ofRMBstrength.ChinawillneedtoactivelydeployitsvariousFXtoolkits,including:(a)looseningitsmacropolicies;and/or(b)wideningtheoutflowchannels;toturnthetideonitsmassivesurplusesandweakenthecurrency.PerryKojodjojo,HongKong+8522203615320January2022ChinaMarketPerspectivesPage28DeutscheBankAG/HongKongIfsuccessful,China's'Zero-Covid'strategyshouldkeeptheRMBincheckDespitetheworldmovinginthedirectionof'livingwithCovid',andwithatleast88%ofChina'spopulationbeingvaccinated,Chinahasheldontoits'Zero-Covid'strategy.Movingforwardin2022,thisstrategywillfaceitsbiggesttesttodate.AsidefromtheriseinDeltaoutbreaksinChina(Figure34&Figure35),thegovernmenthasreportedthattheOmicronvarianthasnowbeendetectedinafewcities.ThearrivalofthisvariantaddsanadditionaldimensionofchallengestoChina'scontainmentstrategy,giventhevariant'shighertransmissibility,shorterincubationtime,andgreaterabilitytoevadevaccines.Figure34:Withthechangeinweather,therehasbeenanotableriseinCovidcasesinChina...04080120160200May-20Aug-20Nov-20Feb-21May-21Aug-21Nov-21ChinaDailynewcases:non-imported,7dmaChinaActiveseverecases:non-importedNoofpatientsSource:DeutscheBank,CEICFigure35:...notonlyinoneprovince,butinvariousprovinces,whichsuggeststhatholdingbackthespreadofthevirusisbecomingdifficult0%10%20%30%40%50%60%70%Apr-20Jul-20Oct-20Jan-21Apr-21Jul-21Oct-21Jan-22Proportionofprovinceswithalocalcaseinlast2weeksSource:DeutscheBank,CEICRegardlessofthechallengesposedbythisvariant,webelievethatChinawillstickwithitscurrentstrategy.Thisisnotsurprising,given:(a)thelackofChinese-producedmRNAvaccines;(b)theonce-in-a-decadeleadershipchangeinNovember;and(c)alackofpublicpressuretoshiftthegovernment'sstrategy.Moreimportantly,ithasbeenreportedthatifChinaweretodropitszero-toleranceapproachandlifttravelbans(likeitspeers),itcouldface300-600kCovidcasesperday(vsthedailyaverageof23casesperdayin2021).ItseemsthatthisisnotariskthattheChineseauthoritiesarewillingtotake,particularlygiventheirdesiretomaintainafatalityrateof<0.1%(vs.the2%ratethattheworldiscurrentlyfacing),andespeciallywith2022beingapoliticallyimportantyear.ThisistheviewreiteratedbyProfessorLiangWannian,aformerNationalHealthCommissionofficialandtheheadofapanelofexpertsadvisingBeijingonitsCovidpolicies.Inarecentinterview,hestatedthat"Chinacannot'livewithCovid-19',asitwouldcauselargenumbersofsevereillnessanddeath,aswellasamajorpoliticalproblem".Hence,wemaintainourbasecasethatChinawillkeepitsbordersrelativelyclosed,withonlyselectivereciprocaltravelcorridorsbeingopen(likeHongKong)untilatleast4Q22.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage29ProsandconsofthecurrentCovidstrategyThisstrategyhasclearbenefitsandcosts.Thebenefitsinclude:nLessstrainonChina'sdomestichealthcareresources;andnAfavorableenvironmentformanufacturing,production,andgoodsexports,especiallyifChinaisabletokeepthevirusawayfromtheEasternprovinces.Indeed,lookingat2021,althoughChina'sfightagainstCovidhasnegativelyaffecteditsservices,themanufacturingsectorhasbarelybeenaffected,andforeigndirectinvestmentishigherthanitwasbeforethepandemic.However,thestrategyalsocarriescleareconomiccosts:nConstantlockdowns/tighteningofsocialdistancingregulationswillcontinuetobeaheadwindforthegrowthrecovery(esp.fortheservicessector).AccordingtoestimatesfromtheMinistryofTransport,railwayandairpassengertripsduringtheNewYear'sDayholiday(1-3January)weredownby16.5%and26.8%,respectively,fromoneyearago.AccordingtoBaidu,thedailyaveragelengthofcongestiononexpresswaysduringtheNewYear'sDayholiday(1-3January)was28.1%belowthatofthesameperiodin2021.Domestictourismhasalsobeenimpacted.Followingtheriseincasesin2H21,domestictourismhasagainslowed,bothintermsoftouristnumbersandexpenditure(seeFigure36).IftheOmicronvariantresultsinmoreprolonged/strictlockdowns,furthergrowthweaknesscannotbediscounted.nTheongoingredirectionoffiscalresourcestowardCovidprevention(whichhasclosetonopositivemultipliereffect)iscomingattheexpenseofslowerinfrastructurespending–especiallywithfiscalrevenuesdecliningasaresultofweakerpropertysales(Figure37).nOngoingisolationfromtherestoftheworldcouldnotonlysubstantiallyreduce:(a)cross-borderpassengerflows,impactingthetourism/servicessector;butalso(b)knowledgeflow,hinderingChina'sabilitytoclimbupthevaluechaininmanysectors.UnderwhatconditionswillChinashiftitsstance?Overthepastyear,thegovernmenthashaileditssuccessincrushingthecoronavirusasevidenceofthestrengthandeffectivenessofitspoliticalsystem.Hence,ashifttoward'livingwithCovid'wouldinvolveasignificantchangeoftune.ForsuchaU-turninpolicy,wecanonlythinkoftwocircumstancesthatwouldresultinsuchadramaticshift:(1)theCovidsituationissogravethatongoinglockdownisnolongeraviablestrategy;or(2)thegovernmentisconfidentitcanminimizethesocialandeconomicimpactonopeningup.Regardingtheformer,aheadofkeypoliticalevents,itremainsdifficulttojudgewhenthegovernmentwouldbewillingto'throwinthetowel'andshifttoward"livingwithCovid".OpeningupChina'sborderscouldstrainitshealthcaresystemandcreatesocialandpoliticaldiscontent,whichthegovernmenthopestoavoid.Hence,webelievethatashiftinthegovernment'sstancewouldlikelyonlyoccurintheeventofwidespreadtransmissionoftheOmicronvariantinChina,inwhichcasemaintainingthestrategywouldnolongerbeeconomicallyorpoliticallybeneficialandthewillingnessofitssocietytobearthecostofamoreporousborder.Alternatively,ashasbeenthecaseintheG7world,ongoinglockdownfatiguecouldalsoresultinsocialdiscontent,forcingthegovernmenttoshiftitsFigure36:Theongoingtighteningoftheruleshassubsequentlyledtoaweakertourismrecovery20%40%60%80%100%120%140%160%180%LNY2020Labourday2020Dragonboat2020Goldenweek2020LNY2020Labourday2021Dragonboat2021Goldenweek2020%ofrecoveryvspre-pandemiclevel(averageof2018/19)TourismRevenueNooftouristRiseincaseshasseenaslowdownindomestictourismSource:DeutscheBank,CEICFigure37:Withfiscalrevenueonthedeclineduetoweakeningpropertysales,Covidriskpreventioncostswilllikelyleadtolessfiscalstimulus-40%-30%-20%-10%0%10%20%30%40%50%101112131415161718192021Overallgovtfiscalbal:Revenue(%YoY3MMA)Source:DeutscheBank,CEIC20January2022ChinaMarketPerspectivesPage30DeutscheBankAG/HongKongstrategy.Nevertheless,evenifthegovernmentsucceedsinsufficientlycontainingtheOmicronvariant,forittowillinglyopenupitsborders,webelievethatthefollowingconditionswouldfirstneedtobemet:nProductionofaneffectivevaccine.Forthetimebeing,afewstudies(e.g.,thosedonebytheUniversityofHongKong)haveshownthattheantibodiesproducedinresponsetoCoronaVac(acommonlyusedChinesevaccine)donotpreventinfectionwithOmicronaftereitheraseconddoseorabooster.Inotherwords,China'shighvaccinationratemaydolittletohinderOmicron'sspread–although,likeothervaccines,itshouldstilloffergoodprotectionagainstseveresymptomsanddeath.GivenChina'scommitmenttolimitCovid-19deathratestolessthan0.1%,aswellasthetransmissionrateofeachinfectedpersonat1to1.5individuals,producingamoreeffectivevaccineinordertoachievehigherlevelsofimmunityisneeded.TheeasiestpathtoachievethisgoalwouldbetoapproveanyofthevariousforeignmRNAvaccines.Yet,withChina'sdesiretoremainself-reliant(esp.inanenvironmentwhereChina-G7relationsarepoor),webelieveitwillcontinuetoprefermakingitsownvaccines.Onthevaccinefront,Chinesebiotechcompany,SuzhouAbogenBiosciences,anditspartner,WalvaxBiotechnology,havereceivedregulatoryapprovaltotesttheirmRNAvaccinecandidateinaboostertrial,withhopesofproducingthemRNAshotsoon.Chinesepharmaceuticalcompaniesarealsointheprocessofmanufacturingtheirownoralpills.Currently,threepotentialcandidatesareinlate-stageclinicaltrails,withhopesthatoneormorewillbeapprovedlaterthisyear.Ifthesedrugsaresuccessfulinkeepingthevirus(includingtheOmicronvariant)atbay,thiswouldbethefirststepinconsideringashiftinpolicystance.nHerdimmunityof85%ormore.IfChinadoesachieveamoreeffectivevaccineagainstthevariousCovidvariants,thesecondconditionwouldbethatatleast85%ofitspopulationisinoculatedwiththenewvaccine.Thegovernmentwouldalsowanttoseesufficientstockpilingofthesevaccines/pillstoensurethattheycanbedeployeddomestically,inaneffectiveandefficientmanner,inordertokeepcaseloadslowwithinitsborders.nFurtherstrengtheningofChina'shealthcareinfrastructure.GiventhelowefficacyofthecurrentChina-madevaccines,evenifChinasucceedsinvaccinatingalmostallofitscitizens(assomeEuropeancountrieshavedone),hospitalizationswouldstillincreaseifitweretoopenitsborders.GivenChina'sweakhealthcaresystem(especiallyinruralareas–e.g.,4.47intensivecarebedsforevery100,000residents,comparedto34.7bedsper100,000intheUnitedStatesand29.2inGermany),thegovernmentwouldneedtosupportthedevelopmentofamorerobustandresilienthealthcaresystem(onewhichwouldnotbeeasilyoverwhelmedwhenthebordersareopenedup).nWillingnesstolivewiththevirus.Sofar,Chinahasnotshownanydesiretoshiftitsstance,asrecentsurveyscontinuetosuggestthatpublicsupportforitscurrentpolicyremainspopular.Assuch,forthegovernmenttoconsiderapivot,itwouldneedtoensurethatithasoverwhelmingpublicsupportfortheshift.nUnderstandingofhowthevirusmutates.Inorderforthegovernmenttobecomecomfortableenoughtoopenupitsborders,itwouldneedtoseethatthedangerposedbythevirusisataminimum(giventheacceptablefatalityandtransmissionrate).OnepromisingsignoftheOmicronvariantisthattheproportionofCovidpatientsadmittedtohospitalwhorequire20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage31ventilatorsisnowlowerthanatanyothertimeduringthepandemic.Hence,ifChinamanagestocreateamoreeffectivevaccine,andifitisabletoimproveitshealthcareinfrastructure,alessvirulentstrainwouldhelpinconvincingChinatopivot.nSufficientquarantinecenterstoisolatepotentiallyinfectedindividualsinordertoensurethatthespreadofthevirusismanageablewithinitsborders.IfandwhenChinadoesopenup,webelieveitislikelytofollowinthefootstepsofSingapore,i.e.viaaVaccinatedTravelLanewithselectivecountries,butpotentiallywithatwist.Chinamaystillrequirevisitorsorreturningresidentstostayinquarantinecenterstemporarily(butforashorterperiodoftime)inordertoensurethattheyareCovid-free.Inrecentmonths,afewChineseprovinceshavebeenactivelyconstructingmultiplemass-quarantinecentersatvariouskeyentrypointsintoChina(suchasGuangzhou).TheirobjectiveistominimizetheriskoflocalspreadingofthecoronavirusduetoimportedCovid-19cases.ThesequarantinecenterscouldalsobeusedtoenhancetherobustnessofthehealthcaresystemduringperiodwhenCovidcasesspikes.ImplicationsfortheRMBThecurrent'Zero-Covid'strategydeployedbytheauthoritiesandtheemergenceoftheOmicronvariantcouldhavesignificantramificationsfortheRMB.Giventhatthevariantwilllikelyspreadmoreeasily,anotableriseinOmicroncasescouldtriggerthenecessityforharsher,widerlockdowns,whichcouldforcemoreeasinginordertobolstergrowth.Inthepast,narrowinginterestratedifferentials(particularlyduetoamorehawkishFed)andaturnhigherinthecreditimpulsehavebothbeenassociatedwithaweakercurrency(Figure38).AggressivelockdownsmayalsodisruptChina'sexportcycletotheextentthatfactories/portsareaffected,leadingtoaweakerRMB(Figure39).Ontopofthis,Q1tendstobewhenChina'scurrentaccountisseasonallytheweakest,accountingfor~10%ofthefull-yearsurplus(Figure40).Hence,ifChinaweretostruggletocontainthespreadofthevirusandcontinuestoresorttostringentlockdowns,therisktoUSD/CNYistotheupside.Ontheotherhand,ifChinamanagestocurtailthespreadoftheOmicronviruswithinitsborders,theimpactofthe'Zero-Covid'strategywouldlikelyresultinarepeatof2021,wherebytheservicedeficitcouldremaininsufficienttorecyclethesizeabletradesurplus.SincetheclosureofChina'sborders,itstourismdeficithasnarrowedconsiderably,fromanaverageof~$20bnpermonthto~$8bn(Figure41).Thisreductionisnotonlyduetoareductioningenuineoutboundtourism,butalsoaninabilityfor'hotmoney'toleavethesystem.Basedonourestimation,~25%ofpre-pandemictourismoutflowswere'hotmoney'(Figure43),usedtoacquireforeignassetsunderthepretextoftourism.However,withthebordersclosed,andgiventheregulatoryhurdlesrequiredtorepatriatecapitaloffshore(a$50klimitperpersonperyear),this'hotmoney',stuckinChina,contributedover$100bntothecurrentaccountsavingsin2021.Hence,ifOmicronissuccessfullycontained(1Qwillbeapivotalperiod),wewouldexpecttheongoingstrategytoresultinaresumption(albeitamoderateone)ofRMBstrength.IfChinaisabletosuccessfullymanagetheCovidsituationandopensitsbordersofitsownaccord,RMBweaknessmightnotbeobvious.Itistruethatwiththeopeningofitsbordersweshouldseearesumptionofawidertourismdeficit,andthatamorepronouncedconsumptionrecoverywouldleadtoanarrowercurrentaccountsurplus.However,itssuccessinlimitingtheeconomicandsocialimpactonitssystemcouldalsoresultin:(a)anongoingonshoringofglobalsupplychain;Figure38:Afurthereasingofmonetaryconditionsshouldalsoencouragemoreequityoutflows-80-60-40-200204060-0.25-0.20-0.15-0.10-0.050.000.050.100.150.200.25161718192021USDbn,6Msum3MMACreditimpulseNetequityflows(6Mlagged,RHS)Source:DeutscheBank,CEICFigure39:ThenotableslowdowninexportswilllikelyweighonUSD/RMBsignificantly-8%-6%-4%-2%0%2%4%6%8%10%12%-20%-10%0%10%20%30%40%1112131415161718192021%YoY,3MMA%YoY,3MMAExportsCNY/USD(RHS)Source:DeutscheBank,CEIC20January2022ChinaMarketPerspectivesPage32DeutscheBankAG/HongKong(b)portfolioflowsonthebackofamoresustainablerecoveryingrowth;and(c)arepatriationofoverseasproceedsonthebackofastrongeconomy.Withanarrowingcurrentaccountsurplusandporouscapitalaccount,whatislikelyisamorevolatileRMBascapitalflowsbecomethedominantdriverofRMBperformance.Figure40:Seasonally,China'scurrentaccountsurplustendstobethesmallestin1Q01020304050601Q2Q3Q4Q$bnSeasonalperformanceofChina'sC/Asince1998Source:DeutscheBank,CEICFigure41:Followingthepandemicandborderclosures,thetourismdeficithasnarrowednotably-25-20-15-10-5018192021$bn,3MMABoPnetservicesbal:Tourism2018-19deficitaverage$20bnpermonthTo$8bnpermonthin2020-21Source:DeutscheBank,CEICFigure42:Beforethepandemic,tourismoutflowsreportedbytheSAFEweredoublethenumberreportedbytheMCT80120160200240280320141516171819USDbnOutboundTourismExpbyMCYTourismoutflowfromSAFEDifferencebetweenSAFEandMinistryofCulture&Tourismdataisfrom2014bankcardsandbanktransactions(includingeducationcosts)areaddedintoSAFEtouismBoPSource:DeutscheBank,CEICFigure43:Strippingouteducationcosts,potential'hotmoney'outflowscomprise~25%oftourismoutflows80120160200240280141516171819USDbnResidual-potential'hotmoney'EducationcostsGenuinetourismexpendituresSource:DeutscheBank,CEIC20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage33AgradualfinancialdecouplingbetweentheUSandChinaDespitePresidentBidenhavingenteredtheWhiteHouse,therelationshipbetweentheUSandChinaremainsfrail.Notonlyhastherebeenalackofhigh-leveltalks,leadingtotheexpiryofthePhaseOneTradeagreementattheendof2021,butanincreasingnumberofChinesecompanies(~120asofDecember2021),rangingfromquantumcommunicationsand5Gtoartificialintelligenceandrobots,havebeenaddedtotheUSEntityList.Now,anotherfronthasopened–thistimearoundinthefinancialsector.FollowingthepassageoftheHoldingForeignCompaniesAccountableAct(HFCAA)inDecember2020,on2December2021,theSECannounceditsfinalplantomandateforeigncompaniestoopenuptheirbookstoUSscrutinyorriskbeingdelistedfromUSexchangeswithinthreeyears.Moreover,foreignissuerswillberequiredtodisclosethelevelofforeigngovernmentownershipinthoseentities.TherulewillalsorequireenhanceddisclosuresfromChineseentitieslistingintheUSviaavehicleknownasavariableinterestentity(VIE).AsofDecember,therewere~380ChinesecompanieslistedoutsideofChinaandHongKong,281ofwhichwerelistedintheUS,withatotalmarketcapitalizationof~$1.56tn.Ofthese,188oftheChinesecompaniesintheUSarelistedthroughaVIEstructure(Figure44),withatotalmarketcapof~$1tn(Figure45).Amongthesefirms,theconsumerdiscretionarysegmentaccountsfor32%oftotalUSlistingsviaaVIEstructure(intermsoftotalnumberoffirmslistedintheUS),followedbyinformationtechnology(32%)andfinancials(16%).Figure44:ThemajorityofChinesefirmslistedoverseasareintheUS…02004006008001,0001,2001,4001,6001,800inUSinEUinSGOthersUSDbnMarketcapofChinesefirmslistedoverseas(excludingHK)Source:DeutscheBank,WindFigure45:...mainlyviaVIEstructures02004006008001,0001,200VIEOthersUSDbnMarketcapofChinesefirmslistedinUSVIEandnonVIEstructuresSource:DeutscheBank,Wind20January2022ChinaMarketPerspectivesPage34DeutscheBankAG/HongKongFigure46:CompaniesintheconsumerdiscretionaryandITsectorsmakeupthemajorityofthelistings...010203040506070ConsumerDisITFinancialsIndustrialsRealestateOthersNooffirmslistedviaVIEstructureintherespectivesectorsSource:DeutscheBank,WindFigure47:...althoughthelargestmarketcapcompaniesareintheconsumerdiscretionarysector0100200300400500600700800ConsumerDisITFinancialsIndustrialsRealestateOthersUSDbnMarketcapoffirmslistedviaVIEstructureintherespectivesectorsSource:DeutscheBank,WindHowever,notonlyistheUSmakingitdifficultforChinesefirmstolistoverseas–therearealsonewsetsofregulatoryrulesfromvariousChineseauthoritiesthatChinesefirmsneedtofollowiftheywishtoobtainapprovalforoverseaslisting(includingthroughVIEstructures).FollowingthetighteninginoperationalregulationsonChinesetechnologycompaniesin2H21,theChineseauthoritieshavenowshiftedtheirattentiontowardputtingaregulatoryframeworkinplaceforChinesefirms,particularlyinsectorsonChina's"negativelist",whowishtoraisefundingoverseas.InlateDecember,theCSRCreleaseditsproposedrules(whichareopenforpubliccommentuntil23January)inordertoestablishafilingrequirementforcompaniesintendingtolistoverseas.TheserulesallowtheCSRCtobananoverseasIPOifthelistinghasthepotentialtothreatennationalsecurity.TheyalsorequirecompanieslookingtoIPOoffshoretocomplywithexistingrulesconcerningforeigninvestment,cybersecurity,anddatasecurity.AlthoughtheproposedrulespermitforeignIPOs(includingthroughVIEstructures),theprovisionsremainvagueandrequirevariousregulatoryagencies'approvals,includingfromtheMoComandtheNDRC,whicharealsopermittedtoblockthelistingsforvariousreasons.Indeed,thelatestannualversionoftheforeigninvestmentnegativelist,publishedon27December,containsnewprovisionsthatspecifythatcompanieslistingabroadneedspecialpermissionfromtheseregulatorsiftheIPObreachesthenegativelist'slimitsonforeigninvestment.Foreignlistingsarealsosubjectedtothesamecapsonforeignownershipthatapplyonmainlandstockexchanges–10%foranysingleforeigninvestorand30%combinedforallforeigninvestors.WhatcanChinesefirmsdo?GiventhevariousapprovalhurdlesthatChinesefirmswillneedtopassandChina'sdesiretoencouragemoredomesticlistings(aspartofitsRMBinternationalizationagenda),webelievethatmoreChinesefirmswilllooktolistinChinaorHongKong,particularlyinlightoftheHFCAA.ForChinesefirmsalreadylistedintheUS,wedonotexpectthemtodelistactively.However,tominimisetheriskofpotentialde-listingduetothechangeinregulatorylandscape,dualprimary/secondarylistingsinChinaorHongKongarelikely.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage35Onthelatter,giventheconditionssetbytheHongKongExchangesandClearing(HKEX)forsecondarylistings,notallcompaniesmeettheminimalrequirements.Basedonourcalculations,thereare37Chinesecompanieswithamarketcapgreaterthan$1bnthatarelistedintheUS,butnotinHongKong.Intotal,theyhaveacombinedmarketcapof~$278bn.ThelargestcompaniesarePDD,Nio,andDidi.However,notallhavemettheminimumrequirementforasecondarylisting,whichstatesthatacompanymusthavebeenlistedoverseasforatleasttwoyears.Ofthe37Chinesefirms,18(withamarketcapof$93bn)haveyettomeetthisrequirement,andlikeXpeng(electricvehiclemaker)andDidi,theywillhavetocompleteadualprimarylistinginHongKongiftheyintendtolistinthenearterm.TheremainingcompaniesthatdidnotmeettheHKExlistingrequirementwilllikelyhavetolistinChina.ImplicationsfortheRMBTraditionally,theongoingriseinChinesefirms'listinginHongKonghasaidedintherecyclingofChina'slargecurrentaccount,asChineseinvestorshavetypicallyinvestedmoreactivelyviatheSouthboundconnectintoHongKong.WithChinalikelytoeasemonetaryconditionsmoreactively,theoutflowscouldactuallybelarger(Figure38).However,twofactorscouldshifttheflowdynamics:nListingbackinChinaratherthaninHongKong.GivenChina'sdesiretodeepenitsowncapitalmarket,itisplausiblethatsomeofthesecompaniesthatmeettheconditionstolistinHongKongmaybeencouragedtolistinChinainstead.Indeed,IPOsinChinahavebeenrisingnotablyvs.thoseinHongKong(Figure48).ThereisalsostillalackofclarityonwhetherChineseinternetplatformoperatorswithmorethan1mnusersinChinawillneedtogothroughacybersecurityreviewiftheyplantolistinHongKong.nListinginRMB-denominatedequity.Alternatively,firmsthatprefertolistinHongKongandarepermittedtodosobytheChineseauthoritiescouldbeaskedtoissueRMB-denominatedequitiesratherthaninHKD.Infact,giventhedepthoftheoffshoreRMBmarketinHongKongandChina'sgoaltofurtherexpandtheuseoftheRMB,inOctober2021,theSecuritiesandFuturesCommissionsetupaworkinggroup(alongwiththeHKMAandtheHKEX)tostudyhowtopromoteRMB-denominatedsecurities(includingequitydenominatedinRMB)inHongKong.Inourview,thiscouldpotentiallybeannouncedaftertheelectionofthenewChiefExecutiveinHongKonginMarch.Ifso,demandfortheRMBcouldactuallyincrease.In2021,Chinarecorded~$67bnofequityinflowsviatheNorthboundconnect,doubletheamountofinflowsin2020(Figure49),despite:(a)thegrowthslowdown,and(b)variousregulatorychanges.Ifmorewell-establishedtechnologycompaniesarelistedinChina,theseequityinflowscouldpickupmoredecisively–particularlyifChinaweretoloosenitsregulatorygriponthissector.Ontopofthat,wecouldalsoseeaslowdowninequityoutflowsviatheSouthboundconnect.Overthelasttwoyears,followingtheriseinthenumberofChinesefirmslistinginHongKong(particularlyfromthetechnologysector),equityflowsviatheSouthboundconnectintoHongKonghavebeenrelativelystrong(Figure50).TotalSouthboundflowsin2021and2020($146bn)weremorethanthesumoftheSouthboundflowsfrom2015-2019($136bn).Alternatively,ifChinesefirmsweretolistthemselvesinHongKongbutchoosetobeRMBdenominated,thiscouldalsoslowFXconversion(fromRMBtoHKD)inHongKongandreducetherecyclingofChina'scurrentaccountsurplus.Regardingthelatter,overthepasttwoyears,netequityflowshaverecycledabout20%ofChina'scurrentaccountsurplusonaverage.Figure48:WiththeongoingliberalizationofChina'scapitalaccount,moreIPOsarebeingcompletedinChina020406080100120Jun15Dec15Jun16Dec16Jun17Dec17Jun18Dec18Jun19Dec19Jun20Dec20Jun21Dec21USDbnIPOinChinaHKSource:DeutscheBank,CEIC20January2022ChinaMarketPerspectivesPage36DeutscheBankAG/HongKongFigure49:Despitethegrowthslowdownandregulatorychanges,equityinflowscontinuetobestrong01020304050607015161718192021USDbnEquityflowsviaNorthboundSource:DeutscheBank,CEICFigure50:IfmoreChinesefirmsarelistedinChina,Southboundoutflowscouldslow01020304050607015161718192021USDbnEquityflowsviaSouthboundSource:DeutscheBank,CEICForeigncorporatesremaincommittedtoChinaDespitetheworseningtensionbetweentheUS/G7andChina,andthegradualfinancialdecouplingbetweentheUSandChina,tradeconnectivityremainsverymuchintact.Infact,overthepastyear,FDIinflowsintoChinacontinuedtoholdupwell.Ona12Mmoving-sumbasis,Chinahasrecorded~$336bnworthofinflows,thelargestlevelonrecord.Inourview,thisisbeingdrivenbythreefactors:nTheongoingopeningofitsmarket.AlthoughChinahasbeenslowtoopenitsmarkettoforeigninvestors,theoveralldirectionoftravelhasbeenencouraging.Overthepastyearorso,ChinahasincreasinglyallowedsomeforeigncompaniestooperateindependentlyinChinawithouttheneedforaJV.Ithasalsobeennarrowingitsnegativelist,havingremovedtwomoresectors,bringingthetotalnumberofsectorsthatareofflimitsforforeigninvestorsfrom33to31.ThishassubsequentlyledtostrongFDIinflows.Indeed,inthelatestAmChamShanghaiSurvey,almost60%ofitsrespondentswereincreasinginvestmentsin2021,comparedtoonly39%ofmembersin2020(Figure51).NotonlyareUSMNCslookingtoexpandtheirfootprint,butEUMNCsaredoingsoaswell(Figure52).AccordingtothelatestEuropeanChamber'sBusinessConfidenceSurvey,59%ofEUMNCswereconsideringexpandingtheircurrentChinaoperationsin2021,8ppthigherthanin2020andarecordhighsince2015.nForeigninvestors'resilienceinChinainordertosecuretheirmarketpositionandmitigateexposuretogeopoliticaltrends.Indeed,one-fourthofEUMNCshavebeenonshoringatleastsomeoftheirsupplychain(5xthenumberthatareoffshoring).Inaddition,91%ofthemareNOTlookingtorelocatetheirfactories(Figure53).EvenUSMNCs(Figure54)areincreasinglypreferringtostaywithinChina,despiteworseningUS-Chinatensions.OneargumentsupportingtheirpreferenceistheprofitabilityoftheChinesemarket,giventhepotentialgrowthintheChineseconsumermarket.YTD(asofNovember),Chinahasalreadyrecorded~$157bnofnewinvestmentsflowingintoChina(~30%morethantheinflowsin2018or2019duringthesameperiod,basedonMoComdata).Meanwhile,China'sODIhasnotincreasedmuch,duetothetensionsbetweenChinaandG7countries.InasurveyconductedbyChina'sGeneralChamberofCommerceintheUSinAprilandreleasedinJune(basedonresponsesfrom183Chinesecompaniesandaselectnumberofexecutiveinterviews),only12%ofChinesebusinessesarelookingtoincreasetheirinvestmentsinthe20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage37US(downfrom23%in2020and39%in2018,whenPresidentTrumpinitiatedtradefrictionswithChina).ThisisbeingdrivenbytheongoingworseningofUS-Chinatensions,despitethenewadministration.nTheongoingriseinretainedearnings.GivenongoingexpectationsfortheRMBtoholdupwellandtheongoingopeningupofChina'scapitalaccount,foreigninvestorsareincreasinglykeepingtheirproceedsonshoreforfutureinvestments(Figure56).ThenetimpactofthisisawideningofChina'snetFDIsurplus($221bnona12Mmovingsum).OureconomistforecastsnetFDItobe~$160bnfor2022,butgiventhetrend,thereisriskthattheactualnumbercouldbehigher.Figure51:AsChinaopensupitsmarkettoforeigninvestors,USMNCsareincreasinglyinvestingonshore,particularlygiventhesizeoftheChinesemarket...0%10%20%30%40%50%60%70%80%90%100%202120202019201820172016InvestmentchangesinthecomingyearIncreaseNochangeDecreaseSource:DeutscheBank,AMCHAMChinaFigure52:...asareEUMNCs0%10%20%30%40%50%60%70%80%90%100%2021202020192018201720162015Areyoulookingtoexpandcurrentoperations?YesNoDon'tknowSource:DeutscheBank,EUCHAMChinaFigure53:Inaddition,EuropeanMNCsareincreasinglylookingtokeeptheirsupplychaininChina0%10%20%30%40%50%60%70%80%90%100%2021202020192018201720162015NoplanstorelocateproductionsPlanstorelocateproductionsSource:DeutscheBank,EUCHAMChinaFigure54:...asareUSMNCs70%72%74%76%78%80%82%2021202020192018NoplanstorelocateproductionsSource:DeutscheBank,AMCHAMChina20January2022ChinaMarketPerspectivesPage38DeutscheBankAG/HongKongFigure55:Giventheongoingliberalizationofitscapitalaccount,ChinahasseenarecordlevelofnetFDIinflows-300-200-100010020030012131415161718192021USDbn,12MMsumOutflowsInflowsNetFDISource:DeutscheBank,CEICFigure56:OngoingstrengthintheRMBisalsokeepingFDIinflowsincheck6.06.26.46.66.87.07.2-20020406080100120140160121416182012MMA$bn,12MsumRetainedearningsflowUSD/CNY(RHS)Source:DeutscheBank,CEICPolicychangeisnecessarytoturnthetidesagainsttheRMBFollowingtheongoingRMBstrengthandcommentaryfromregulators/formerofficialsimplyingthatthePBoCisuncomfortablewiththelackoftwo-wayvolatility,webelievethatChineseauthoritieswillneedtoleanagainstthewindmoreproactivelyiftheyintendtoweakentheRMB.Inrecentweeks,theauthoritieshavetakensomeactions:(1)hikingtheRRRonFXdepositsby200bpto9%;(2)fixingUSD/CNYhigherthanmarketexpectations(althoughinthefollowingdays,thefixingwillagainmoveinlinewithmarketexpectations);and(3)activelyinjectingliquidityintotheFXswapmarkettoreducetheattractivenessofbeinglongRMBvs.theUSD.Indeed,thelatterhasresultedintheimpliedannualizedrate(forexampleinthe3M)fallingfromahighof3.2%to2%.Nevertheless,thesemeasureswill,atbest,onlyslowRMBappreciationtemporarily,giventhesizeablecurrentaccountsurplusandthepotentialforstrongercapitalinflowsmovingforwardin2022.Toachieveamoreeffectivewayofrecyclingtheseinflows,theauthoritiesmayconsiderthefollowingmeasures:1)FurtherRRRhikesonforeigncurrencydeposits.SimilartoDecember,thePBoCcouldconsiderraisingtheRRRonFXdepositsmoreactively(Figure57).ThiswouldincreasetheUSDinterestrateinChina,makingashortUSD/RMBpositionlessattractive.Alternatively,thePBoCcouldalsoallowonshorebankstoswaptheRMB-denominatedRRRheldbythePBoCintoforeigncurrency.Theriskisthatthiscouldimpactcorporates'financingcosts.AsofNovember,thesizeofFXloansintheonshoremarketwas~$949bn.2)Furthercapitalaccountliberalizationtoencourageoutflows.GivenChina'songoingdesiretoopenupitscapitalaccountandtobalancetheoverallflowdynamic,webelievethatotherregulatorychangescouldtakeplace–e.g.,acontinuationoftheincreaseinvariousqualifieddomesticinvestmentprogramquotasthattheSAFEandthePBoCimplementedlastyear.SinceSeptember2020,Chinahasapproveda~$41bnQDIIquotatoencouragemoreoutflows(Figure58).Thisistwo-thirdsofthetotalapprovedQDIIquotasince2008.Giventhestrong20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage39desirefordomesticinvestmentoffshore,itislikelythattheongoingwideninginoutflowchannelswillcurbRMBappreciation.AccordingtoBain&Company,thetotalamountofinvestableassetsheldbyChineseindividualsis~RMB190tn($30tn).Forcontext,a1%shiftfromdomestictooverseasinvestmentbylocalscouldresultin$300bnofoutflows,equaltothemajorityofChina'scurrentaccountsurplus,basedonDeutscheBankestimatesfor2022.Alternatively,Chinacouldconsidertwootheroptions:(1)wideningthescopeonhowtheannualindividualFXquotaof$50,000canbeused,and/orincreasingtheoveralllimit(say,to$100,000).Ontheformer,inFebruary2021,YeHaisheng,directoroftheSAFE'scapitalaccountmanagementdepartment,suggestedthatChinawasconsideringplanstoallowinvestmentinoverseassecuritiesandinsurancewithintheannualindividualFXquota,whichiscurrentlynotpermitted.Asofnow,Chineseresidentsareallowedtopurchaseupto$50,000offoreigncurrencyperyear(forcurrentaccountactivitiesonly).However,withmostindividualsusingupthemajorityofthequotatopayfortheirchildren'soverseaseducationandtravel,merelywideningthescopeofwhatthequotacanbeusedformightnotbesufficienttorecycletheongoinginflows.Hence,webelievethatdoingboth–increasingthelimit,andhowindividualscanusethequota–wouldbeabetteroptionfortheregulatorsandthatitisinlinewiththeongoingcapitalaccountliberalization.(2)ThesecondoptionwouldbetoencourageChinesecorporatestowinddowntheirforeigndebt.AsofJune2021,theyhaveaccumulated~$944bninforeigndebt,with$661bnintenorsunderayear(Figure59).GiventhePBoC'sdesiretode-leverthesystem,thiscouldencourageearlierrepayments.3)Reintroducingthecounter-cyclicalfactor(CCF)inordertohedgepro-cyclicalsentimentofRMBappreciation.Tomanagethemarket'sRMBexpectation,ChinacouldreintroducetheCCFtoanchorit.Indeed,inAugust2018,whenthePBoCreintroducedtheCCFintoitsfixingformula,itdidmanagetoanchormarketexpectationsandslowRMBweaknessbyfixingUSD/CNYsignificantlylowerthanmarketexpectations.Forexample,inAugust2018,thePBoCfixedUSD/CNYanaverageof33pipslowerthanmarketexpectations,whileinAugusttoSeptember2019(followingthebreakdownintradetalks),ChinafixedUSD/CNYanaverageof82pipsbelowmarketexpectations.ThelattermanagedtopulltheUSD/CNYfixbelow7andanchormarketexpectationsforRMBdepreciation(asevidencedbythefallinlongUSD/CNHpositionsatthatpoint).Assuch,areintroductionoftheCCFinordertoanchormarketexpectationsandslowRMBstrengthcouldbeaneffectivetool.However,thisalonewouldnotbesufficient.Instead,webelieveacombinationofmeasuresthatincludetheCCFwouldbeneededtoturnthetides.Theriskstotakingthisactionare:(1)potentialcriticismfromtheUSthatChinaistryingtomanipulatetheRMBandthepotentialforChinatobelabeledasacurrencymanipulatorinthesemiannualTreasuryreport;and(2)goingagainstthegoalofachievingamoremarket-drivencurrency,therebysuggestingthatChinaisnotreadytoopenupitscapitalaccount.4)Furtherchangestothemacroprudentialassessment.SimilartoJanuarylastyear,Chinamightconsider:(1)changingitscross-borderregulations–e.g.,viaafurtherincreaseindomesticcorporates'outboundlendingquota,whiletighteningcorporates'andfinancialinstitutions'inboundborrowingquota;and(2)simplifyingtheuseofRMBforcross-bordertradeandinvestment,thusencouragingtheuseofRMBforinvestmentandtradesettlements–althoughthelatterwouldtakemuch20January2022ChinaMarketPerspectivesPage40DeutscheBankAG/HongKonglongertobeeffective.Absentanyactivepolicyshift,webelievethatthesumofthethreethemesthatwehavehighlightedaboveshouldkeepRMBstrengthintact(especiallyifcontainmentoftheOmicronvariantissuccessful),withtheCFETSbasketapproachingcloseto105(basedonDeutscheBankFXforecastsforyear-end2022).Figure57:ThePBoChashikedtheRRRonFXdepositsforthesecondtimein12M;however,ifitintendstotightenUSDliquidity,morehikesshouldbeconsidered2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%0506070809101112131415161718192021RRRonFXdepoSource:DeutscheBank,CEICFigure58:Tocounterongoinginflows,ChinahasbeenapprovingmoreQDIIquotainordertoencourageoutflows(likein2010-2015)6.06.26.46.66.87.07.27.4406080100120140160180101112131415161718192021QDIIQuotaUSD/CNYspot(RHS)Source:DeutscheBank,CEICFigure59:TheauthoritiescouldpersuadedomesticcorporatestoreducetheiroffshoreUSDholdingsinordertocurbRMBstrength02004006008001,0001,200040506070809101112131415161718192021Claims>1YrClaimsUpto1YrSource:DeutscheBank,CEIC,BISFigure60:ChinacouldreintroducetheCCFinordertoanchormarketexpectationsontheRMB-230-180-130-80-302070Jun-18Dec-18Jun-19Dec-19Jun-20Dec-20Jun-21Dec-21PipsActual-PredictedUSD/CNYDailyFixing(5DMA)Source:DeutscheBank,BloombergFinanceLP20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage41Figure61:ListofregulatorymeasuresthatChinahasimplementedtoweaken/strengthenthecurrencyRMBperformancevstheUSDPeriodFXtools/regulationusedtomanageRMBtrendOct-04FXRRRsetat3%Aug-05AllowexporterstokeepmoreFXunconvertedSep-05ThePBOCWidenedtheNon-dollarTradingBandfortheCNYMar-06LiberalizationofcapitalaccountincludingallowingdomesticcompaniestoinvestmoreoverseasAug-06IntroductionoftheQDIIprogramSep-06FXRRRraisedto4%from3%Jan-07PBoCincreasedindividualFXpurchaseslimit$20Kto$50KAug-07FXRRRraisedto5%from4%Aug-07RemovemandatorycurrentacctFXconversionAug-08SAFErequiresexporterstoputtheirFXearningsinspecialbankaccountsforverificationsJul-08NDRCtightencontrolsonFDIinflowapprovalsAug-08ChinarevisesforeignexchangerulestoencouragemoreoutflowsAug-10ChinaallowsexporterstoparktheirFXearningsoffshoreNov-10Tightenbanks'shortFXpositionsJan-11PBoCannouncedthelaunchofRMBoutbounddirectinvestment(ODI)May-13Linkbanks'NOPtoFXloan/depositratioAug-15SAFEaskedbankstolimitFXpurchaseordersSep-15Introductionofthe20%RRRonlongUSD/CNYforwardsSep-15SAFEtightenrulesonoverseastransfersSep-15PBoCcappedannualoverseascashwithdrawalsatRMB100kJan-16ApplyRMBRRRonRMBdepositsplacedinclearingbanksMay-17IntroduceCounterCyclicalFactor(CCF)infixingJul-17LaunchNorthboundBondConnectSep-17PBOClowerRRRonRMBforwardsfrom20%to0%Jan-18CCFneutralizedJun-18ExpandQFIIquotaandsimplifyoperationsAug-18RRRonlongUSD/CNHforwardwasre-introduced(0%to20%)Aug-18CCFre-activatedSep-19SAFEcancelquotalimitonQFIIandRQFIIOct-20RRRreducedto0%againOct-20PBOCsuspendsCCFOct-20ResumptioninQDIIapprovalDec-20Tightenbanks'inboundborrowingquotaJan-21Expandcorporates'outboundlendingquotaJan-21Tightencorporates'inboundborrowingquotaMay-21FXRRRraisedto7%from5%May-21PBoChighlightedtheneedtomanageexpectationsandcrackdownonmanipulationNov-21PBoCaskedFIstostepupexchange-rateriskmanagementandrefrainfrommakingonewaybetontheyuanDec-21FXRRRraisedto9%from7%Dec-21PBoCfixedUSD/CNY197pipshigherthanmarketexpectationDec-21OngoinginjectionofliquidityviaFXswapstodiscourageshortUSD/RMBpositionsAppreciationphaseDepreciationphaseAppreciationphaseDepreciationphaseAppreciationphaseSource:DeutscheBank,BloombergFinanceLP,PBoC20January2022ChinaMarketPerspectivesPage42DeutscheBankAG/HongKongRMBfixedincomeoutlookRMBCGBandPBBoutperformedin2021RMBfinancialmarkethadatumultuousyearin2021asChinacontinuedstructuralrebalancingintherealeconomybyaddressinglong-termmacroleveragerisksandformalizing/tighteningregulationintheNewEconomysectorswhilekeepingthepandemicundercontrolandkeepingnear-termgrowth/inflationdynamicwithintargets.TheRMBbondmarketstartedtheyearwithabearishtoneonconcernsofliquiditytighteninggivenmacropolicywastokeepleverageconditionsstableand10YCGByieldrosefrom3.1%to3.3%inFebruary.Sincethen,credittighteninginthepropertysectorandLGFV,limiteddebtsupply,risingregulatoryuncertaintiesanddefaulteventsintheproperysectorweakenedbothgrowthmomentumaswellasRMBequityandcreditrisksentiment,andthebondmarketralliedonexpectationsofmonetaryeasing.TheJulyRRRcut,whichwasasurprisetothemarket,pushed10YCGByieldfrom3.10%to2.85%duringJulyanddippedto2.82%inearlyAugust.RMBratesbrieflyreboundedduringSeptemberandOctoberonFedtaperingrisk,upsideriskoninflationandbackloadedlocalgovernmentdebtsupply,butthedownwardtrendinRMBratesresumedaseconomicfundamentalsweakenedmorethanexpectationinQ3,andmacropolicieshaveshiftedtowardsfurtheraccommodation.RMBCGBandpolicybankbondsdelivered8.48%totalreturninUSDand5.72%inCNYin2021.ForUSD-fundedinvestors,37.5%ofthe2021totalreturnwasattributabletocarry,30%wasattributabletodurationand32.5%toRMBappreciation.RelativetoglobalpeersaccordingtotheBloombergBarclaysGlobalAggregateTreasuryIndexwhichsufferedalossof6.6%lastyear,theRMBCGBandPBBsoutperformedglobalbenchmarksignificantlywitharealizedSharperatioof4.88x.Julysawthebestmonthlyreturnat1.54%(inCNY).RMBlong-termrisk-freerate,accordingto10YCGByield,finished2021atthelowestleveloftheyearat2.77%followingtheDecemberRRRcutandwithgrowingexpectationsoffurthermonetaryeasing.RMByieldvolatilitywaslowerin2021with10YCGByieldhavingtradedinanarrowerrangeat2.77%-3.28%thanin2020at2.48-3.36%.Figure62:MonthlytotalreturnofRMBCGBs/PBBsaccordingtotheBBGAindex-2.00%-1.50%-1.00%-0.50%0.00%0.50%1.00%1.50%2.00%2.50%3.00%Dec-20Mar-21Jun-21Sep-21Dec-21CNYUSDSource:DeutscheBank,BloombergFinanceLPFigure63:RMBCGB/PBBsoutperformedglobalpeers(rebasedtolevelsasofendof2020=100)9092949698100102104106108110Dec-20Mar-21Jun-21Sep-21Dec-21BloombergBarclaysGlobalAggTreasuriesTotalReturnIndexunhedgedUSDBloombergBarclayChinaTreasury+PolicybankTotalReturnIndexUSDSource:DeutscheBank,BloombergFinanceLPLinanLiu,HongKong+85222038709RMBfinancialmarkethadatumultuousyearin2021asChinacontinuedtomakestructuralrebalancingintherealeconomybyaddressinglong-termmacroleveragerisksandformalizing/tighteningregulationintheNewEconomysectorsmeanwhilekeepingthepandemicundercontrolandkeepingnear-termgrowth/inflationdynamicwithintargets.RMBCGBandpolicybankbondsdelivered8.48%totalreturninUSDand5.72%inCNYin2021,outperformedglobalbenchmarksignificantlywitharealizedSharperatioof4.88x.WebelieveChinafixedincomewillcontinuetobeasoliddiversificationplayforglobalinvestorsin2022,despiteplentyofuncertaintiessurroundingtheglobalpandemic,inflationandmonetarypolicynormalization.WeenvisagethreedefiningtrendsintheRMBmarketin2022:de-correlation,durationriskandglobalallocation.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage43Asoliddiversificationplayin2022WebelieveRMBfixedincomewillcontinuetobeasoliddiversificationplayforglobalinvestorsin2022,despiteplentyofuncertaintiessurroundingtheglobalpandemic,inflationandmonetarypolicynormalization.WeenvisagethreedefiningtrendsintheRMBmarketin2022:de-correlation,durationriskandglobalallocation.Thefirsttrendwhichhasalreadybeguntodevelopin2021andwhichwebelievewillstrengthenin2022istheincreasingde-correlationofChinafixedincomewithglobalmarkets.Themacrodriversofthisde-correlationare(a)China'stightpandemic(includingborder)controls,whichlimittheriskstodomesticconsumptionandproductionfromnewCOVIDvariants;(b)thenear-termshiftinmacropolicytowardsgrowthstabilization,whichimpliesastep-upinfiscalspendinginH1andamonetarypolicyfocusonsupportingcreditgrowthwith"cross-cyclical"adjustments(stableM2andcreditgrowth,andbottomingoutininvestmentgrowthinH1);and(c)economicrebalancinginthemediumtermtowards"dualcirculation"withafocuson"domesticcirculation",requiringgrowingindependenceofdomesticmacropolicysettings.Assuch,evenintheeventoffasterFedtightening,RMBrateswilllikelyoutperformotherEM.Thesecondtrendisincreasingdurationrisk.In2022,weseefivekeyriskstoRMBduration:(a)easingofcreditconditionstosupportlendingandcreditbondfinancing,crowdingoutdemandforrisk-freeassets;(b)agradualrecoveryinrisksentimentasfiscalspendingandcreditconditionsrelaxationstabilizegrowthinQ2-Q3;(c)supply(anunchangeddeficit/GDPwilltranslateintonetcentralgovernmentdebtfinancingup20%toRMB3tnandlocalgovernmentdebtfinancingflat);(d)dissipatingpoliticaluncertaintyafterthe20thPartyCongress;and(e)spilloverfromrisingglobalrates.Conversely,weexpectthePBoCtostepupmonetaryaccommodationtofacilitatemarketfinancingandpreventexcessivevolatilityinRMBinterestratesandFX.Weforecast10YCGByieldtorangebetween2.6%and3.2%.ThestructuraltrendofglobalallocationtoRMBbondsisintact,thoughthepaceofbondinflowswillmoderate.WiththeopeningupoffinancialmarketsandRMBbondandequityindexinclusion,offshoreholdingsofRMBfinancialassets(bonds,equities,depositsandothers)haverisenfromRMB1,275bnattheendof2013toRMB8,661bnbyend-Septemberthisyear,implyinganaverageannualizedgrowthrateof31%.In2021,weestimateabout70%oftheoffshorecapitalinflowswenttotheRMBbondmarket,atRMB665bn.ForeignersheldaboutRMB4tnbondsbytheendofNovember,morethandoublevsend-2018.WiththeChina-USlong-termratedifferentialstillwideatabout145bp,therelativelylowshareofglobalownershipofRMBassets,andChina'seffortstobroadenmarketaccess,webelievethetrendofglobalallocationtoRMBassetsisintact.However,givenrisksfromglobalratesandthedollar,plusthepaceofWGBIbondinclusion,weexpectpassiveinflowstoslowdownandinflowstobedominatedbyglobalreservemanagersandactiveassetmanagers.WeexpectRMB450bnofinflowsin2022.Keytailrisksfor2022includeinflation,creditdefaultsandregulatoryuncertainty.(a)Inflation:upsideriskstoglobalcommodityanddomesticporkpriceswillmakeitchallengingforthePBoCtomaintainpolicyaccommodation;(b)riskofcreditdefaultsbymajorpropertydeveloperswillcontinuetobeasourceofconcernformarkets;and(c)regulatoryuncertaintyinselectedsectorscoulddriveupvolatilityincross-borderflows.Weexpectboth1Yand5YLPRfixingstofallby10bpsonJanuary20th,reflectingfullpass-throughofthelatestMLFratecut.WeseeriskstiltedtowardsonetotwopolicyeasingactionsbeforetheendofH1thisyearandweforecastthebenchmark7Dreporatetoaverageat2%inH1.Weexpectmodestgrowthinfiscalfinancingin2022butfinancinglikelywillbemorefront-loaded.Riskofemergingcrediteventsandthefactthatfinancialconditionremainsconstrainedfortargetedsectorssuggestcreditpricing"polarization"willpersistinH1.Webelieveinthenearterm,thebalancebetweenfurtherpolicyeasing,supplyriskandcreditconcernsuggeststhatthedownwardtrendofRMBinterestrateswillcontinue.Wewentinto2022witharecommendationtoextenddurationasweexpectmonetarypolicyeasingtobefrontloaded.Wehaverecommendedextendingtothe10YpartoftheCGB/CDBcurve,andreceiving5YNDIRSat2.4%.20January2022ChinaMarketPerspectivesPage44DeutscheBankAG/HongKongFigure64:Interbankliquiditywillbekeptstable0.001.002.003.00161718192021benchmark7Dreporate7DrevrepoSLF7DrateonexcessreserveSource:DeutscheBank,PBoC,WindFigure65:China-USpolicyratesdifferentialwillnarrow66.26.46.66.877.27.40.00.51.01.52.02.53.03.54.0151617181920217DrevrepoFedFundRateUSDCNYSpot(RHS)Source:DeutscheBank,PBoC,WindFigure66:Notionalamountofdefaultedbondsinthedomesticmarket(RMBbn)05010015020020142015201620172018201920202021DefaultedbondsRMBbnSource:DeutscheBank,PBoC,WindFigure67:Divergencetrendinthedomesticcreditmarketwillpersist(creditspreadof5Ycorporatebondsinthedomesticmarket)-2000200400600800100015161718192021AAAAAASource:DeutscheBank,PBoC,WindFigure68:OffshoreinvestorsholdaboutRMB4tnbonds1.0%1.5%2.0%2.5%3.0%3.5%050010001500200025003000350040004500131415161718192021ForeignersRMBbondholdingsRMBbnShareofRMBdomesticbondmarketRHSSource:DeutscheBank,PBoCFigure69:OffshoreholdingofRMBassetshasgrownby31%YoYonaveragesince2013-40%-20%0%20%40%60%80%-2,0004,0006,0008,00010,000131415161718192021TotaloffshoreholdingofRMBassetsYoYchgAvgAnnualizedchgsince2013Source:DeutscheBank,PBoC,20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage45Q1InvestmentOutlookLiquidityoutlookSincetheDecemberRRRCut,fourdevelopmentssuggestroomforfurthermonetaryeasinginthenearterm:nTheDecemberfixingof1YLoanPrimeRate(LPR)wasloweredby5bpsto3.80%,while5YLPRfixingwasunchangedat4.65%.TherealizationoftheLPRcutwithunchanged1YMLFrate,whichwehadpointedoutasariskyscenarioaheadoftheDecemberfixing,indicatesroomforfurtherloweringcorporatefundingcosttostabilizecreditgrowth.nWebelievethestatementofQ4meetingbythePBOCmonetarypolicycommitteereflectsgrowingdovishnessinpolicyoutlookbymembersoftheMPC.Ongrowthoutlook,theMPCstressedglobalgrowthuncertaintiesanddomesticeconomyfacestripleheadwinds,namelyweakeningaggregatedemand,aggregatesupplyshockandweakeningexpectation;andonpolicyoutlook,theMPCemphasizedthatprudentmonetarypolicyshouldbemoreflexible,moreforwardlooking,moretargetedandmoreindependent;thatthePBoCwillusebothaggregatepolicytoolsandstructuralpolicytoolstostrengthensupporttotherealeconomy.nThePBoCcut1YMLFrateand7Dreversereporateby10bpsonJanuary17th;nAtthepressconferenceonJanuary18th,thePBoCreiteratedthedovishbiasonmonetaryaccommodationtostabilizegrowandmarketsentiment.WebelievethedovishpolicytoneraisesthechanceofadditionalmonetaryeasingviaRRRcutsorinterestratecuts(another10-15bps)inH1thisyear,inadditiontothestructural/targetedpolicytoolssuchasthegreenrelendingfacilityandtwodirectcreditfacilitiestosupportlendingtosmall/microfirms.Recentlyrisingnewomicroncasesgloballyanddomesticallyaswellastighteningofpandemiccontrol,andcrediteventsinthepropertysectorcontinuetoposedownsideriskstobusinesssentimentandtoeconomicgrowthespeciallyinH1.Moreover,asweexpecttheFedtostarthikingratesinMarchthisyearatapaceofonehikeeachquarter,andgiventhecurrentRMBvaluation,webelieveH1isthebestwindowforChinatostrengthenpolicyaccommodationwithoutworryingtoomuchaboutdestabilizingtheRMBexchangerate.Thereforeweexpectbothfiscaleasingandmonetaryeasingtobefrontloadedinordertostabilizecreditandeconomicgrowththisyear.Weexpectboth1Yand5YLPRfixingstofallby10bpsonJanuary20th,reflectingfullpass-throughofthelatestMLFratecut.WeseeriskstiltedtowardsonetotwopolicyeasingactionsbeforetheendofH1thisyear.Weforecastbenchmark7Dreporatetoaverageat2%inH1thisyear.InterbankliquidityconditionimprovednotablysincetheJulyRRRcut,althoughtheaveragebenchmark7Dreporatefellbyonly2bpsto2.16%inH22021,itwasmuchmorestableinH2withapeakof2.55%H1vs.apeakof3.16%inH2.WhiletheFed'staperingandratehikeswilldriveupvolatilityofcross-borderflows,whichisarisktoRMBmoneymarketliquidity,weexpectinterbankliquiditytobemoreflushinH1thisyearonfurtherpolicyaccommodationandforecastthe7Dbenchmarkreporatetofluctuatebetween1.8%and2.2%withanaverageof2%inH1thisyear.Spilloverfromcrediteventswillkeepthe7Drepofixingratemorevolatileandweforecast7Drepofixingratetoaverageat2.1%inH1thisyear.20January2022ChinaMarketPerspectivesPage46DeutscheBankAG/HongKongSupplyoutlookBackloadedgovernmentfinancinglastyear.In2021,grosssupplyofCGB,LGBandPBBwasRMB19.84trn,upby5.7%YoY,andnetsupplyofsuchbondsfellby15%YoYtoRMB9.3trn.ThecentralgovernmentraisedRMB6.8trngross(-4.5%YoY)andRMB2.33trn(-42.5%YoY)netfunding.LocalgovernmentissuedRMB7.48trngross(16%YoY)andRMB4.8trnnet(10.2%YoY),andtheweightedaveragelifeofLGBsupplywasshortenedfromtwelveyearstoroughly8.7years.NetissuanceofGPLGBwasRMB785bn,andnetissuanceofSPLGBwasRMB3.6trn,slightlybelowtheirrespectivebudgetedfundingtargetatRMB820bnandRMB3.65trn.AboutRMB900bnLGBwasissuedtorollimplicitlocalgovernmentliabilities.BothcentralgovernmentandlocalgovernmentfinancingwasbackloadedwithacceleratedpaceofnewissuanceinQ3andnetsupplypeakedinQ4lastyear.AccordingtotheMinistryofFinance,50%ofthefundingproceedsfromSPLGBissuancewereinvestedintransportationinfrastructure,municipalinfrastructureandindustryparks;30%wereinvestedinpublichousing,health-care,elderlycare,education,culture/tourismsectors;whiletheremaining20%inagriculture/waterconservancy,energyandurban-rurallogisticssectors.LocalgovernmentpreparedforRMB170bnascapitalformajorspecialprojects,outoftheRMB200bnplannedbytheStateCouncilinlast2020.Weexpectmodestgrowthinfiscalfinancingin2022butfinancinglikelywillbemorefront-loaded.In2022,weforecastsupplyofCGB,LGBandPBBfinancingwillgrowby8%YoYtoRMB21.4trngrossandby4%YoYtoRMB9.7trnnet.AssumingunchangedfiscaldeficittoGDP,weforecastnetCGBissuanceatRMB3trn,20%upYoY.GrossCGBsupplywillgrowby24%YoYtoRMB8.4trngivenlargeredemption.WeexpectnetsupplyofGPLGBwillriseby9%YoYtoRMB900bnwhilenetSPLGBissuancewillbeunchangedYoY.Weexpectfiscalspendingtobefront-loadedthisyeartostabilizeinvestmentgrowthinH1andassuchLGBfinancinglikelywillbefront-loaded.TheMoFallocatedthefirstbatchofSPLGBissuancequota(RMB1.46trn)for2022inDecemberlastyear.WeforecastnetissuanceofPBBatRMB2.15trn,unchangedfromlastyear.WeforecastQ1grosssupplyofgovernmentandpolicybankbondsat20%ofthe2022grosssupply.InQ1,therewillbetwenty-onescheduledCGBauctionswitheighteenauctionsinkeytenorsandthree30Yauctions,twelvediscountbillsauctionsandtwoseriesofsavingsCGBofferings.WeforecastQ1grossCGBsupplyatRMB1.8trn,andnetsupplyatRMB200bn.Weexpectroughly80%oftheallocatedLGBfinancingquotawillbeissuedinQ1,whichwillbringRMB1.35trngrossandRMB1.2trnnetLGBsupplytothemarket.WeexpectPBBfinancingtoberelativelymoreevenlydistributedquarterlywithRMB500bnnetandRMB1.4trngrossinQ1.Assuchweforecast20%ofthe2022grosssupplyofCGB,LGBandPBBwillbecompletedinQ1atRMB4.55trnandnetsupplyatRMB1.9trn.MonthlyaveragegrosssupplyofCGB,LGBandPBBwillbeRMB600bn,RMB450bnandRMB467bnrespectivelyandconsideringtheLNYholiday,weexpecttheshareofgrosssupplyinJanuary,FebruaryandMarchlikelywillbe35%,25%and40%.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage47Figure70:NetCGBfinancingwasbackloadedwith85%ofplanned2021financingfilled-20%0%20%40%60%80%100%RunrateofnetCGBfinancingin2021RunrateofnetCGBfinancingin2020Source:DeutscheBank,WindFigure71:BackloadednetLGBfinancingin20210%20%40%60%80%100%RunrateofnetLGBfinancingin2020RunrateofnetLGBfinancingin2021Source:DeutscheBank,WindFigure72:Weforecast8%growthingrosssupplyofCGB,LGBandPBB(RMBbn)in202205000100001500020000250002019202020212022FCGBLGBPBBSource:DeutscheBank,WindFigure73:Weforecast4.3%growthinnetsupplyofCGB,LGBandPBB(RMBbn)in20220200040006000800010000120002019202020212022FCGBLGBPBBSource:DeutscheBank,WindFigure74:Weestimateabout20%of2022grossCGB/LGB/PBBsupplytobefilledinQ10500100015002000JanFebMarchCGBLGBPBBSource:DeutscheBank,WindFigure75:WeestimateRMB1.9trnnetCGB/LGB/PBBsupplyinQ1-400-20002004006008001000JanFebMarchCGBLGBPBBSource:DeutscheBank,Wind20January2022ChinaMarketPerspectivesPage48DeutscheBankAG/HongKongCreditOutlookIn2021,credittighteninganddeleveraginginthepropertysectorandLGFVsledtoatargeteddownturninthecreditcycle.AlthoughinthedomesticRMBmarket,thenotionalamountofdefaultedbondsatRMB154bn,waslessthanitwasatRMB176bnin2020,intheoffshoreUSDdebtmarket,therewereUSD7-8bndefaultedcreditbondsbyChinesecorporateissuers.Relativelyto2020,creditdefaultswereconcentratedintheprivatelyownedenterprises(POEs)(about56%ofdefaultednotionalamount)andlocalSOEnames(about25%ofdefaultednotionalamount)andinthepropertysector.Figure76:DistributionofdomesticdefaultedbondsnotionalamountsbyissuersCentralSOE12%LocalSOE25%POE56%Publiccompanies3%JointlyOwned3%Others1%CentralSOELocalSOEPOEPubliccompaniesJointlyOwnedOthersSource:DeutscheBank,WindCreditconditionsdeterioratedsharplyinQ4lastyearfollowingcrediteventsinthepropertysector.Weexpectcreditriskin2022toremainconcentratedintheproperty,LGFVandsmallfinancialinstitutions.Forthepropertysector,therehavebeenencouragingdevelopmentssinceNovemberlastyear.nCreditpolicyhasbeenrelaxedsinceearlyNovemberlastyearandfinancingbyrealestatedevelopersintheloanmarketandinbondmarketresumed,householdmortgageborrowingbegantorecoverduringOctober-November,;nTheDecemberCentralEconomicWorkConferenceconcludedwithaclearpolicycommitmenttostabilizingthepropertymarket-"propertyisnotforspeculation;developlong-termhousingrentalmarket;supportcommercialpropertymarkettomeetproperhousingdemandbyhomebuyers,andsupportthehealthydevelopmentofthepropertymarket."ThePBoC'sQ4MPCstatementreiteratedthesamemessage.20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage49nTheCBIRCandthePBoCinDecemberissuedanoticecallingforcommercialbankstoorderlycarryoutM&Aloanbusinessbasedontheprinciplesoflegalcompliance,controllablerisk,businessviabilityandespeciallytosupportstrongdevelopersinacquiringgoodqualityprojectsoftroubleddevelopers,asawaytosettlerisksofkeyrealestateprojects.nAnumberoflocalgovernmentsintroducedmeasuresto"stabilizepropertyprices,stabilizelandpricesandstabilizeexpectation".Whiletheabovepolicymoveswillhelpstabilizecreditsentiment,wethinkseveralriskfactorspointtotheriskthatitmaytaketwotothreequartersifnotlongertoseepropertysectorsentimentbottomingout.nCreditdifferentiation:Currentlyfinancingconditionshaveimprovedprimarilyforhigh-quality,mostlystate-owneddevelopers,weakerprivatelyowneddevelopersfacepersistentfundingchallenges;nPropertytax:Consideringthenewpilotprogramsofpropertytaxlikelywillbelaunchedlaterthisyear,homebuyersarehesitantandpropertysalesgrowthcontinuedtodecline.;nDebtrepaymentrisk:RepaymentpressureofonshoreandoffshoredebtbypropertydevelopersisconcentratedinH1.WeestimateaboutUS$65bninUSDdebtredemptionbydevelopersin2022,mostlyinH1,anddomesticcorporatebondsataboutRMB250bn,andaboutRMB900bnUSTredemption.nSpilloverrisktoothercredits:DefaultriskofoffbalancesheetfinancingbythepropertysectorandLGFVmayspillovertofinancialinstitutions,suchastrustcompanies.In2022,weestimateproperty-relatedtrustproductsredemptionwillbeatleastRMB500bn.OntheLFGVandthefinancialsector,wethinkcreditdefaultriskslikelycomefromspilloverofpropertydebtdefault,butrisksarelikelylowerthanthepropertysectorconsideringtheoptionoflocalgovernmentdebtissuancetoswapimplicitlocaldebt(lastyeardebtswapwasaboutRMB817bn),andtherecapitalizationtoSMEbankslastyear.Inourviewsmallbanksandtrustcompaniesarelikelytobemorevulnerable.Riskofemergingcrediteventsandthefactthatfinancialconditionsremainconstrainedfortargetedsectorssuggestcreditpricing"polarization"willpersistinH1beforemoresignsof(a)economicgrowthstabilizing;(b)crediteventrisksdissipating.Weexpectcreditallocationwillkeepfavoringhighlyratedcreditnames.InvestmentstrategyWebelieveinthenearterm,thebalancebetweenfurtherpolicyeasing,supplyriskandcreditconcernsuggeststhatthedownwardtrendofRMBinterestrateswillcontinueandwehaverevisedour10YCGByieldforecastto2.6%-3.2%from2.8%-3.4%.WehaverecommendedtoexpressourviewincashbondsorinNDIRS:(a)long10YCGBat2.82%(target2.6%andstoplossat2.95%)orlong10YCDBat3.08%(target2.88%andstoplossat3.2%);(3)receive5YNDIRSat2.4%target2.15%andstoploss2.55%.TheriskstoourtradeareinterbankliquiditysqueezesorstrongreboundsinriskappetiteormorevolatilethanexpectedbehaviorintheRMBexchangerate.20January2022ChinaMarketPerspectivesPage50DeutscheBankAG/HongKongFigure77:China-USlongtermbondyields%01234509111315171921UST10YCGB10YRSource:DeutscheBank,BloombergFinanceLPFigure78:China-USlong-termyielddifferentialvs.USDCNYspot6.006.507.007.500501001502002503001112131415161718192021CGB-UST10YylddiffUSDCNYSpot(RHS)Source:DeutscheBank,BloombergFinanceLP20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage51Appendix1ImportantDisclosuresOtherinformationavailableuponrequestPricesarecurrentasoftheendoftheprevioustradingsessionunlessotherwiseindicatedandaresourcedfromlocalexchangesviaReuters,Bloombergandothervendors.OtherinformationissourcedfromDeutscheBank,subjectcompanies,andothersources.ForfurtherinformationregardingdisclosuresrelevanttoDeutscheBankResearch,pleasevisitourglobaldisclosurelook-uppageonourwebsiteathttps://research.db.com/Research/Disclosures/FICCDisclosures.Asidefromwithinthisreport,importantriskandconflictdisclosurescanalsobefoundathttps://research.db.com/Research/Disclosures/Disclaimer.Investorsarestronglyencouragedtoreviewthisinformationbeforeinvesting.AnalystCertificationTheviewsexpressedinthisreportaccuratelyreflectthepersonalviewsoftheundersignedleadanalyst(s).Inaddition,theundersignedleadanalyst(s)hasnotandwillnotreceiveanycompensationforprovidingaspecificrecommendationorviewinthisreport.LinanLiu,PerryKojodjojo,YiXiong.20January2022ChinaMarketPerspectivesPage52DeutscheBankAG/HongKongAdditionalInformationTheinformationandopinionsinthisreportwerepreparedbyDeutscheBankAGoroneofitsaffiliates(collectively'DeutscheBank').Thoughtheinformationhereinisbelievedtobereliableandhasbeenobtainedfrompublicsourcesbelievedtobereliable,DeutscheBankmakesnorepresentationastoitsaccuracyorcompleteness.Hyperlinkstothird-partywebsitesinthisreportareprovidedforreaderconvenienceonly.DeutscheBankneitherendorsesthecontentnorisresponsiblefortheaccuracyorsecuritycontrolsofthosewebsites.IfyouusetheservicesofDeutscheBankinconnectionwithapurchaseorsaleofasecuritythatisdiscussedinthisreport,orisincludedordiscussedinanothercommunication(oralorwritten)fromaDeutscheBankanalyst,DeutscheBankmayactasprincipalforitsownaccountorasagentforanotherperson.DeutscheBankmayconsiderthisreportindecidingtotradeasprincipal.Itmayalsoengageintransactions,foritsownaccountorwithcustomers,inamannerinconsistentwiththeviewstakeninthisresearchreport.OtherswithinDeutscheBank,includingstrategists,salesstaffandotheranalysts,maytakeviewsthatareinconsistentwiththosetakeninthisresearchreport.DeutscheBankissuesavarietyofresearchproducts,includingfundamentalanalysis,equity-linkedanalysis,quantitativeanalysisandtradeideas.Recommendationscontainedinonetypeofcommunicationmaydifferfromrecommendationscontainedinothers,whetherasaresultofdifferingtimehorizons,methodologies,perspectivesorotherwise.DeutscheBankand/oritsaffiliatesmayalsobeholdingdebtorequitysecuritiesoftheissuersitwriteson.AnalystsarepaidinpartbasedontheprofitabilityofDeutscheBankAGanditsaffiliates,whichincludesinvestmentbanking,tradingandprincipaltradingrevenues.Opinions,estimatesandprojectionsconstitutethecurrentjudgmentoftheauthorasofthedateofthisreport.TheydonotnecessarilyreflecttheopinionsofDeutscheBankandaresubjecttochangewithoutnotice.DeutscheBankprovidesliquidityforbuyersandsellersofsecuritiesissuedbythecompaniesitcovers.DeutscheBankresearchanalystssometimeshaveshorter-termtradeideasthatmaybeinconsistentwithDeutscheBank'sexistinglonger-termratings.SometradeideasforequitiesarelistedasCatalystCallsontheResearchWebsite(https://research.db.com/Research/),andcanbefoundonthegeneralcoveragelistandalsoonthecoveredcompany’spage.ACatalystCallrepresentsahigh-convictionbeliefbyananalystthatastockwilloutperformorunderperformthemarketand/oraspecifiedsectoroveratimeframeofnolessthantwoweeksandnomorethanthreemonths.InadditiontoCatalystCalls,analystsmayoccasionallydiscusswithourclients,andwithDeutscheBanksalespersonsandtraders,tradingstrategiesorideasthatreferencecatalystsoreventsthatmayhaveanear-termormedium-termimpactonthemarketpriceofthesecuritiesdiscussedinthisreport,whichimpactmaybedirectionallycountertotheanalysts'current12-monthviewoftotalreturnorinvestmentreturnasdescribedherein.DeutscheBankhasnoobligationtoupdate,modifyoramendthisreportortootherwisenotifyarecipientthereofifanopinion,forecastorestimatechangesorbecomesinaccurate.Coverageandthefrequencyofchangesinmarketconditionsandinbothgeneralandcompany-specificeconomicprospectsmakeitdifficulttoupdateresearchatdefinedintervals.UpdatesareatthesolediscretionofthecoverageanalystoroftheResearchDepartmentManagement,andthemajorityofreportsarepublishedatirregularintervals.Thisreportisprovidedforinformationalpurposesonlyanddoesnottakeintoaccounttheparticularinvestmentobjectives,financialsituations,orneedsofindividualclients.Itisnotanofferorasolicitationofanoffertobuyorsellanyfinancialinstrumentsortoparticipateinanyparticulartradingstrategy.Targetpricesareinherentlyimpreciseandaproductoftheanalyst’sjudgment.Thefinancialinstrumentsdiscussedinthisreportmaynotbesuitableforallinvestors,andinvestorsmustmaketheirowninformedinvestmentdecisions.Pricesandavailabilityoffinancialinstrumentsaresubjecttochangewithoutnotice,andinvestmenttransactionscanleadtolossesasaresultofpricefluctuationsandotherfactors.Ifafinancialinstrumentisdenominatedinacurrencyotherthananinvestor'scurrency,achangeinexchangeratesmayadverselyaffecttheinvestment.Pastperformanceisnotnecessarilyindicativeoffutureresults.Performancecalculationsexcludetransactioncosts,unlessotherwiseindicated.Unlessotherwiseindicated,pricesarecurrentasoftheendoftheprevioustradingsessionandaresourcedfromlocalexchangesviaReuters,Bloombergandothervendors.DataisalsosourcedfromDeutscheBank,subjectcompanies,andotherparties.TheDeutscheBankResearchDepartmentisindependentofotherbusinessdivisionsoftheBank.Detailsregardingourorganizationalarrangementsandinformationbarrierswehavetopreventandavoidconflictsofinterestwithrespecttoourresearchareavailableonourwebsite(https://research.db.com/Research/)underDisclaimer.Macroeconomicfluctuationsoftenaccountformostoftherisksassociatedwithexposurestoinstrumentsthatpromisetopayfixedorvariableinterestrates.Foraninvestorwhoislongfixed-rateinstruments(thusreceivingthesecashflows),increasesininterestratesnaturallyliftthediscountfactorsappliedtotheexpectedcashflowsandthuscausealoss.Thelongerthematurityofacertaincashflowandthehigherthemoveinthediscountfactor,thehigherwillbetheloss.Upsidesurprisesininflation,fiscalfundingneeds,andFXdepreciationratesareamongthemostcommonadversemacroeconomicshockstoreceivers.Butcounterpartyexposure,issuercreditworthiness,clientsegmentation,regulation(includingchangesinassetsholdinglimitsfordifferenttypesofinvestors),changesintaxpolicies,currencyconvertibility(whichmayconstraincurrencyconversion,repatriationofprofitsand/orliquidationofpositions),andsettlementissuesrelatedtolocalclearinghousesarealsoimportantriskfactors.Thesensitivityoffixed-incomeinstrumentstomacroeconomicshocksmaybemitigatedbyindexingthecontractedcashflowstoinflation,toFXdepreciation,ortospecifiedinterestrates–thesearecommoninemergingmarkets.Theindexfixingsmay–byconstruction–lagormis-measuretheactualmoveintheunderlyingvariablestheyareintendedtotrack.Thechoiceoftheproperfixing(ormetric)isparticularlyimportantinswapsmarkets,wherefloatingcouponrates(i.e.,couponsindexedtoatypicallyshort-datedinterestratereferenceindex)areexchangedforfixedcoupons.FundinginacurrencythatdiffersfromthecurrencyinwhichcouponsaredenominatedcarriesFXrisk.Optionsonswaps(swaptions)theriskstypicaltooptionsinadditiontotherisksrelatedtoratesmovements.Derivativetransactionsinvolvenumerousrisksincludingmarket,counterpartydefaultandilliquidityrisk.Theappropriateness20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage53oftheseproductsforusebyinvestorsdependsontheinvestors'owncircumstances,includingtheirtaxposition,theirregulatoryenvironmentandthenatureoftheirotherassetsandliabilities;assuch,investorsshouldtakeexpertlegalandfinancialadvicebeforeenteringintoanytransactionsimilartoorinspiredbythecontentsofthispublication.Theriskoflossinfuturestradingandoptions,foreignordomestic,canbesubstantial.Asaresultofthehighdegreeofleverageobtainableinfuturesandoptionstrading,lossesmaybeincurredthataregreaterthantheamountoffundsinitiallydeposited–uptotheoreticallyunlimitedlosses.Tradinginoptionsinvolvesriskandisnotsuitableforallinvestors.Priortobuyingorsellinganoption,investorsmustreviewthe'CharacteristicsandRisksofStandardizedOptions”,athttp://www.optionsclearing.com/about/publications/character-risks.jsp.Ifyouareunabletoaccessthewebsite,pleasecontactyourDeutscheBankrepresentativeforacopyofthisimportantdocument.Participantsinforeignexchangetransactionsmayincurrisksarisingfromseveralfactors,includingthefollowing:(i)exchangeratescanbevolatileandaresubjecttolargefluctuations;(ii)thevalueofcurrenciesmaybeaffectedbynumerousmarketfactors,includingworldandnationaleconomic,politicalandregulatoryevents,eventsinequityanddebtmarketsandchangesininterestrates;and(iii)currenciesmaybesubjecttodevaluationorgovernment-imposedexchangecontrols,whichcouldaffectthevalueofthecurrency.InvestorsinsecuritiessuchasADRs,whosevaluesareaffectedbythecurrencyofanunderlyingsecurity,effectivelyassumecurrencyrisk.Unlessgoverninglawprovidesotherwise,alltransactionsshouldbeexecutedthroughtheDeutscheBankentityintheinvestor'shomejurisdiction.Asidefromwithinthisreport,importantconflictdisclosurescanalsobefoundathttps://research.db.com/Research/oneachcompany’sresearchpage.Investorsarestronglyencouragedtoreviewthisinformationbeforeinvesting.DeutscheBank(whichincludesDeutscheBankAG,itsbranchesandaffiliatedcompanies)isnotactingasafinancialadviser,consultantorfiduciarytoyouoranyofyouragents(collectively,“You”or“Your”)withrespecttoanyinformationprovidedinthisreport.DeutscheBankdoesnotprovideinvestment,legal,taxoraccountingadvice,DeutscheBankisnotactingasyourimpartialadviser,anddoesnotexpressanyopinionorrecommendationwhatsoeverastoanystrategies,productsoranyotherinformationpresentedinthematerials.Informationcontainedhereinisbeingprovidedsolelyonthebasisthattherecipientwillmakeanindependentassessmentofthemeritsofanyinvestmentdecision,anditdoesnotconstitutearecommendationof,orexpressanopinionon,anyproductorserviceoranytradingstrategy.Theinformationpresentedisgeneralinnatureandisnotdirectedtoretirementaccountsoranyspecificpersonoraccounttype,andisthereforeprovidedtoYouontheexpressbasisthatitisnotadvice,andYoumaynotrelyuponitinmakingYourdecision.Theinformationweprovideisbeingdirectedonlytopersonswebelievetobefinanciallysophisticated,whoarecapableofevaluatinginvestmentrisksindependently,bothingeneralandwithregardtoparticulartransactionsandinvestmentstrategies,andwhounderstandthatDeutscheBankhasfinancialinterestsintheofferingofitsproductsandservices.Ifthisisnotthecase,orifYouareanIRAorotherretailinvestorreceivingthisdirectlyfromus,weaskthatyouinformusimmediately.InJuly2018,DeutscheBankreviseditsratingsystemforshorttermideaswherebythebrandinghasbeenchangedtoCatalystCalls(“CC”)fromSOLARideas;theratingcategoriesforCatalystCallsoriginatedintheAmericasregionhavebeenmadeconsistentwiththecategoriesusedbyAnalystsglobally;andtheeffectivetimeperiodforCCshasbeenreducedfromamaximumof180daysto90days.UnitedStates:Approvedand/ordistributedbyDeutscheBankSecuritiesIncorporated,amemberofFINRA,NFAandSIPC.AnalystslocatedoutsideoftheUnitedStatesareemployedbynon-USaffiliatesthatarenotsubjecttoFINRAregulations.EuropeanEconomicArea(exc.UnitedKingdom):Approvedand/ordistributedbyDeutscheBankAG,ajointstockcorporationwithlimitedliabilityincorporatedintheFederalRepublicofGermanywithitsprincipalofficeinFrankfurtamMain.DeutscheBankAGisauthorizedunderGermanBankingLawandissubjecttosupervisionbytheEuropeanCentralBankandbyBaFin,Germany’sFederalFinancialSupervisoryAuthority.UnitedKingdom:Approvedand/ordistributedbyDeutscheBankAGactingthroughitsLondonBranchatWinchesterHouse,1GreatWinchesterStreet,LondonEC2N2DB.DeutscheBankAGintheUnitedKingdomisauthorisedbythePrudentialRegulationAuthorityandissubjecttolimitedregulationbythePrudentialRegulationAuthorityandFinancialConductAuthority.Detailsabouttheextentofourauthorisationandregulationareavailableonrequest.HongKongSAR:DistributedbyDeutscheBankAG,HongKongBranch,exceptforanyresearchcontentrelatingtofuturescontractswithinthemeaningoftheHongKongSecuritiesandFuturesOrdinanceCap.571.Researchreportsonsuchfuturescontractsarenotintendedforaccessbypersonswhoarelocated,incorporated,constitutedorresidentinHongKong.Theauthor(s)ofaresearchreportmaynotbelicensedtocarryonregulatedactivitiesinHongKong,andifnotlicensed,donotholdthemselvesoutasbeingabletodoso.Theprovisionssetoutaboveinthe'AdditionalInformation'sectionshallapplytothefullestextentpermissiblebylocallawsandregulations,includingwithoutlimitationtheCodeofConductforPersonsLicensedorRegisteredwiththeSecuritiesandFuturesCommission.Thisreportisintendedfordistributiononlyto'professionalinvestors'asdefinedinPart1ofScheduleoftheSFO.Thisdocumentmustnotbeactedorreliedonbypersonswhoarenotprofessionalinvestors.Anyinvestmentorinvestmentactivitytowhichthisdocumentrelatesisonlyavailabletoprofessionalinvestorsandwillbeengagedonlywithprofessionalinvestors.India:PreparedbyDeutscheEquitiesIndiaPrivateLimited(DEIPL)havingCIN:U65990MH2002PTC137431andregisteredofficeat14thFloor,TheCapital,C-70,GBlock,BandraKurlaComplexMumbai(India)400051.Tel:+912271804444.ItisregisteredbytheSecuritiesandExchangeBoardofIndia(SEBI)asaStockbrokerbearingregistrationno.:INZ000252437;20January2022ChinaMarketPerspectivesPage54DeutscheBankAG/HongKongMerchantBankerbearingSEBIRegistrationno.:INM000010833andResearchAnalystbearingSEBIRegistrationno.:INH000001741.DEIPLmayhavereceivedadministrativewarningsfromtheSEBIforbreachesofIndianregulations.DeutscheBankand/oritsaffiliate(s)mayhavedebtholdingsorpositionsinthesubjectcompany.Withregardtoinformationonassociates,pleaserefertothe“Shareholdings”sectionintheAnnualReportat:https://www.db.com/ir/en/annual-reports.htm.Japan:Approvedand/ordistributedbyDeutscheSecuritiesInc.(DSI).Registrationnumber-RegisteredasafinancialinstrumentsdealerbytheHeadoftheKantoLocalFinanceBureau(Kinsho)No.117.Memberofassociations:JSDA,TypeIIFinancialInstrumentsFirmsAssociationandTheFinancialFuturesAssociationofJapan.Commissionsandrisksinvolvedinstocktransactions-forstocktransactions,wechargestockcommissionsandconsumptiontaxbymultiplyingthetransactionamountbythecommissionrateagreedwitheachcustomer.Stocktransactionscanleadtolossesasaresultofsharepricefluctuationsandotherfactors.Transactionsinforeignstockscanleadtoadditionallossesstemmingfromforeignexchangefluctuations.Wemayalsochargecommissionsandfeesforcertaincategoriesofinvestmentadvice,productsandservices.Recommendedinvestmentstrategies,productsandservicescarrytheriskoflossestoprincipalandotherlossesasaresultofchangesinmarketand/oreconomictrends,and/orfluctuationsinmarketvalue.Beforedecidingonthepurchaseoffinancialproductsand/orservices,customersshouldcarefullyreadtherelevantdisclosures,prospectusesandotherdocumentation.'Moody's','StandardPoor's',and'Fitch'mentionedinthisreportarenotregisteredcreditratingagenciesinJapanunlessJapanor'Nippon'isspecificallydesignatedinthenameoftheentity.ReportsonJapaneselistedcompaniesnotwrittenbyanalystsofDSIarewrittenbyDeutscheBankGroup'sanalystswiththecoveragecompaniesspecifiedbyDSI.SomeoftheforeignsecuritiesstatedonthisreportarenotdisclosedaccordingtotheFinancialInstrumentsandExchangeLawofJapan.TargetpricessetbyDeutscheBank'sequityanalystsarebasedona12-monthforecastperiod..Korea:DistributedbyDeutscheSecuritiesKoreaCo.SouthAfrica:DeutscheBankAGJohannesburgisincorporatedintheFederalRepublicofGermany(BranchRegisterNumberinSouthAfrica:1998/003298/10).Singapore:ThisreportisissuedbyDeutscheBankAG,SingaporeBranch(OneRafflesQuay#18-00SouthTowerSingapore048583,6564238001),whichmaybecontactedinrespectofanymattersarisingfrom,orinconnectionwith,thisreport.WherethisreportisissuedorpromulgatedbyDeutscheBankinSingaporetoapersonwhoisnotanaccreditedinvestor,expertinvestororinstitutionalinvestor(asdefinedintheapplicableSingaporelawsandregulations),theyacceptlegalresponsibilitytosuchpersonforitscontents.Taiwan:Informationonsecurities/investmentsthattradeinTaiwanisforyourreferenceonly.Readersshouldindependentlyevaluateinvestmentrisksandaresolelyresponsiblefortheirinvestmentdecisions.DeutscheBankresearchmaynotbedistributedtotheTaiwanpublicmediaorquotedorusedbytheTaiwanpublicmediawithoutwrittenconsent.Informationonsecurities/instrumentsthatdonottradeinTaiwanisforinformationalpurposesonlyandisnottobeconstruedasarecommendationtotradeinsuchsecurities/instruments.DeutscheSecuritiesAsiaLimited,TaipeiBranchmaynotexecutetransactionsforclientsinthesesecurities/instruments.Qatar:DeutscheBankAGintheQatarFinancialCentre(registeredno.00032)isregulatedbytheQatarFinancialCentreRegulatoryAuthority.DeutscheBankAG-QFCBranchmayundertakeonlythefinancialservicesactivitiesthatfallwithinthescopeofitsexistingQFCRAlicense.ItsprincipalplaceofbusinessintheQFC:QatarFinancialCentre,Tower,WestBay,Level5,POBox14928,Doha,Qatar.ThisinformationhasbeendistributedbyDeutscheBankAG.RelatedfinancialproductsorservicesareonlyavailableonlytoBusinessCustomers,asdefinedbytheQatarFinancialCentreRegulatoryAuthority.Russia:Theinformation,interpretationandopinionssubmittedhereinarenotinthecontextof,anddonotconstitute,anyappraisalorevaluationactivityrequiringalicenseintheRussianFederation.KingdomofSaudiArabia:DeutscheSecuritiesSaudiArabiaLLCCompany(registeredno.07073-37)isregulatedbytheCapitalMarketAuthority.DeutscheSecuritiesSaudiArabiamayundertakeonlythefinancialservicesactivitiesthatfallwithinthescopeofitsexistingCMAlicense.ItsprincipalplaceofbusinessinSaudiArabia:KingFahadRoad,AlOlayaDistrict,P.O.Box301809,FaisaliahTower-17thFloor,11372Riyadh,SaudiArabia.UnitedArabEmirates:DeutscheBankAGintheDubaiInternationalFinancialCentre(registeredno.00045)isregulatedbytheDubaiFinancialServicesAuthority.DeutscheBankAG-DIFCBranchmayonlyundertakethefinancialservicesactivitiesthatfallwithinthescopeofitsexistingDFSAlicense.PrincipalplaceofbusinessintheDIFC:DubaiInternationalFinancialCentre,TheGateVillage,Building5,POBox504902,Dubai,U.A.E.ThisinformationhasbeendistributedbyDeutscheBankAG.RelatedfinancialproductsorservicesareavailableonlytoProfessionalClients,asdefinedbytheDubaiFinancialServicesAuthority.AustraliaandNewZealand:Thisresearchisintendedonlyfor'wholesaleclients'withinthemeaningoftheAustralianCorporationsActandNewZealandFinancialAdvisorsAct,respectively.PleaserefertoAustralia-specificresearchdisclosuresandrelatedinformationathttps://australia.db.com/australia/content/research-information.htmlWhereresearchreferstoanyparticularfinancialproductrecipientsoftheresearchshouldconsideranyproductdisclosurestatement,prospectusorotherapplicabledisclosuredocumentbeforemakinganydecisionaboutwhethertoacquiretheproduct.Inpreparingthisreport,theprimaryanalystoranindividualwhoassistedinthepreparationofthisreporthaslikelybeenincontactwiththecompanythatisthesubjectofthisresearchforconfirmation/clarificationofdata,facts,statements,permissiontousecompany-sourcedmaterialinthereport,and/orsite-visitattendance.WithoutpriorapprovalfromResearchManagement,analystsmaynot20January2022ChinaMarketPerspectivesDeutscheBankAG/HongKongPage55acceptfromcurrentorpotentialBankingclientsthecostsoftravel,accommodations,orotherexpensesincurredbyanalystsattendingsitevisits,conferences,socialevents,andthelike.Similarly,withoutpriorapprovalfromResearchManagementandAnti-BriberyandCorruption(“ABC”)team,analystsmaynotacceptperksorotheritemsofvaluefortheirpersonalusefromissuerstheycover.Additionalinformationrelativetosecurities,otherfinancialproductsorissuersdiscussedinthisreportisavailableuponrequest.Thisreportmaynotbereproduced,distributedorpublishedwithoutDeutscheBank'spriorwrittenconsent.Backtested,hypotheticalorsimulatedperformanceresultshaveinherentlimitations.Unlikeanactualperformancerecordbasedontradingactualclientportfolios,simulatedresultsareachievedbymeansoftheretroactiveapplicationofabacktestedmodelitselfdesignedwiththebenefitofhindsight.Takingintoaccounthistoricaleventsthebacktestingofperformancealsodiffersfromactualaccountperformancebecauseanactualinvestmentstrategymaybeadjustedanytime,foranyreason,includingaresponsetomaterial,economicormarketfactors.Thebacktestedperformanceincludeshypotheticalresultsthatdonotreflectthereinvestmentofdividendsandotherearningsorthedeductionofadvisoryfees,brokerageorothercommissions,andanyotherexpensesthataclientwouldhavepaidoractuallypaid.Norepresentationismadethatanytradingstrategyoraccountwillorislikelytoachieveprofitsorlossessimilartothoseshown.Alternativemodelingtechniquesorassumptionsmightproducesignificantlydifferentresultsandprovetobemoreappropriate.Pasthypotheticalbacktestresultsareneitheranindicatornorguaranteeoffuturereturns.Actualresultswillvary,perhapsmaterially,fromtheanalysis.ThemethodforcomputingindividualE,S,GandcompositeESGscoressetforthhereinisanovelmethoddevelopedbytheResearchdepartmentwithinDeutscheBankAG,computedusingasystematicapproachwithouthumanintervention.Differentdataproviders,marketsectorsandgeographiesapproachESGanalysisandincorporatethefindingsinavarietyofways.Assuch,theESGscoresreferredtohereinmaydifferfromequivalentratingsdevelopedandimplementedbyotherESGdataprovidersinthemarketandmayalsodifferfromequivalentratingsdevelopedandimplementedbyotherdivisionswithintheDeutscheBankGroup.SuchESGscoresalsodifferfromotherratingsandrankingsthathavehistoricallybeenappliedinresearchreportspublishedbyDeutscheBankAG.Further,suchESGscoresdonotrepresentaformalorofficialviewofDeutscheBankAG.ItshouldbenotedthatthedecisiontoincorporateESGfactorsintoanyinvestmentstrategymayinhibittheabilitytoparticipateincertaininvestmentopportunitiesthatotherwisewouldbeconsistentwithyourinvestmentobjectiveandotherprincipalinvestmentstrategies.ThereturnsonaportfolioconsistingprimarilyofsustainableinvestmentsmaybelowerorhigherthanportfolioswhereESGfactors,exclusions,orothersustainabilityissuesarenotconsidered,andtheinvestmentopportunitiesavailabletosuchportfoliosmaydiffer.CompaniesmaynotnecessarilymeethighperformancestandardsonallaspectsofESGorsustainableinvestingissues;thereisalsonoguaranteethatanycompanywillmeetexpectationsinconnectionwithcorporateresponsibility,sustainability,and/orimpactperformance.Copyright©2022DeutscheBankAGDavidFolkerts-LandauGroupChiefEconomistandGlobalHeadofResearchPamFinelliGlobalChiefOperatingOfficerResearchStevePollardGlobalHeadofCompanyResearchandSalesAnthonyKlarmanGlobalHeadofDebtResearchMichaelSpencerHeadofAPACResearchAndreasNeubauerHeadofGermanyResearchGerryGallagherHeadofEuropeanCompanyResearchMatthewBarnardHeadofAmericasCompanyResearchTimRokossaHeadofGermanCompanyResearchPeterMillikenHeadofAPACCompanyResearchJimReidGlobalHeadofThematicResearchFrancisYaredGlobalHeadofRatesResearchGeorgeSaravelosGlobalHeadofFXResearchPeterHooperGlobalHeadofEconomicResearchInternationalProductionLocationsDeutscheBankAGDeutscheBankPlaceLevel16CornerofHunter&PhillipStreetsSydney,NSW2000AustraliaTel:(61)282581234DeutscheBankAGEquityResearchMainzerLandstrasse11-1760329FrankfurtamMainGermanyTel:(49)6991000DeutscheBankAGFilialeHongkongInternationalCommerceCentre,1AustinRoadWest,Kowloon,HongKongTel:(852)22038888DeutscheSecuritiesInc.2-11-1NagatachoSannoParkTowerChiyoda-ku,Tokyo100-6171JapanTel:(81)351566000DeutscheBankAG1GreatWinchesterStreetLondonEC2N2EQUnitedKingdomTel:(44)2075458000DeutscheBankSecuritiesInc.TheDeutscheBankCenter1ColumbusCircleNewYork,NY10019Tel:(1)2122502500

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