As we move into the Year of the Tiger, we analyse nine major themes to explore how China’s financial markets will continue to develop during 2022.
- In 2022, the Chinese government is aiming to “stabilise the economy” in the wake of COVID-19. The World Bank projects growth this year will be 5.1 percent.
- The Greater Bay Area will eventually become an international hub for China, enabling a smoother collaboration between the manufacturing and financial sectors.
- China’s progress in green and sustainable finance was bolstered in 2021, and will continue to an area of investment focus in 2022.
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1. China’s economic growth outlook: 2022
The COVID-19 pandemic continued to impact the world in 2021 with new variants making the road even bumpier.
The Central Economic Work Conference held towards the end of last year provided a plan for 2022 to “stabilise the economy” by ensuring fiscal spending intensity, accelerating spending progress and carrying out infrastructure investment ahead of schedule.
China’s GDP grew by 8.1 percent in 2021, but the second half of the year saw continued economic weakness, with GDP growth falling to 4.9 percent and 4 percent year-on-year in the third and fourth quarters. The risk created by the spread of local COVID-19 cases and the continued exposure of real estate company added uncertainty to the fundamentals.
The People’s Bank of China’s (PBOC) medium-term lending facility (MLF) and open market reverse repo operations conducted on 17 January both saw their rates fall by 10 basis points, breaking the trend of unchanged rates since April 2020.
In addition, on 20 January, the 1-year and 5-year loan prime rates (LPR) were also lowered by 10 basis points and 5 basis points, respectively. The pace of regulation of the PBOC has changed to become more aggressive and proactive.
The PBOC’s easing policy at the beginning of the year has not only maintained reasonable liquidity in the banking system, but also allowed it to match spending in infrastructure construction, while increasing investment in areas such as pollution reduction and new energy. This not only expands short-term demand but also enhances long-term momentum and boosts social consumption.
The World Bank lowered its projection of China’s GDP growth rate to 5.1 percent in 2022 from 5.4 percent six months earlier in January. China’s benign inflation environment creates room for further monetary policy easing, despite the continued and increasing downward pressure on the economy.
China’s economic growth rate in 2022 is expected to “start low and end high,” with an expected growth rate of 5.2 percent for the year, according to estimates from about 60 institutions in the latest quarterly survey by Reuters.
2. The regulation of disorderly capital expansion, policy corrections and risk mitigation
The Central Economic Work Conference clarified and corrected five long-term priorities in relation to common prosperity, capital, supply security of primary products, prevention and resolution of risks, and double carbon goals. It also clarified its policy guidance.
The Conference proposed a “traffic light” system for capital, as a clear policy signal that beneficial capital shall be promoted while harmful capital shall be eliminated, with equal emphasis on the promotion of capital development and legal regulation.
The internet platform economy, online celebrity live streaming, and education and training, which have created countless wealthy people in the last decade through monetisation of traffic, will give way to “hard and core technology” innovation, such as new energy, autonomous driving and chip manufacturing under the new era theme of common prosperity.
After the temporary pain, China’s policy environment in 2022 should be more friendly towards the economy and capital markets than in 2021.
3. Accelerated regional economic integration of Guangdong, Hong Kong and Macau
The Greater Bay Area (GBA) and its development will enable the manufacturing and financial sectors to collaborate more seamlessly.
Together with the added advantages of cross-border connections, talent supply, and regulatory support, it will gradually become an international hub for China.
The GBA “Cross-boundary Wealth Management Connect” (WMC) was officially launched in September 2021, enabling eligible residents to invest in RMB-denominated financial products issued by banks in Hong Kong and Macao, and vice versa.
After just a few months in 2021, the total number of participating individual investors was approximately 22,000, investing a total of RMB486 million. Hong Kong and Macau investors accounted for 65 percent of the total invested.
State-owned banks dominated in handling cross-border WMC business, accounting for more than half of the funds transferred. Joint-stock banks came in second (36.53 percent), followed by foreign banks (9.19 percent).
Under the northbound WMC scheme, individual investors in Hong Kong and Macau preferred wealth management products as well as fund products, while mainland individual investors under the southbound scheme were more cautious.
As of the end of 2021, nearly 96 percent of the market value balance of investment products held by mainland individual investors in Hong Kong and Macau are invested in deposit-based products.
4. China’s sustainable financial development
China’s “dual carbon” goals have accelerated the development of green and sustainable finance in 2021, with significant progress in green credit, green bonds, green insurance, and other businesses.
Data shows that as of the end of September 2021, green loans of Chinese financial institutions was RMB14.8 trillion, up 27.9 percent year-on-year.
As of the end of November 2021, the cumulative issuance of green bonds exceeded RMB1.6 trillion, and the cumulative issuance of carbon neutral bonds reached RMB253 billion.
Market-based carbon finance tools such as carbon emission revenue right loans, carbon repurchase and carbon forward are being launched one after another; transition finance is starting to gain traction, and new tools and products such as green insurance and green trust have great potential to sustain this positive momentum.
From a corporate perspective, LSEG has also been driving this progress through the Future of Sustainable Data Alliance and by partnering organisations such as the International Sustainability Standards Board (ISSB) to help better integrate and promote product sustainability with the aim of improving efficiency in sustainable investments.
LSEG’s own Green Economy Mark initiative has grown to become a leading hub for sustainable financial development. The initiative recognises listed companies and funds that derive more than 50 percent of their revenues from products and services that contribute to environmental goals, such as climate change mitigation and adaptation, waste and pollution reduction, and the circular economy.
Refinitiv is also an active provider of high-quality ESG data to drive efficient allocation of capital towards green and sustainable finance, and raise disclosure standards about green companies, assets and projects in China.
Additionally, the FTSE Russell Sustainable Climate Development Index is helping to promote Chinese sustainable companies and projects (cross-border investment) through ESG evaluations.
These initiatives bring us closer together under LSEG as one team and provides real momentum towards the global green revolution through our partnerships with Chinese regulators, companies, and investors.
5. Opening of China’s national carbon market in the first year of the “dual carbon” goals
2021 marked the opening of the national carbon market, with ups and downs of trading. On the last day of 2021, the market closed at RMB54.22 per ton, up about 13 percent from the opening price on the first day of trading on July 16.
In the 114 trading days of cumulative operation, the cumulative transaction volume of carbon emission allowances reached 179 million tons, with a cumulative transaction volume of RMB7.661 billion and a compliance completion rate of 99.5 percent.
The average online trading price for the year was RMB47.6 per ton, and the average bulk trading price was RMB42.0 per ton, for a total average trading price of RMB43.85. This figure was in line with Refinitiv’s forecast of the first-year allowance price of the China carbon market estimated in early 2021.
2022 will be a year for the national carbon market to link the past and the future.
The gap in carbon emission rights legislation and the new compliance period quota allocation methods urgently needs to be filled this year; the restart of China’s voluntary emission reductions and the specific timetable for more industries to be included in the national carbon market need to be put in place to ensure the smooth sailing of the carbon market.
A more mature monitoring-verification-reporting system and stricter emission benchmarks will inevitably push up the price of carbon allowances in the new year.
Refinitiv predicts that the average price of allowances in the national carbon market will rise to RMB65 per ton in 2022. Although this price is far from the price level in the international markets, such as the EU carbon market at around EUR90 per ton, such a price is moderate and promising for a new market.
6. Further opening-up of China’s financial markets to the world
The competition between China and the U.S. in the fields of trade, technology, and finance is becoming increasingly fierce. Meanwhile, international investment institutions are stepping up their pace of investment in China, setting up branches in the country to allocate RMB assets.
In addition to Chinese USD bonds, RMB assets are becoming increasingly attractive to overseas investors.
According to data released by the Shanghai headquarters of the People’s Bank of China, the volume of bonds held by international institutions in the interbank market reached RMB4 trillion in 2021, equivalent to the total GDP of Shanghai in 2021. This represents an increase of about RMB750 billion, or 23 percent, from the end of December 2020.
Heading into 2022, the Chinese bond market, which has just been included in the FTSE Russell WGBI Index, will also drive the allocation demand by global bond funds, with China becoming the market of choice for global financial capital to enhance returns after the tightening of the quantitative easing policy in the U.S.
7. Secondary listing of Chinese concepts stocks in Hong Kong
Amid the U.S.-China regulatory tensions, Chinese concepts stocks of the new economy are facing tighter controls in China, while also complying with disclosure requirements in the U.S. after the adoption of the Holding Foreign Companies Accountable Act.
DIDI officially announced its “exit from the US for listing in Hong Kong” only six months after its debut on the NYSE in June 2021, which is believed to be a typical move among the Chinese concept stocks of the new economy.
Following the increasingly stringent requirements of the Chinese and U.S. regulators, it is expected that more U.S.-listed Chinese companies will accelerate their listing in Hong Kong in 2022.
The HKEX’s newly revised listing regime for overseas issuers and the SPAC listing mechanism are also actively attracting the return of Chinese concept stocks, and the Connects could also enhance the liquidity of these stocks.
The Hang Seng Index announced that it aims to increase the number of constituent stocks to 80 (from the current 64) by mid-2022, with the ultimate aim of a final fixed number of 100.
8. Outlook for the RMB in the year of the Tiger
Most institutions expect the RMB exchange rate to fluctuate in the 6.3-6.55 range in the Year of the Tiger.
The PBOC has raised the foreign exchange reserve requirement ratio twice in 2021, expressing unease about the rapid appreciation of the yuan.
Regulators also tried to stabilise market expectations and moderate yuan appreciation through a series of moves such as expanding outflows and regulating market behaviour.
China has adopted a dynamic clearing policy for the prevention and control of the pandemic, which will put a damper on economic development and domestic consumption.
The narrowing of key “gaps” this year will expose the yuan to more depreciation risks due to the time lag between the start of the pandemic and the recovery process in the U.S. and China.
For instance, the quarterly economic growth gap between the U.S. and China gradually narrowed from 7 percent to about 3 percent from 2014 to 2019, while the RMB exchange rate maintained its depreciation trend against the U.S. dollar.
After the onset of the COVID-19 pandemic, the GDP gap between China and the U.S. had widened again to more than 10 percent, and the RMB continued to appreciate against the U.S. dollar for two years.
In 2022, the gap in GDP growth between China and the US will narrow again as the global economy gradually recovers from the pandemic.
According to a Reuters economic survey, the U.S. economy will grow at 3.9 percent this year and China at 5.2 percent, and the gap will further narrow to 1.3 percent, putting pressure on the RMB to depreciate against the US dollar.
Furthermore, the global supply chain crisis brought about by the pandemic gave China an advantage in exports in 2020 and 2021, and China benefited from an impressive export growth rate during this period.
As the situation of pandemic gradually improves around the world, major manufacturing bases in Asia, such as Indonesia, Thailand, and Malaysia – as well as major raw material producing countries in South America and the Middle East – will gradually resume production capacity, diverting export orders from China and potentially reducing its advantage in export growth rates.
9. Digital transformation of wealth management
In recent years, online financial wealth management has developed very rapidly, with traditional financial institutions and internet financial institutions moving towards increased integration in terms of technology, products, and services.
As big data has become a fundamental national strategic resource and intangible asset, China’s big data industry is also continuing to grow at a rapid pace.
The pandemic has provided an opportunity for the online wealth management industry to develop rapidly under the management of unified business rules.
At present, China ranks first in the world in terms of penetration rate and volume of mobile payments. With the popularisation of electronic payments, particularly mobile payments, China has achieved full coverage of basic financial services in both urban and rural areas.
In addition, China is also actively developing the e-CNY, and is one of the fastest growing countries in this area.
A pilot version of the digital yuan wallet application has been available for download since January, although the use of e-CNY is still limited to 10 major “pilot” cities and the site of the Beijing Winter Olympics, so that foreigners visiting China will be able to use the currency without having to open a bank account in China.
The PBOC is also actively carrying out research on easy-to-use app designs and wearable smart devices that support the e-CNY to encourage more people to switch from the already popular Alipay and WeChat Pay to using the e-CNY.
With rising income and wealth levels in China, the demand for regulated, healthy and comprehensive wealth management services in the market will continue to grow.
Online wealth management will be a major direction for the development of China’s financial markets in the future, and the market will require clearer and more rigorous regulation in the future to support the healthy development of the industry.
How do China’s financial markets appeal to investors?
As we enter the Year of the Tiger, we believe that China’s financial markets will continue to open up more to the world to attract more investments, and the Chinese economy is expected to maintain its upwards momentum.
As the world’s leading provider of financial market infrastructure and data, the London Stock Exchange Group remains firmly committed to delivering robust China market data, insights and tools to empower investors to make better decisions in the post-pandemic world.