2022虎年中国投资策略：繁荣、机遇和可持续性（英） HSBC 2022.2 163页

Multi-Asset
China
February 2022
www.research.hsbc.com
China in the
Year of the Tiger
Prosperity, opportunity, sustainability
After a real estate crunch, policy
crackdowns and supply chain
disruptions…
…we explain why we are more

optimistic about 2022 and…
…provide a one-stop shop for our

macro and equity views on China
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Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
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Work in progress, from 2021 to 2022
Change of growth model  China’s great transition: from construction to capex

and consumption. Page 11
Property investment: annual  Real estate tightening: property high-yield bonds –
growth rate to halve to 3-4% Survival of the fittest. Page 75

 Green investment: ESG and climate policy. Page 29
in the next five years
 Higher-end manufacturing: Smart manufacturing to
Green and higher-end manufacturing to rise fuel capex. Page 69
Common prosperity  The road to common prosperity: reduce inequality

and revive competition. Page 13
Middle class: <30% of  Common prosperity and tax reforms. Page 71
population  Richer households: China’s rising wealth. Page 51
 Tech: Internet – A new playbook. Page 41

When this ratio hits 50%, private consumption to
contribute about 60% of GDP
Reducing risk/deleveraging  Decoupling: A closer look at technology imports.

Page 61
Property and related sectors:  Demographics: How worrying is slowing population
25% of GDP growth? Page 63

 High leverage: China’s rising debt – how big is the
LGFVs with outstanding bonds: Total assets risk? Page 65
>RMB100trn
0
Multi-Asset ● China
February 2022
Greater focus this year
Easing to support growth  China in 2022 – Five macro themes. Page 9

 A switch-up in investment. Page 49
Green investment:  Time for a tech and green stimulus package. Page 67
RMB200trn over 2022-2060  Stepping up target easing. Page 47
Higher-end manufacturing: 60% of

all manufacturing by 2030
Tiger macro outlook  Credit: China Onshore Insights – 2022 outlook.

Page 17
USD/RMB: 6.40 at end-Q1,  FX: RMB overstretching. Page 19
6.55 at end-Q4  Rates: Onshore China – Off to a roaring start.
Page 21
9-16% index upside for A shares  Equity strategy: 2022 outlook. Page 105
in 2022e
Investment compass  Green: ESG Integrated – Utilities. Page 31

 Green: Electric vehicles – Taking it up a notch.
Sustainability, manufacturing, Page 39

consumption  Manufacturing: Automation – Gear up for growth.
Page 33
 Manufacturing: Printed circuit boards. Page 143
 Consumption: Consumer – Silver dollars, the she-
economy, Gen-Z style. Page 37

 Consumption: Cosmetics – Time to shine for local
brands. Page 127
1
February 2022
Welcome Tiger, good riddance Ox
We expect Beijing to introduce more targeted easing measures –

support for green investments, small businesses and
manufacturers, and tax incentives and subsidies to promote
innovation and technological upgrading. This all bodes well for
equities in 2022.
Few China investors will be sad to see the back of the Year of the Ox. It will be remembered for
widespread disruption on several fronts – the lingering pandemic, abrupt policy changes, and
the tanking property market. As we showcase our latest views on China at the start of the Year
of the Tiger, we see reasons for optimism.
After a rough year and a rocky start in January, we forecast upside of between 9% and 17% for
mainland China and Hong Kong stock indices in 2022, propelled by pro-growth policies,
improving earnings, low valuations and ample liquidity. Underpinned by a rebounding economy
and a backdrop of monetary easing in China as the US Fed tightens, this should be good news
for chastened equity investors who learned an important lesson last year – it is unwise to stray
too far from Beijing’s latest policy directives.
On the macro front:

 Our economists forecast 5.6% GDP growth in 2022e.
 HSBC’s FX team thinks the RMB is overstretched and sees the USD-RMB heading to 6.55
by end-2022.
 Our fixed income analysts remain overweight China government bonds in 2022. The policy
divergence between China and US has widened, with the People’s Bank of China delivering
the first interest rate cut in two years.
 On the credit front, the focus is on identifying the survivors in the offshore high-yield
property sector after a year of record bond defaults and the biggest correction in a decade.
What worries us most going into 2022 are bonds issued by local government financing
vehicles (LGFVs). Given their size and complexity, we cannot stress enough that fixing
LGFV debt is the problem that China cannot afford to get wrong.
Beyond our headline forecasts, we also flag the long-term trends investors need to follow (see
page 4). This report has two sections. At the front we highlight what we see as the major reports
of the year. The second section highlights the depth and breadth of our China coverage. The
total of 62 two-page summaries cover economics, FX, rates, credit, and ESG, as well as
thematic reports by our A- and H-share equity analysts.
A happy Year of the Tiger from all of us at HSBC Global Research and HSBC Qianhai Securities.
2
February 2022
Key data and forecasts
We see China’s economy rebounding to 5.6% in 2022e …

Q1 2022e Q2 2022e Q3 2022e Q4 2022e 2022e Q1 2023e Q2 2023e
GDP, % y-o-y 4.4 5.2 6.2 6.2 5.6 6.3 5.9
GDP, % q-o-q 1.1 2.6 1.5 1.2 n/a 1.3 1.6
CPI, % y-o-y 1.6 1.9 2.4 2.3 2.0 2.3 2.3
Source: CEIC, HSBC forecasts
… with the RMB staying relatively range-bound …

Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
USD-RMB 6.40 6.40 6.45 6.50 6.55
Source: HSBC
… and the major stock indexes rising between 9.2% and 17%
SHCOMP CSI 300 SZCOMP Hang Seng
HSBC end-2022 target 4,000 5,600 17,500 28,030
HSBC target implied 12-month forward PE (x) 12.9 15.1 23.7 11.4
Index upside 9.2% 10.08% 15.6% 17%
Source: Bloomberg, Wind, HSBC Qianhai Securities estimates
Steady rise in foreign holdings of China government bonds
140 12
120 11
% of outstanding stock
100 10
80 9
RMB bn
60 8
40 7
20 6
0 5
-20 4
Nov 21
Dec 21
Feb-18
Feb-19
Feb-20
Feb-21
Aug 21
Sep 21
Mar-18
Apr-18
Oct-18
Mar-19
Apr-19
Oct-19
Mar-20
Apr-20
Oct-20
Mar-21
Apr-21
Jul-18
Jul-19
Jul-20
Jul 21
Oct 21
Nov-18
Dec-18
Nov-19
Dec-19
Nov-20
Dec-20
Jan-18
Jun-18
Aug-18
Sep-18
Jan-19
Jun-19
Aug-19
Sep-19
Jan-20
Jun-20
Aug-20
Sep-20
Jan-21
Jun-21
May-18
May-19
May-20
May-21
Foreign purchase of CGBs Foreign ownership ratio (RHS)
Source: CEIC, HSBC
ESG: Wind and solar sector share price performance relative to equity indices
500
400
300
200
100
-
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22
Solar sector (H-shares) rel. performance to HSI Solar sector (A-shares) rel. performance to SHCOMP
Wind sector rel. performance to HSI
Source: Refinitiv Datastream, HSBC estimates
3
February 2022
HSBC’s key investment themes
ENERGY TRANSITION
Power producers like China Resources Power and China Power International used to be
“unloved” by investors due to their coal exposure. They are now benefiting from investment
plans which are increasingly geared to renewable energy – their share prices are up more
than 100% in the last 18 months. See page 30.
AUTOMATION
China’s industrial robot density is still only around one-fifth of leading countries such as Singapore
and South Korea. Sales of key automation products are expected to rise by 20% y-o-y in 2021e.
China accounted for around 44% of global new robotics installation in 2020. See page 32.
FUTURE CONSUMER
New generation, new mind-set. Young people have a different set of consumer needs and wants.
They want convenience and ready-to-cook dishes and use fresh food e-commerce to save time and
money. They like electric vehicles, too. In many sectors, we see Generation Z – those born between
1995 and 2010 – as the most important consumer group over the next decade. See page 36.
FUTURE TRANSPORT
Cars manufacturers are moving to the next level of autonomous driving. Cameras are the most
commonly used sensors and we forecast the average number of cameras per car to increase
from 1.7 today to 5.3 in 2030e. We see lenses and image sensor makers as the key
beneficiaries and forecast the addressable market size in China for these devices to increase
from over USD2bn in 2020 to over USD11bn in 2030e. See page 38.
DEMOGRAPHICS
Population growth has slowed to a record low and the labour force is shrinking. But a smarter
workforce is replacing retirees. In 2020, there were over 218m people who had a university or
higher level of education, a 73% increase from 2010. China’s current number of students in
tertiary education is greater than those in the US, Japan, Germany, South Korea, and the UK
combined. See page 54.
FUTURE CITIES
China continues to expand the national high-speed rail (HSR) network. We expect HSR
passenger traffic to grow at a CAGR of 10-11% over 2020-25e, with the share of railway
passenger transport rising from 64% in 2019 to 80% by 2025e. See page 146.
DIGITAL FINANCE
China’s e-CNY is leading the global push for central bank digital currencies. The number of
individuals with digital CNY accounts has risen to 140m – 10% of the population – with 10m
corporate accounts created. See page 86.
DISRUPTIVE TECHNOLOGY
Even before COVID-19 emerged, Chinese consumers were starting to purchase medical drugs
from telemedicine platforms. That trend is now accelerating. Our analysis finds that the online
pharmaceutical market will grow from RMB125bn in 2019 to RMB1trn in 2030e. That means the
online penetration will jump from 5% to 24%. See page 148.
4
February 2022
Contents
Welcome Tiger, good riddance Ox 2 ESG 93
HK SFC updates guidance for fund disclosures 94
Our major China reports 7 HK to embed more ESG in revised
governance code 96
Economics: China in 2022 – five macro themes 8
Climate Investment Update –
Economics: China’s great transition 10
China’s 14th Five-year Plan 98
Economics: The road to common prosperity 12
Green Bonds in China 100
Economics: Greater Bay Area – picking up pace 14
Credit: China Onshore Insights – 2022 outlook 16
FX: RMB overstretching 18
Equity Strategy 103
Rates: Onshore China – Off to a roaring start 20 China Equity Strategy: 2022 outlook 104
Multi-asset: The launch of Why we remain overweight on mainland China 108
Southbound Bond Connect 22 Ageing and pensions 110
Equity Strategy: Upgrade China to overweight 24 ‘East, West, Home Best’: ADRs and VIEs 112
ESG and climate policy 28 Hong Kong Equity Strategy: 2022 outlook 114
ESG Integrated: Utilities –
From “unloved” to winners 30
Equities 117
Automation: Gear up for growth 32
Consumer: Silver dollars, the she-economy, Aluminium: Going green –
Gen-Z style 36 challenges vs opportunities 118
Electric Vehicles: Taking it up a notch 38 Autonomous driving: Smart cars need
smart sensors 120
Internet: A new playbook 40
Banks: A new playbook for wealth management 122
Virtual Reality: Hitting its stride 42
Construction: Buying time to build new businesses124
Cosmetics: Time to shine for local brands 128
Our China coverage: Depth, Financials survey: Anatomy of
breadth, and big ideas – Macro 45 a financial consumer 130
Economics: Stepping up targeted easing 46 Hong Kong Real Estate: Building back
better in 2022 132
Economics: A switch-up in investment 48
Internet data centres: Regulated growth 134
Economics: The rising wealth of China 50
Meat products: The need for speed 136
Economics: Demographics –
three won’t make a crowd 52 Olefins: Strong home base, big home run 138
Economics: Climbing the ladder of scientific Passive Components: Getting aggressive 140
research 54 Printed circuit boards: Global leader
Economics: Why technology diffusion is with more room to run 142
so important 56 Railways: Let the train take the strain 146
Economics: A closer look at technology imports 60 Telemedicine: A RMB1trn market by 2030e 148
Economics: How worrying is slowing Titanium dioxide: Batteries now included 150
population growth? 62 Vocational Education: Driven by
Economics: Rising debt – how big is the risk? 64 job-hungry graduates 152
Economics: Time for a tech and
green stimulus package 66
Disclosure appendix 155
Economics: Smart manufacturing to fuel capex 68
Economics: Common prosperity and tax reforms 70
Economics: What decoupling? 72 Disclaimer 160
Credit: Property HY – Survival of the fittest 76
Credit – AMCs: The wounds are healing 78
Credit: Bond markets –
the promise of diversification 80
Credit: Internet – sailing into the wind 82
Credit: LGFVs – 2022 outlook,
worried but not scared 84
FX: The e-CNY prepares for lift-off 86
The PBoC strikes back 88
Rates: WGBI inclusion the last piece of the puzzle 90
5
February 2022
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6
February 2022
Our major
China reports
7
February 2022
Economics: China in 2022 –

five macro themes
 Beijing will likely step up monetary and fiscal easing, fine-tune

property lending, and slow the pace of regulations
 Growth in both higher-end manufacturing and green investments is
set to quicken; property investment to bottom
 We expect GDP growth to recover gradually into H2 2022, but core
inflation will likely stay muted
Qu Hongbin China’s slowing economy in recent months has prompted Beijing to step up policy easing to
Co-Head Asian Econ Research, shore up growth. How and when will these measures kick in and help drive a recovery? As a
Chief China Economist
The Hongkong and Shanghai guide to 2022, we highlight five key macro themes:
Banking Corporation Limited
hongbinqu@hsbc.com.hk More easing. We expect the PBoC to cut the reserve ratio for banks and increase relending
+852 2822 2025
(banks given funds to lend to customers) to boost cash available for higher-end manufacturing,
Jing Liu green projects and SMEs. The central government is also set to increase spending on
Senior Economist, Greater China
The Hongkong and Shanghai technology and allow local governments to borrow more to bolster investments in new
infrastructure like 5G. Meanwhile, Beijing will also likely slow the pace of regulations to mitigate
jing.econ.liu@hsbc.com.hk
+852 3941 0063 the negative impact on growth.
Jingyang Chen
Manufacturing investment is set to quicken. Despite softer global demand, investment in mid
Economist, Greater China
The Hongkong and Shanghai to high-end manufacturing is set to gain momentum next year thanks to improving profitability
jingyang.chen@hsbc.com.hk
and high capacity utilisation rates. Indeed, manufacturing capex spending has already picked
+852 2996 6558 up, reaching a two-year CAGR of over 6% since August, higher than 2019’s growth of 3.1%.
Erin Xin More generous tax incentives and other policy support for technology upgrading should also
Economist, Greater China add fuel to the upturn in manufacturing investment, which will likely grow by double digits.
The Hongkong and Shanghai
erin.y.xin@hsbc.com.hk
Green investments. After rolling out detailed plans for de-carbonising the economy, Beijing is
+852 2996 6975 ready to jumpstart green investments next year. Given the massive amount of spending needed
Shanshan Song to achieve its longer-term climate goals, there is ample room for front-loading of projects and
Economist, Greater China lifting growth in green investments to above 30% p.a. in the coming years.
shan.shan.song@hsbc.com.cn Property investment to bottom out gradually. Beijing has already started, and will likely
+86 10 5999 8234 continue, to fine-tune its property lending policies. Combined with anticipated easing in general
financial conditions as well as local administrative measures, this should help put a floor on the
property downturn next year.
Core inflation to stay muted. We expect core CPI to stay below 1.5% next year considering
the absence of supply-chain bottlenecks and a modest recovery in GDP growth.
Main risks. More-than-expected cases of COVID-19 at home, especially in light of new variants like
Omicron, may hinder the consumption recovery. Geopolitical tensions could also weigh on business
sentiment.
8
February 2022
Policy easing to shore up growth
The key message from Beijing in recent months has been clear: supporting growth is now the
key priority. But why is there this new determination to prop up the economy? Because officials
worry about the rising threat to the stability of the labour markets amid headwinds stemming
from the “triple pressures”: demand contraction, supply shocks and weakening expectations.
We expect more easing measures on four fronts into 2022: Monetary, fiscal, property lending
and regulations (China Central Economic Work Conference, 11 December).
Proactive fiscal policies to do the heavy lifting

Fiscal measures will take the lead in supporting the economic recovery, especially as Beijing
has vowed to front-load policy stimulus. While the official budget deficit next year is expected to
remain in line with this year’s, at 3.2% of GDP, the broadly defined fiscal deficit is likely to
increase by at least 1.0ppt to 7.3% of GDP (up from 6.3% of GDP in 2021e). These fiscal
measures will likely include the following:
 Rollout of tax cuts and fee reductions, particularly for hard hit firms (SMEs) and areas of
focus like manufacturing, innovation and green investments.
 Direct funding support and loan guarantees for new growth drivers like industrial upgrading,
technology innovation and green development.
 RMB1trn in sovereign green bond issuance for green projects like electrification and green
technology development.
 Speedier project approvals for new infrastructure projects like 5G, digitalisation and EV
charging stations.
 Quota issuance of special local government bonds1 is likely to see a modest increase to
RMB4.0trn (vs. the average amount of about RMB3.7trn in 2020 and 2021), with front-loading of
part of the quota (an expected RMB2.2trn) prior to the National People’s Congress in March 2022.
While infrastructure investment has been a relative underperformer – it has only risen about
0.4% year-to-November – we see fiscal support likely accelerating infrastructure investment,
given increased special local government bond issuance in H2 2021 and an expected pick-up in
2022.
Moreover, if the global commodity price rally comes to an end and more focus is put on
ensuring sufficient production domestically, the construction industry could benefit. Alongside
some policy adjustments around the property sector, a ramp-up in public housing development,
as well as increased acceleration in infrastructure project approvals (particularly new
infrastructure like 5G) could help bring infrastructure investment growth up to 5% y-o-y in 2022
and above the pre-pandemic level of 3.8% in 2019.
That said, Beijing will still be keeping an eye on local government debt risk. That means, local
governments will find it difficult to add leverage via implicit debt, while at the same time the
cooling land market will continue to weigh on their balance sheets. Higher performing regions
like first-tier cities may fare better in light of stronger economic activity, and thus government
revenues, but we expect that Beijing will increase transfer payments to local governments in
2022 amid the continued headwinds.
For the full report, see China in 2022 – Five key macro themes, 16 December 2021.
1Special local government bonds have certain restrictions on their use compared with general local
government bonds. They can only be repaid by revenues from their projects as opposed to fiscal reserves.
They are typically used to finance infrastructure projects.
9
February 2022
Economics: China’s great

transition
 China’s decades-long boom in real estate and infrastructure, a major

source of economic growth, is coming to an end
 To pick up the slack, investment is already rotating to higher-end
manufacturing and green projects
 The middle class is also set to expand, making consumption a
bigger growth driver in the coming years
Qu Hongbin China’s recent measures to cool the housing market have been much tougher than previous
Co-Head Asian Econ Research, attempts. Hence, it’s not very surprising to see highly leveraged property developers such as
The Hongkong and Shanghai Evergrande struggling with heavy debt loads. But the more important question is why Beijing is
now more determined than ever to tame the rampant property market? We believe it’s because
hongbinqu@hsbc.com.hk
+852 2822 2025 policymakers know that after a more than two-decade long housing boom, the country can no
Jing Liu longer rely on the real estate sector to drive the economy forward. By looking at a range of key
Senior Economist, Greater China measures, it soon becomes apparent that the housing market is reaching its limits:
 Property investment has surged by an average 18.2% per year since 1997, 1.6 times
+852 3941 0063 nominal GDP growth in the same period, and lifting property investment’s share of fixed
Jingyang Chen asset investment and nominal GDP to a record high of 25% and 10% respectively. That’s
The Hongkong and Shanghai higher than the ratio in Japan during its 1980s property boom.
jingyang.chen@hsbc.com.hk  Home ownership has surged from 47% in the mid-1990s to over 80% in recent years, much
+852 2996 6558
higher than developed economies such as the US, Japan and South Korea. About 40% of
Erin Xin households now own at least two apartments.
 Residential living space per person has doubled since 2000 to around 40 square metres,
erin.y.xin@hsbc.com.hk higher than many developed economies in Asia and Europe.
+852 2996 6975
Shanshan Song All this doesn’t necessarily mean property investment is going to collapse, especially with millions
Economist, Greater China of villagers still moving to towns and cities each year, and a need to renovate the stock of old
Banking Corporation Limited houses. Rather, it implies that property investment is likely to slow substantially in the years
shan.shan.song@hsbc.com.cn
+86 10 5999 8234
ahead. And it’s not alone as investment in infrastructure may also slow after being on a tear
over the past decade. Doubtlessly, there is still a need for more investment in 5G networks and
other IT infrastructure facilities, but the days of making massive investments to ease crucial
bottlenecks in manufacturing or transport are behind us. Combined, investment for property and
infrastructure make up 22% of the economy, and the slowdown will lower demand for
commodities and building materials in the years ahead.
However, the focus of this report is exploring what new engines of growth can pick up the slack.
With so much more capital being freed up, this can all be reallocated into other areas.
10
February 2022
Over the last four quarters growth, as bank lending to the real estate sector has slowed, growth
in credit to the manufacturing sector has accelerated. This credit reallocation has reinforced the
rotation in investment away from construction to spending on manufacturing, especially in the
medium and high-tech sectors. We expect this rotation to gain momentum for these reasons:
 China’s manufacturing sector is climbing up the global value chain while some 9-10m
college graduates per year (more than the US, German, Japan, Korea and ASEAN
combined) provide support for expanding further into higher technology manufacturing.
 China’s ranking in the global innovation index has been rising, and is now the only
emerging market in the top 15, a move which will likely drive industrial upgrading.
 China’s 14th Five-year Plan (FYP) outlined concrete steps towards developing technology,
which if implemented well could also add fuel to industrial upgrading.
As a result of all this, we expect the medium to high-tech sectors to account for over 60% of
total manufacturing by 2030 (vs. around 45% in 2020). Such a shift would partially offset the
slowdown in real estate and infrastructure investment. More importantly, reallocating capital
from real estate to more productive manufacturing sectors will likely fuel productivity growth and
therefore keep the potential growth rate above 6% in the years ahead. As the experiences of
Japan and South Korea show, moving up the global value chain is a proven pathway for China
(as a middle income economy) to graduate into a high income one.
Along with faster growth in loans to the manufacturing sector, more credit is also being gradually
More credit is being gradually
channelled into green and channelled into green and low-carbon projects. About USD65bn of green bonds have been
low-carbon projects issued so far this year, already some four times the amount in full-year 2020. The State Council
has published new guidelines to ensure carbon emissions peak by 2030, especially for the
energy and industrial sectors which account for the bulk. But it will come at a cost as the
International Energy Agency (IEA) estimates China needs to invest more than RMB200trn
(equivalent to 200% of GDP in 2020) in the next 40 years to achieve carbon neutrality. Some
estimates from a government think tank put the number as high as RMB500trn. Still, funding
should not be an issue as China’s high level of savings (one of the highest in the world) could
be channelled into such projects. The key challenge though is accelerating financial reforms to
open up more channels to reallocate the funds to green projects. Based on the IEA estimate,
total green investment needs to top RMB5trn a year, i.e. c5% of 2020 GDP, beating the one-off
post-Global Financial Crisis stimulus of RMB4trn. This will help to not only offset the slower
growth in construction investment, but also develop green technology and make economic
growth more sustainable.
All of these initiatives will create more high-skilled jobs. Combined with Beijing’s policy support
All of these initiatives will
create more high-skilled jobs for small and medium-size enterprises, this should provide opportunities for the 9-10m college
graduates and around 5m vocational school graduates per year in the coming years. This will
enable this cohort to transition into middle-class consumers, driving growth in consumer spending,
especially for new products and services. This, in turn, should create demand for medium to
high-tech manufacturing businesses in China, creating a positive feedback loop between the
rise of the middle class and medium to high-tech manufacturing business. Moreover, we expect
Beijing’s common prosperity initiative (see China regulation: The roadmap to common prosperity
starts in Zhejiang, 16 August 2021) to also drive growth in the middle class as it will accelerate
hukou (household registration) reforms to give 286m migrant workers equal opportunities. By
giving this cohort equal access to social welfare in the coming 10-15 years, we estimate that this
will likely raise their propensity to consume and therefore lift annual GDP growth by 0.6% in the
coming years.
For the full report, see China’s great transition – From construction to capex and consumption,
9 November 2021.
11
February 2022
Economics: The road to

common prosperity
 We put Beijing’s regulatory clampdown into a global context

 We also look at the pilot scheme that China has launched in
Zhejiang province to promote common prosperity
 Based on this model, Beijing is set to pass structural reforms to
support entrepreneurs and SMEs and boost social welfare
Jing Liu Regulatory tightening. Three policy red lines for property developers, an antitrust drive against
Senior Economist, Greater China tech companies, new rules for after-school tutoring … the market wants to know the rationale for
Banking Corporation Limited the clampdown and what the next target will be. This report explains the logic behind the
jing.econ.liu@hsbc.com.hk campaign – to reduce inequality and revive competition – puts the issue into a global context,
+852 3941 0063
discusses the concept of common prosperity, and looks at the pilot scheme launched in China’s
Qu Hongbin
Co-Head Asian Econ Research, coastal province of Zhejiang.
The Hongkong and Shanghai Widening inequality, worsening competitive environment. Aside from China, these two
hongbinqu@hsbc.com.hk problems have plagued many other economies for years, with COVID-19 only exacerbating the
+852 2822 2025 situation. Advocates for policies and actions to combat inequality and anti-competitive behaviour
are on the rise globally.
Structural reforms needed ... Zhejiang the model. Common prosperity has become a
buzzword in official speeches and documents, but the concept remains vague to many. We
think the development targets for Zhejiang, the first common prosperity demonstration zone,
illustrate how China plans to achieve inclusive growth that matches levels in developed countries
and improves upward social mobility. We think this initiative sheds light on Beijing’s broader
policy goals of structural reform, which are at times muffled by the noise from recent short-term
regulatory tightening. They include the following:
 Strengthening SMEs and entrepreneurship. SMEs and entrepreneurship are key growth
engines. Beijing plans to bolster support for the c40m SMEs through tax reductions,
improved funding conditions, and the antitrust policies that should help create a level
playing field.
 Increasing upward social mobility. Income and wealth inequality impede social mobility. The
14th Five-year Plan devotes two chapters to plans to promote social mobility, including
policies covering education, health, family, income distribution, and regional imbalances.
 Improving the social safety net. China plans to overhaul its social safety net programme and
build a tiered social assistance system in two years. It aims to provide medical, housing,
education and employment help for the elderly, children, the disabled, and those living on the
edge of poverty.
12
February 2022
Regulatory tightening
Escalating property curbs, antitrust drive on Big Tech, ban on private tutoring
Government efforts to reduce the level of economic risks have attracted headlines as China got
back on its feet after H2 2020. Regulatory tightening measures have been rolled out one after
another, starting with the property sector, moving on to an antitrust drive against Big Tech firms
and then the after-school tutoring business. The list may grow as the de-risking strategy
broadens (see China Economic Spotlight: Mitigating the risks of de-risking, 20 July 2021).2
What to expect next?

The campaign, which appears to target seemingly unrelated sectors, actually has a common
Concerns behind regulatory
crackdown: widening
goal – to revitalise the economy by reducing inequality and promoting business competition.
inequality and weakening Property market curbs and the overhaul of after-school tutoring are aimed at reducing the level
competition … of inequality, while tighter regulation of internet companies is designed to promote competition.
… two big hurdles to Clearly, growing inequality and deteriorating levels of competition are Beijing’s major concerns
common prosperity right now. After four decades of reforms and opening up, China has lifted nearly 800m people
out of poverty and the next stage of development is to pursue the goal of common prosperity.
The government wants to enhance the skills of the poorer members of society and improve their
capacity for self-development, so a thriving economy generates opportunities for individuals to
climb up the social ladder. According to the 14th Five-year Plan, common prosperity will result in
the people sharing the fruits of China’s prosperity.
The Zhejiang demonstration zone

In May 2021, China issued guidelines for building the eastern coast province of Zhejiang into a
Zhejiang to be developed into
the first demonstration zone
demonstration zone for common prosperity. In July, Zhejiang province released a detailed plan,
for common prosperity with the main idea being the formation of an “olive-shaped” social structure with the middle
income households being the largest group. Table 1 lists key development goals set by both the
central and provincial authorities for the Zhejiang demonstration zone.
Highlights of the pilot scheme include: (1) “prosperity” as a key word – per capita GDP is targeted
at the level of moderately developed countries by 2025 and that of developed countries by
2035, and (2) the “olive-shaped” social structure reflects the view that common prosperity
depends on a growing middle income group and a narrowing income gap. The Zhejiang
government has announced 52 tasks and goals relating to income, employment, housing,
education and public health, implying a comprehensive mix of policies are in the pipeline.
It is no coincidence that Zhejiang has been chosen as the demonstration zone. It is a wealthy
province located in the Yangtze River Delta region. In 2020, Zhejiang’s GDP per capita reached
USD14,600, trailing only Beijing, Shanghai, Jiangsu, Fujian, and Tianjin among 31 provincial-
level regions. Zhejiang has an urban-rural income ratio of 1.96:1, vs. the national average of
2.56:1, one of the lowest in China. It is also known as a centre of entrepreneurship which has
cultivated successful traditional merchants as well as the new generation of tech start-ups,
which have facilitated the digitalisation and upgrading of the local economy.
For the full report, see China regulation – The roadmap to common prosperity starts in Zhejiang,
16 August 2021.
2 On 11 August, the Central Committee of the Communist Party of China and State Council jointly issued an
“Implementation Outline for Building a Government Ruled by Law: 2021-2025”. Reassuringly, it stated that
future regulation will involve consultations beforehand and assessment afterwards, with any major changes
to regulations going through legislative procedures.
13
February 2022
Economics: Greater Bay

Area – picking up pace
 New development plans for Hengqin and Qianhai focus on

developing technology and high value-added services …
 … while Connect programmes solidify the GBA as a cross-border
financial hub, supporting capital account liberalisation …
 … and Hong Kong’s plan for its Northern Metropolis area on the
border should deepen integration with Shenzhen
Erin Xin
The Greater Bay Area has seen a flurry of recent policy plans aimed at further integrating and
Economist, Greater China developing this already fast-growing region. Next steps will focus on strengthening synergies
Banking Corporation Limited across the major cities and allow for each to leverage their unique advantages. Hong Kong is an
erin.y.xin@hsbc.com.hk international financial centre, Shenzhen an innovation and technology hub, and Guangzhou a
+852 2996 6975
manufacturing hub and trade window to mainland China. Such moves will also allow for these
Qu Hongbin economies to open up further and to increase innovation.
Co-Head Asian Econ Research,
The Hongkong and Shanghai Hengqin and Qianhai
Banking Corporation Limited Recent plans to develop Hengqin (near Macau) and Qianhai (in Shenzhen) emphasise the
+852 2822 2025 importance of building up capabilities in high value-added services like finance as well boosting
innovation. Diversifying growth drivers and moving more towards technology, medicine, and
tourism in Hengqin will help to support longer-term growth there. Meanwhile, continuing to open
up services and deepening international coordination, such as through reductions in the
negative list (which points out areas which face explicit business or investment restrictions) or
aligning commercial business regulations to be more in line with international standards, will
help to boost technology and financial services in Qianhai.
Hong Kong’s Northern Metropolis
Hong Kong’s planned development of its Northern Metropolis will help to not only address long
term housing supply issues for the city, but also increase the integration between the key
offshore financing hub and the innovation centre that is Shenzhen.
The Connect programmes
Mainland China is redoubling its efforts on further capital account liberalisation with the launch
of Wealth Connect and Southbound Bond Connect, adding to its repertoire of tools to help
manage the transition towards opening up capital flows. The Connect programmes also open
up the doors for more diversification for both domestic and foreign investors.
On the whole, increased connectivity through physical infrastructure, coordination in policies
and regulations, increase in ease of flows of people will help to deepen integration in the GBA in
the coming years. Meanwhile, continued opening up and reforms, such as strengthening
commercial legal regulations and IP protections, will help attract more foreign investment and lift
innovation and high value-added services capabilities.
14
February 2022
Summary of Greater Bay Area statistics

City/Region Population Area GDP* GDP per Output per Deposits# Retail Sales Utilised FDI R&D Top 100
(m) (km2) (USDbn) capita* km2* (% share)** (% share)** (% share)*** (% of GDP)† universities‡
(USD) (USDm)
Guangzhou 18.7 7,249 342 22,351 47 3.1 2.3 5.1 2.9 -
Shenzhen 17.6 1,997 390 29,009 195 4.6 2.2 6.1 4.9 -
Zhuhai 2.4 1,732 50 24,581 29 0.4 0.2 1.8 - -
Dongguan 10.5 2,460 137 16,219 56 0.8 0.9 0.9 - -
Zhongshan 4.4 1,784 45 13,381 25 0.3 0.4 0.3 - -
Foshan 9.5 3,798 156 19,078 41 0.9 0.9 1.1 - -
Huizhou 6.0 11,347 60 12,394 5 0.3 0.5 0.7 - -
Jiangmen 4.8 9,505 46 9,839 5 3.1 0.3 0.6 - -
Zhaoqing 4.1 14,891 33 7,776 2 4.6 0.3 0.7 - -
Hong Kong 7.5 1,050 363 48,273 346 3.0 1.1 - 0.9 4
Macao 0.7 33 55 81,156 1676 0.3 0.2 - 0.2 -
GBA 86.2 55,853 1,677 23,072 30 14.1 9.3 - - 4
Note: Data is latest available unless specified
*Data is from 2019 to omit the COVID-19 shock
#Refers to all deposits, not just household savings
**Percent of national share including Hong Kong and Macau

***Percent of national share
†R&D spending is for 2019 except for Macao which is for 2018
‡QS University Ranking 2021
Source: CEIC, NBS, HSBC Research
Summary of Connect programmes

Stock Connect Bond Connect Wealth Connect
Northbound RMB52bn (daily quota) No quota RMB150bn (annual quota, aggregate)
No annual quota Launched in 2017 RMB1m (individual annual quota)
Launched SH-HK in 2014 Launched in 2021
Launched SZ-HK in 2016
Southbound RMB42bn (daily quota) RMB20bn (daily quota) RMB150bn (annual quota, aggregate)
No annual quota RMB500bn (annual quota) RMB1m (individual annual quota)
Launched SH-HK in 2014 Launched in 2021 Launched in 2021
Launched SZ-HK in 2016
Source: HKEX, HK Bond Connect, Gov.hk, HSBC
The economic size of GBA is larger than One of the largest city clusters in the
that of some developed economies world, by population size
US$tn
6 Population, million
140
Thousands
5 120
100
4
80
3
60
2 40
1 20
0
0 YRD JJJ GBA TKB NYM SFM
GBA
JJJ
KR
BR
AU
NYM
SFM
TKB
MX
DE
UK
CA
FR
CA
NL
JP
IN
ID
IT
Note: Data is last available; Country codes are based ISO codes Note: Data is last available
Key: YRD = Yangtze River Delta, JJJ = Jing-jin-ji, GBA = Greater Bay Area, NYM = Key: YRD = Yangtze River Delta, JJJ = Jing-jin-ji, GBA = Greater Bay Area, NYM =
New York Metropolitan area, SFM = San Francisco Metropolitan Area, TKB = Tokyo New York Metropolitan area, SFM = San Francisco Metropolitan Area, TKB = Tokyo
Bay Area Bay Area
Source: CEIC, BEA, HKTDC Source: CEIC, BEA, HKTDC
For the full report, see China’s Greater Bay Area – Picking up the pace of integration,
20 October 2021.
15
February 2022
Credit: China Onshore

Insights – 2022 outlook
 Tail risks for local government funding vehicles to rise, but the
default rate should be very low; the same applies to local SOEs
 Central SOEs stand to benefit even more from deleveraging; foreign
investors should focus on this sector
 The outlook for privately owned enterprises remains grim, in our
view, but rapidly declining maturity will help
Helen Huang Rising LGFV tail risks. Looking into 2022, what worries us most are bonds issued by local
Head of China Onshore Credit government financing vehicles (LGFVs). Given their size and complexity, we cannot stress
Research
The Hongkong and Shanghai enough that fixing LGFV debt is the problem that China cannot afford to get wrong. For
investors, diversification and tail-risk management are key. We recommend filtering out LGFV
helendhuang@hsbc.com.hk
+852 2996 6585 names that (1) are least favoured by the market or (2) have fiscally weak local governments. We
believe the LGFV credit market is a prime candidate for the next “stress test” by regulators that
will allow LGFVs to default for the first time; this would create opportunities for investors.
Central SOEs set to benefit. As key pillars of the real economy, industrial SOEs are back on the
right side of the long-term policy equation now that property and infrastructure have been
replaced by high-end manufacturing and technology as the new economic growth engines. For
foreign investors exploring the onshore RMB corporate bond market, we believe central SOEs
are an attractive place to start in terms of relative valuation to dollar bonds, better liquidity, and
low default rate. We also see them as a relative safe-haven should local SOEs and LGFVs run
into trouble next year. Local SOEs are more problematic. The Yongcheng Coal default in 2020
shows how hard it is to meet the policy goal of weaning them off government support.
Grim outlook for POEs. Privately owned enterprises (POEs) have gone through four
consecutive years of elevated default rates and net redemptions in the RMB bond market. And
the pain being suffered by POE property developers is likely to continue for several months.
Although we have been following China’s deleveraging story for years, we underestimated how
harsh the funding environment would be for POEs this year. On the positive side, the maturity of
POE bonds will decline sharply in 2022e and the default rate is starting to fall. We believe that
those developers which manage to survive will emerge stronger. Still, given the damage already
done, market confidence in POEs will probably remain weak in 2022 and start to recover only in
2023, which might help primary issuance turn positive again.
2021 and the year ahead

This year will be remembered for the intense pressure POE property developers have been
under in both the onshore and offshore credit markets. We expect their problems to continue in
the next few months, overshadowing all other factors when it comes to market sentiment. Even
the events surrounding China Huarong AMC between April and August 2021 pale in comparison.
16
February 2022
For context, we think investors should see the travails of these developers as part of the bigger
Beijing has been “stress
testing” the riskiest areas of
policy picture – what Beijing is trying to achieve through deleveraging the economy. Beijing has
China’s financial system been “stress testing” the riskiest and most highly leveraged areas of China’s financial system
since 2018 since 2018:
 2018: Shadow banking
 2019: Regional banks
 2020: Local SOEs (excluding LGFVs)3
 2021: POE property developers
After analysing these stress tests and the subsequent consequences, we increasingly realise
that deleveraging does not necessarily have to be about reducing the absolute amount of debt,
which is very difficult to achieve when the pace of economic growth is slowing down. Instead,
pragmatic policy efforts have focused on two goals: (1) while existing debt can’t be eliminated, it
can be refinanced; and (2) stopping new debt from growing too quickly, particularly in sectors
that are already highly leveraged.
We believe the best way to deliver the first goal is to show that access to refinancing is still
We believe this also
represents the thinking of top
possible for prudent companies even after large, overstretched corporates have failed. The
policymakers most effective way to meet the second goal is to let the default rate of highly leveraged sectors
rise, which will slow lending to these sectors. We believe this also represents the thinking of top
policymakers.
We draw several other conclusions from previous stress tests. First, none of the four sectors
listed above was completely wiped out. Even shadow banking, which was hit very hard in 2018,
is still a key supplement to China’s banking sector, though much diminished in terms of size and
leverage. Second, while the market’s risk appetite shrinks for a considerable period of time after
the stress test, at least a few quarters or even longer, it eventually stabilises. Lastly, looking at
the big picture, the resilience of China’s financial system has actually improved as more highly
leveraged sectors show that stress and defaults do not cause contagion. For investors, while this
means occasional painful short-term volatility, it comes with the promise of long-term stability.
The key question now is what to expect in 2022? We think policymakers will look for potential
triggers and risks before deciding which part of the financial system is the best candidate for the
next stress test. In terms of the big picture, we think the aim of showing that different sectors
can come under extreme pressure without causing systemic risk is still in place. In this report,
we discuss what worries us the most and the least from the perspective of LGFVs, SOEs and
POEs. We stress that, when the next shoe does drop, it should create rather than eliminate
opportunities for investors.
For the full report, see China Onshore Insights – What worries us most about 2022,
22 November 2021.
3
For ease of presentation, “local SOEs” or “SOEs” in this report exclude LGFVs
17
February 2022
FX: RMB overstretching
 The RMB may stay strong in the near-term

 But the RMB’s valuation is stretched and its yield advantage is
rapidly narrowing
 We expect a turning point sometime around mid-2022, when the Fed
hikes rates and China’s trade surplus falls
Paul Mackel We acknowledge that the RMB may stay strong in the near term, because of China’s still-large trade
Global Head of FX Research surplus (alongside corporates’ historical tendency to increase their FX conversion ratio in the first
Banking Corporation Limited quarter of the year), optimism that China’s regulatory crackdown is taking a breather and a potential
paulmackel@hsbc.com.hk
pick-up of bond inflows related to World Government Bond Index (WGBI) inclusion.
+852 2996 6565
Joey Chew However, assuming that there will not be a dramatic shift in US-China relations, we doubt that
Senior Asia FX Strategist
USD-RMB and the DXY index can keep diverging from each other. Our productivity-adjusted
Banking Corporation Limited REER valuation method suggests that the RMB is already slightly overvalued. We believe China
joey.s.chew@hsbc.com.hk
+852 2996 6568 has been subtly leaning against the RMB’s outperformance, via the fixings for instance.
Zoey Zhou It is difficult to be precise about the timing of the turning point for USD-RMB, but we forecast
Associate, FX Strategy
The Hongkong and Shanghai USD-RMB to rise modestly in 2H22 due to the following considerations:
zoey.z.zhou@hsbc.com.hk  Normalising trade surplus: China’s abnormally large trade surplus is partly because
+852 3945 2400
COVID-19 created strong global demand for certain types of goods and caused production
disruptions elsewhere. This situation should correct when the pandemic is under control in
more parts of the world. The trade surplus is also likely to narrow when global growth
momentum (exports) slows more than domestic demand (imports).
 Border re-opening: China’s border controls are restricting outbound tourism and outward
direct investment. China has indicated that there will be no foreign spectators at the 2022
Winter Olympics (4-20 February 2022) in Beijing, but it is unclear how long it will continue to
keep borders tightly closed thereafter when more parts of the world are opening up.
 The Fed’s rate hikes: While the RMB may not be affected much by the Fed ending its bond
purchases and draining USD liquidity, given its large current account surplus, we do not believe
it can be completely immune to the Fed’s rate hikes, as that would directly affect residents’ FX
hedging and portfolio investment decisions. Both the 2-year and 10-year China-US yield
differentials have already fallen below their respective 10-year historical averages (around
200bp and 135bp respectively). Historically, RMB depreciation episodes have coincided with
times when China’s yield advantage was persistently below a historical average. Now that the
infrastructure for Southbound Bond Connect and Wealth Connect has been set up, residents’
outflows can readily accelerate when market conditions turn conducive.
We forecast USD-RMB to rise from 6.40 in Q1 2022 to 6.55 by end-2022.
For the full report, see Currency Outlook: In the Dollar, we trust, 12 November 2021.
18
February 2022
Full page image to come: Insert:

RMB_PBOC images
19
February 2022
Rates: Onshore China – Off to

a roaring start
 The policy divergence between China and US has widened, with the
PBoC delivering the first interest rate cut in two years
 We expect liquidity conditions to improve further
 Seasonally low bond supply helps to keep the bond rally going
André de Silva, CFA

The People’s Bank of China (PBoC) has delivered a combination of interest rate cuts for the first
Head of Global EM Rates time since March 2020. The central bank’s decision to lower the 7-day reverse repo rate and the
Research
The Hongkong and Shanghai 1-year MLF rate by 10bp at the same time, rather than in stages, underscores its strong
intention to anchor investor expectations for liquidity provisions in the money market system and
andre.de.silva@hsbc.com.hk
+852 2822 2217 support growth. There has since been further associated easing via the Loan Prime Rate and
Pin Ru Tan 14-day reverse repo ahead of the Lunar New Year.
Asia-Pacific Rates Strategist
The Hongkong and Shanghai We expect China government bond yields to fall further in the coming weeks, led by two main
Banking Corporation Limited,
Singapore Branch drivers. First, to enforce the new level of the reverse repo rate and ensure the credibility of the
pin.ru.tan@hsbc.com.sg interest rate corridor, liquidity conditions are likely to improve and funding rates should fall.
+65 6658 8782
Second, with the earlier-than-expected interest rate cut, investors could move on to price in
further rate reduction expectations for the coming months.
Funding conditions to improve further as interbank rate corridor shifts lower

The PBoC adheres closely to the interbank rate corridor when managing liquidity conditions,
with a preference to anchor the moving average of the 7-day banks-only interbank repo rate
(DR007) close to its 7-day reverse repo rate. In fact, ever since the central bank shifted to a
more dovish policy bias by lowering banks’ required reserve ratio in July 2021, it has kept the
monthly average of DR007 at a discount to its 7-day reverse repo rate.
Now that the 7-day reverse repo rate has been reduced to 2.10%, we expect the monthly
average of DR007 to be around 2.05%-2.08%. This is slightly lower than the average of 2.09%
seen in the first half of January 2022. Despite the Lunar New Year holiday period (31 January –
6 February), interbank liquidity demand is likely to be moderate, as we assume most residents
remained in their places of residence rather than back in their hometowns.
The growing monetary policy divergence between China and the US

The monetary policy divergence between China and the US has widened notably. A common
client question is about whether the PBoC can ease when the US Federal Reserve is
embarking on a tightening path. The PBoC has always stated that it determines monetary policy
settings based on domestic growth and price considerations and the policy decision today is
consistent in this regard. HSBC economists expect two more rounds of 50bp broad-based RRR
reductions this year.
20
February 2022
Foreign investors have been well-positioned for this policy divergence. Data for full year 2021
Foreign investors well-
positioned for this policy
shows that foreign investors bought RMB576bn of China government bonds, after having
divergence already bought RMB571bn in 2020. The foreign ownership ratio for China government bonds
touched 10.9% in December 2021, up from 9.7% in December 2020. EPFR positioning data
also shows that the weight of China government bonds in EM local currency bond funds has
risen to 11.4% in November 2021, from 7.3% a year ago. Some investors are concerned about
the potential reversal of such foreign flows. We think it is too early for a reversal as China’s
growth path still looks highly challenging, particularly for Q1 2022. However, given high levels of
foreign ownership, we expect foreign inflows into China bonds this year to moderate from the
levels seen in the past few years.
Seasonally low bond supply helps to keep the bond rally going
For 2022, we expect net central government bond (CGB) issuance of RMB3trn and net local
government bond (LGB) issuance of RMB4.55trn. To stabilise economic growth, the local
governments have been given a RMB1.46trn project bond issuance quota for use in Q1 and,
assuming ordinary LGB issuance amounts to RMB300bn during the period, monthly net local
government bond issuance should average RMB600bn from January to March. Despite this, we
assess overall bond supply pressure to be low in Q1 as net CGB issuance is likely to be low,
kicking off only in late March, after the National People’s Congress approves the fiscal budget.
Steady rise in foreign holdings of China government bonds
140 12
120 11
% of outstanding stock
100 10
80 9
RMB bn
60 8
40 7
20 6
0 5
-20 4
Nov 21
Dec 21
Feb-18
Feb-19
Feb-20
Feb-21
Aug 21
Sep 21
Mar-18
Apr-18
Oct-18
Mar-19
Apr-19
Oct-19
Mar-20
Apr-20
Oct-20
Mar-21
Apr-21
Jul-18
Jul-19
Jul-20
Jul 21
Oct 21
Nov-18
Dec-18
Nov-19
Dec-19
Nov-20
Dec-20
Jan-18
Jun-18
Aug-18
Sep-18
Jan-19
Jun-19
Aug-19
Sep-19
Jan-20
Jun-20
Aug-20
Sep-20
Jan-21
Jun-21
May-18
May-19
May-20
May-21
Foreign purchase of CGBs Foreign ownership ratio (RHS)
Source: CEIC, HSBC
For the full report, see China Rates – Off to a roaring start, 17 January 2022.
21
February 2022
Multi-asset: The launch of

Southbound Bond Connect
 Southbound Bond Connect launched on 24 September 2021

 Eligible onshore institutional investors can invest in Hong Kong’s
bond market, subject to a daily and annual quota
 We discuss the rates, credit, currency and economics implications
André de Silva, CFA
Head of Global EM Rates
Research
+852 2822 2217
The People’s Bank of China (PBoC) and the Hong Kong Monetary Authority (HKMA) jointly
Pin Ru Tan announced the launch of the Southbound Bond Connect, a further push to liberalise capital
Asia-Pacific Rates Strategist
The Hongkong and Shanghai flows. This scheme allows eligible mainland China institutional investors to invest in Hong
Singapore Branch
Kong’s bond market, worth over HKD2trn.
pin.ru.tan@hsbc.com.sg
+65 6658 8782 Eligible investors include the 41 open market operation primary dealers as well as registered
Himanshu Malik, CFA investors under the qualified domestic institutional investor (QDII) and renminbi QDII (RQDII)
Asia-Pacific Rates Strategist schemes. As of end-August 2021, there were 173 QDII investors with USD150bn of investment
Banking Corporation Limited quota. There is less clarity over the number of RQDII investors, but we view the RQDII scheme
himanshu1malik@hsbc.com.hk as much smaller than the QDII scheme. To manage the magnitude of the cross-border flows,
+852 3941 7006
the PBoC has set a daily quota of RMB20bn and an annual quota of RMB500bn for the
Helen Huang
Head of China Onshore Credit Southbound Bond Connect.
Research
The Hongkong and Shanghai Due to current constraints of the trading link between the HKMA’s Central Moneymarket Unit
helendhuang@hsbc.com.hk (CMU) and mainland China’s Cross-Border Interbank Payment System (CIPS), only HKD and
+852 2996 6585 CNY bonds can be traded in the initial phase of the scheme. Plans are underway to upgrade the
Paul Mackel trading link to eventually allow investments in bonds denominated in all currencies.
Global Head of FX Research
Our key multi-asset takeaways are:
+852 2996 6565 Rates: Onshore investors are unlikely to find CNH CGBs more attractive than onshore
Qu Hongbin equivalents but could see value in FX-hedged front-end GBHKs.
Chief China Economist Credit: The Southbound Bond Connect will encourage more credit issuance in Hong Kong;
Banking Corporation Limited onshore investors are likely to find yield pick-up opportunities in high-yield Asian dollar bonds as
hongbinqu@hsbc.com.hk well as diversification value in bonds issued by non-mainland China issuers in Dim Sum Bonds.
+852 2822 2025
Erin Xin FX: Limited impact directionally but the linkage between onshore and offshore FX curves will
Economist, Greater China strengthen; such RMB-denominated trade and investment settlement and clearance activities
Banking Corporation Limited have significantly boosted cross-border usage of the RMB and the RMB’s role as an investment
+852 2996 6975
currency is accelerating.
Hazel Lai Economics: Opening up two-way flows shows Beijing’s determination to speed up its capital
Associate
The Hongkong and Shanghai account liberalisation.
hazel.k.h.lai@hsbc.com.hk
+852 2288 7467
22
February 2022
Outstanding bonds at the Central Moneymarket Unit

AUD0.8n NZD0.6bn
(0.04%) 0.03%
EUR0.8bn
0.04%
CNY225bn
(11.7%)
MOP1.0bn
0.05%
USD14bn
0.7%
HKD1,682bn
87.4%
AUD EUR CNY HKD MOP NZD USD

Source: CMU, HSBC
Exchange Fund Bills: 67% of HKD- Tenor distribution of CNY-denominated

denominated bonds bonds on CMU
HKD denominated bonds: HKD1.68trn CNY denominated bonds: CNY224bn
6% 8%
8% 12%
14%
11%
8%
67% 19%
47%
< 1year 1-3 years 3-5 years 5-10 years >10 years < 1year 1-3 years 3-5 years 5-10 years >10 years
Source: CMU, Bloomberg, HSBC Source: CMU, Bloomberg, HSBC
Short-dated GBHKs still attractive when Comparing the onshore and offshore
asset swapped to CNH government bond curves
4.0 40 3.0
3.5
30 2.8
3.0
2.5 20 2.6
Yield (%)
Yield (%)
bp
2.0
10 2.4
1.5
1.0 0 2.2
1Y 3Y 5Y 7Y 10Y
0.5 -10 2.0
GBHKs GBHKs (ASW to CNH) CGBs Spread (LHS)
0.0 CNY China Sovereign Curve (RHS)
'21 '23 '25 '27 '28 '30 '32 '34 '35 '37 '39 '41 '42 '44 '46 '48 '49 '51 CNH China Sovereign Curve (RHS)
Source: Bloomberg, HSBC Source: CMU, Bloomberg
For the full report, see Southbound Bond Connect – China opens up further, 16 September
2021.
23
February 2022
Equity Strategy: Upgrade

China to overweight
 That China is struggling with growth is well known. But valuations

are low and we expect targeted easing
 We expect more targeted easing measures
 The run-up to the 20th Party Congress in October is also under way
Herald van der Linde*, CFA

The baby and the bathwater. Investors are too bearish about China stocks – we think the baby
Head of Equity Strategy, Asia is being thrown out with the bathwater. Yes, China is struggling with growth and a stronger USD
Pacific
The Hongkong and Shanghai is not good news for China’s stock markets. But that’s now well-known and is priced in. Even
good, blue chip stocks are now trading at attractive valuations.
heraldvanderlinde@hsbc.com.hk
+852 2996 6575
A new focus in 2022e. China is now beginning the run towards the 20th National Party
Michelle Kwok*
Head of Real Estate Research, Congress in late 2022. In the past, this has meant a focus on growth and markets have
Asia Pacific responded positively to this.
michellekwok@hsbc.com.hk
Earnings revert to the mean. Consensus is forecasting 12.5% sales growth in China in 2022e,
+852 2996 6918 down from 18.4% in 2021e. Based on the past decade, this is about average.
Nishu Singla*
Associate Portfolio exposure is very low. Mutual funds are significantly underweight China, both globally
Bangalore and regionally. This is particularly so in IT, as reflected in the weightings in retailing and media,
which are IT-dominated sectors.
*Employed by a non-US affiliate of HSBC
Securities (USA) Inc. and not registered/ Valuations are very low, too. On a PE basis, China is not expensive. It is trading at a 12-
qualified pursuant to FINRA regulations
month forward PE of 12.9x, down from as high as 17x at the beginning of the year. China has
never been this cheap versus India – FTSE India is now trading at a premium of 95% to China,
a record high.
Earnings
The market is worried that Chinese earnings in 2021e and 2022e will face downgrades on the
back of pricing pressure. After all, raw material prices have risen considerably. While true, not
all sectors are intensive users of metals or other commodities. For example, Internet, banks and
insurance companies don’t rely on iron or copper to run their businesses. Investors can skew
their portfolios to mitigate this particular risk.
In addition, industries have consolidated, which suggests that the survivors have much more
pricing power. This is in particularly the case for shipping and airlines, but also for heavy duty
trucks and selected technology companies.
Margins in China are forecast to rise, although this could be an optimistic assumption because
of the risk of earnings forecasts being downgraded.
24
February 2022
FTSE India is now trading at a record premium to China
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
FTSE India premium to China (12m PE) Avg +/- Stdev
Source: FTSE Russell, FactSet, HSBC
Chinese equities tend to rise three months (-3m) prior to a National Party Congress
130
120
110
100
90
80
70
60
-18m -12m -9m -6m -3m -1m t=0 +1m +3m +6m +9m +12m +18m
FTSE China- 2012 FTSE China- 2017 FTSE China- 2022
ROEs in Asia expected to rise through … with China’s expected to be 12.4% in

2022e … 2022e
20 25 %
18
16 20
14
12 15
10
8 10
6
4 5
2
0 0
94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 98 00 02 04 06 08 10 12 14 16 18 20 22
estimated ROE ROE Estimated ROE ROE
Source: Bloomberg, HSBC estimates Source: Bloomberg, HSBC estimates
For the full report, see The Flying Dutchman – Upgrade China to overweight, 26 October 2021.
25
February 2022
Full page image to come: Image:

EV car charging
26
February 2022
By 2030
we think nearly 60% of
the passenger cars
on the road in China will be
electric powered,
up from 17% in 2021.
27
February 2022
ESG and climate policy
 China should solidify its 30/60 climate pledge in the coming years as
relevant policies in relevant sectors trickle through the system
 The trading price and volumes in the national ETS could go up as
the coverage is reviewed and carbon derivatives are considered
 We think discussions over methane, biodiversity, air pollution and
corporate governance will grow alongside climate actions
Wai-Shin Chan, CFA

Green priorities and political planning. In 2022, China should steadily release policies
Head, Climate Change Centre; favourable to its “30/60” strategy (peak emissions by 2030 and carbon neutrality by 2060). Two
Head, ESG Research
The Hongkong and Shanghai main events to look out for:
wai.shin.chan@hsbc.com.hk 1) The National People’s Congress meeting in March, where a trickle of green economic
+852 2822 4870
policies may be laid out with a view to bringing in climate and the environment as a growth
Polo Heung
Associate, ESG Research
driver for the economy.
Banking Corporation Limited 2) The 20th Party Congress in October/November when President Xi is widely expected to
polo.heung@hsbc.com.hk
be installed as president for a third term (or perhaps even longer). Setting out a
+852 2914 9861
transformative change in China’s economic and social development – in a green and more
Amy Tyler
ESG Analyst “sustainable” direction – could form part of Xi’s legacy, hence it will become a growing
HSBC Bank plc priority for planners in China.
amy.frances.tyler@hsbc.com
+44 20 3359 4059
Methane. China emphasised methane reduction as a significant part in its “30/60” target in its
Tarek Soliman*, CFA
Analyst
14th Five-year Plan and the Working Guidance on Carbon Peak and Neutrality by the State
HSBC Bank plc Council. As stated in the China-US joint declaration on climate action, China commits to control
tarek.soliman@hsbc.com
+44 20 3268 5528
and reduce methane emissions and develop a national methane emissions reduction plan. We
think the action plan should be released in 2022, with potential regulations and/or initiatives
*Employed by a non-US affiliate of HSBC likely to be imposed on the biggest methane emitters in China – energy and waste
Securities (USA) Inc. and not registered/ management.
ETS enhancements. There are potential revisions to China’s national emissions trading
scheme (ETS) which launched last year. We expect more announcements on the extension of
China’s methane emissions
coverage and participants (including non-emitting industries and financial institutions). The ETS
reduction action plan is only covers the power sector at the moment, but the Shanghai Environment Energy Exchange
expected to be released soon has indicated a plan to expand the coverage to non-ferrous metals and building materials
sectors in 2022. Discussions over auctions (vs free allocation) and the potential resumption of
Non-ferrous metals and the Chinese Certified Emissions Reduction registry will also continue this year.
building materials are likely
Carbon derivatives. The “Guiding Opinions on Promoting Industrial Green Development”,
to be included in the national
ETS in 2022 released in November 2021, mentioned the development of a carbon futures market on the
Guangzhou Futures Exchange. Carbon derivatives could potentially provide more liquidity and
stabilise the volatility of China’s carbon markets. There is no official timeframe but we anticipate
progress to be made in this area in 2022.
28
February 2022
China’s emission allowance price China’s national ETS trading volume
Source: Refinitiv, HSBC Source: Refinitiv, Shanghai Environment and Energy Exchange, HSBC
Biodiversity. As the host of the upcoming UN Biodiversity Conference (COP15), biodiversity

China is hosting Biodiversity
COP15 in April 2022
conservation and restoration are expected to be high on China’s agenda in 2022. According to
the Opinions on Further Strengthening Biodiversity Conservation issued by the State Council,
China will develop a 10-year national biodiversity conservation strategic plan and require provincial
governments to include biodiversity in their development plans. We believe private companies and
investors will not be required to develop biodiversity targets and plans over the short term
however. The anticipated jump in awareness means investors and companies may prepare for
potential regulations which might affect longer-term profitability and/or business models.
4-20
February
The Winter Olympics – air pollution curbs
likely to begin in the weeks prior
Air pollution. We think air pollution could re-emerge as a focus in China in 2022, especially as
Factories near Beijing might
face mandatory shutdowns in
corporates might face potential mandatory shutdowns in early 2022 to curb pollution levels for
early 2022 the Beijing Winter Olympics (4-20 February 2022). When China hosted the Summer Olympics in
2008 and the Asia-Pacific Economic Cooperation forum in 2014, many factories nearby were
forced to close for ‘blue skies’. In October 2021, the Ministry of Ecology and Environment
released an Action Plan for Air Pollution Management in winter 2021/22 (1 October 2021 to
31 March 2022). The regulator extended the pollution target coverage from Beijing-Tianjin-
Hebei region (28 cities) to Henan and Shanxi regions (64 cities), which are the major steel and
aluminium manufacturing hubs.
Corporate governance. Investors should also be aware of corporate governance

China is improving its
corporate governance
developments in China this year. In late 2021, the Shanghai Stock Exchange and Shenzhen
practices Stock Exchange proposed updates to their respective listing rules. The proposals include a new
“corporate governance” section which clarifies disclosure and other requirements as well as
asks companies to “develop and disclosure social responsibility report and relevant documents
based on the regulations”.
For the full report, see The climate in 2022, 4 January 2022, and ESG in 2022, 5 January 2022.
29
February 2022
ESG Integrated: Utilities –

From “unloved” to winners
 Asia utilities, such as mainland China power producers, are at the

Evan Li*
Head, Asia Utilities &
Conglomerates Research
forefront of ESG and have been rewarded by investors
Banking Corporation Limited  We believe the greatest possible upside from here is focusing on
evan.m.h.li@hsbc.com.hk
+852 2996 6619 underappreciated transition efforts
Thomas C. Hilboldt*, CFA
Head of ESG Integration -  It’s not just about environmental efforts, as we find social and
Equities, Asia Pacific
The Hongkong and Shanghai governance factors are increasingly impacting valuations
thomaschilboldt@hsbc.com.hk
+852 2822 2922
Wai-Shin Chan, CFA

Head, Climate Change Centre;
Head, ESG Research
The Hongkong and Shanghai If you care about ESG, start here: ESG matters more to Asia’s utilities, especially China’s
wai.shin.chan@hsbc.com.hk power producers, than to most other sectors. It is not hard to see why. Power and gas
+852 2822 4870
distribution in the region is responsible for 60% of global primary energy consumption and 40%
Daniel Yang* of global carbon emissions. However, the really exciting part is how investors are rewarding
Analyst, Utilities &
Conglomerates companies leading the journey towards net carbon emissions. For instance, Asia’s renewable
Banking Corporation Limited energy stocks, which include many focused on China, have surged over 200% against their
daniel.h.yang@hsbc.com.hk respective indices in the past two years. We don’t believe the rally is over as we see more
+852 299 66976
possible upside as governments’ emission policies become more specific and stronger.
Yushin Park*
Analyst, Korea Industrials &
Utilities
Leading the energy transition: One of the biggest shifts in ESG investing relates to mainland
The Hongkong and Shanghai China’s power producers. They used to be perceived as “unloved” due to their coal exposure
Banking Corporation Limited, Seoul
Securities Branch but are now benefiting from investment plans, which are increasingly geared to renewables.
yushin.park@kr.hsbc.com Their share prices have risen more than 100% over the last 18 months compared with the HSI’s
+82 2 3706 8756
3% decline over the same period.
Rahul Bhatia*, CFA
Analyst
The Hongkong and Shanghai It’s also about “S” and “G”: Undoubtedly, utilities are far more transparent now about non-
Banking Corporation Limited, financial data, such as safety standards and ethics, and unsurprisingly prioritise environmental
Singapore Branch
rahul1.bhatia@hsbc.com.sg ambitions. However, what can easily be missed is that those that have demonstrated efforts in
+65 6658 0623
managing social and governance factors have enjoyed a share price outperformance of over
Wilson Ling* 10% against peers.
Analyst, Conglomerates &
Utilities
The Hongkong and Shanghai Our message in utilities ESG investment. We believe renewable companies, especially pure
Banking Corporation Limited plays, will be most favoured over the long term. As clearer targets and policies towards carbon
wilson.s.l.ling@hsbc.com.hk
+852 2914 9575 neutrality are unveiled in the coming decades, the declining cost of renewable energy and
Yonghua Park*, CFA advancements in technology, including energy storage, mean we expect strong investment
Associate, Asia-Pacific Oil & Gas,
and Chemicals
appetite for renewables. Still, risks in the equipment manufacturing supply chain could arise
The Hongkong and Shanghai from volatility in the demand-supply balance, in our view.
yonghua.park@hsbc.com.hk
+852 3941 7005

Securities (USA) Inc. and not registered/
30
February 2022
Global emissions by sector Mainland China emissions by sector

Power
Coal power
Steel
Gas power
9%
5% Cement
8%
Oil power 29% 7%
Aluminium
Transport 23% 11%
45%
Petrochemical
Industry 9% 4%
2% Coal chemical 5%
1%
Buildings 23% 5%
Transportation 14%
Others
Buildings
Others
Source: IEA. Note: As at 2020. Source:Taipanfgang.com. Note: As at 2020.
CO2 emissions by power source Mainland China and other Asia Pacific
economies account for more than 50% of
global carbon emissions
900 820
800 730
700
600 490
500 China 31%
g/kWh
400 Other APAC 48%

300 230 RoW
200 21%
100 48
12 11 11
0
Solar
Gas
Oil
Wind
Coal
Biomass
Nuclear
Hydro
Source: IPCC, IEA, World Energy Council, IAEA, Nuclear Energy Agency Source: BP Statistical Review. Note: As at 2020.
Wind and solar sector share price performance relative to equity indices
500
400
300
200
100
-
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22
Solar sector (H-shares) rel. performance to HSI Solar sector (A-shares) rel. performance to SHCOMP
Wind sector rel. performance to HSI
Source: Refinitiv Datastream, HSBC estimates
For the full report, see Asia Utilities – ESG Integrated: From “unloved” to winners, 12 January
2022.
31
February 2022
Automation: Gear up for

growth
 We turn more bullish on China’s automation sector and see industrial

robots and customised automation solutions as the top growth areas
 Domestic leaders are catching up with international players with their
market share at home set to rise to 50% in 2025e from 30% now …
 … and have caught up with their global peers in terms of R&D and
ROE, but overseas exposure remains low
Corey Chan* We cover three major topics. First, we are turning even more bullish on China’s automation
Reg. No. S1700518100001) sector. Second, the idea that robots are taking over factory floors is a fairly well-known theme so
Head, A-share Infrastructure &
Renewables Research we throw the debate forward by looking at whether China’s automation leaders can dominate at
HSBC Qianhai Securities Limited home, as well as compete on the global stage? Third, given many of these stocks have had a
corey.chan@hsbcqh.com.cn
+86 21 6081 3801 great run and are well owned, we look closely at how to play this theme.
Dun Wang*
Reg. No. S1700519060002)
1. Doubling our forecasts: We now see China’s automation sector growing 20% in 2021e from
Analyst, A-share Infrastructure & 10% previously, and a further 10% in 2022e from 5% before. The pandemic and China’s
Renewables
HSBC Qianhai Securities Limited push for smart manufacturing has been a tailwind for some time, but what’s changed has
dun.wang@hsbcqh.com.cn been robust order momentum. We see two sectors outperforming the market: industrial
+86 21 6081 3827
robot sales and customised automation solutions.
Amy Hu*
Reg. No. S1700520090001)
Analyst, A-share Industrials &
2. Can China’s leaders dominate at home and then go global? We see a strong case for
Environmental China’s domestic robot makers to increase their market share at home from c30% in 2020
HSBC Qianhai Securities Limited
ruo.lin.hu@hsbcqh.com.cn to c50% in 2025e, and even start to challenge overseas players abroad too. The
+86 755 8898 3408 advantages of China’s automation leaders are that they have lower costs, are faster to
react to changing market conditions locally, and can produce customised offerings. As a
case study, we look to the domestic excavator market where the share of local leaders rose
qualified pursuant to FINRA regulations from c30% to c70% over the past decade on similar drivers.
3. How to invest? We have a differentiated view. The automation market trades at a discount
as it is widely seen as a cyclical industry. However, we believe it is becoming more secular
given labour shortages are leading to rising demand from an increasing number of
industries while manufacturing facilities are being upgraded. That drives our forecast for
higher valuation multiples.
32
February 2022
China’s automation sector trades at a discount to other growth sectors like

semiconductors …
250 PE
200
150
100
50
0
2014-02-28 2015-04-24 2016-06-24 2017-08-25 2018-11-02 2020-01-03 2021-03-05
A-share Industrial Control Automation Index A-share Semiconductor Index
Source: Bloomberg, Wind, HSBC Qianhai Securities
… but we see that changing as the automation industry becomes less cyclical
RMBbn
350 30%
Thousands
300 25%
20%
250 20%
15%
200 10%
150 5% 5% 5% 10%
5%
100 0%
50 -5%
- -10%
2005 2007 2009 2011 2013 2015 2017 2019 2021e 2023e 2025e
China industrial automation market YoY (RHS)
Source: MIR, Bloomberg, HSBC Qianhai Securities estimates
Sales of China’s industrial robots in 2010 … but by 2020 sales have become far
were mostly to heavy industries … more diverse
Medical
2% Others Auto
Others 7% 9%
Home
16% appliance
Food and
5% Solar Auto parts
beverage
LIB 4% 14%
1% 6%
Plastics
and Food and
beverage Auto
chemicals Auto
electronics
10% 50% 6%
Plastics and 5%
chemicals
Metal
processing 1%
10% Metal
processing 3C and
3C and 13%
electronics electronics
13% 28%
Source: MIR, Bloomberg, HSBC Qianhai Securities Source: MIR, Bloomberg, HSBC Qianhai Securities
For the full report, see Spotlight – China Automation: Gear up for growth, 2 July 2021.
33
February 2022

Shopper looking at shelf
34
February 2022
Demographic changes as
the country ages create
opportunities in consumer
markets – the she-economy,
silver dollars, and Generation Z.
35
February 2022
Consumer: Silver dollars, the

she-economy, Gen-Z style
 Demographic changes are shaking up China’s consumer market

 We highlight the opportunities created by the latest trends …
 … and introduce a “3S” investment framework: silver dollars, the
she-economy, and style differentiation by Generation Z
Katharine Song*
China’s latest national census makes interesting reading for investors who keep a keen eye on
Reg. No. S1700517120001) the country’s consumer market. While it confirms trends that are well understood – China is
Head of A-share Consumer
Research ageing as population growth slows – the data also reveal growth opportunities in a number of
HSBC Qianhai Securities Limited areas as the structure of the population changes. This report introduces a “3S” investment
kathy.l.h.song@hsbcqh.com.cn
+86 21 6081 3807 framework – silver dollars, she-economy, and style differentiation by Generation Z – that
Li Quan* supports our view that premiumisation will only accelerate as more consumers spend more
Reg. No. S1700520030002) money on higher quality products.
Analyst, A-Share Consumer
Sector
HSBC Qianhai Securities Limited Silver dollars
li.quan@hsbcqh.com.cn China’s growing elderly population generally has money to spend and plenty of time to spend it.
+86 755 8898 3471
Having saved for their retirement, we think they will travel further and more often. This health
conscious group is also eating and drinking better quality food and drink, so demand for dairy
Securities (USA) Inc. and not registered/ products that offer additional nutrition is rising. The elderly also need professional care
services as young people now have less time to look after their parents.
She-economy
Many women in China work, giving them an independent source of income and, in turn,
boosting discretionary spending. Cosmetics, along with beauty products and treatments,
are driving the she-economy. What’s more, traditionally male-focused industries are now
developing products to cater to the emerging needs of female customers; for example, the beer
industry is developing drinks that appeal to the female palate. Although the overall birth rate is
falling, the market for mothers and babies is actually growing because parents are willing to pay
a premium for better quality products, such as infant milk formula.
Style differentiation by Generation Z

New generation, new mind-set. Young people have a different set of consumer needs and
wants. They want convenience and ready-to-cook dishes and use fresh food e-commerce to
save time and money. They want to try new things and livestreaming and social e-commerce
are high on the agenda. They like electric vehicles, too and, as more of them live alone, the
latest high-tech home appliances are needed. They also favour domestic brands, which is
good news for the sales of cosmetics and sports clothes. In many sectors, we see Generation
Z – those born over 1995-2010 – as the most important consumer group over the next decade.
36
February 2022
New realities and fresh opportunities
HSBC Global Research has done extensive research into the demographic changes taking
China is ageing as population
growth slows and the birth
place across Asia. We now narrow the focus to look at what the latest national census data can
rate falls tell us about China’s sprawling consumer market. Some important trends – China is ageing as
population growth slows and the birth rate falls – are well flagged and are broadly interpreted as
being negative for the economy. This report drills down further to assess the opportunities that
these changes in the structure of China’s population are creating.
Let’s start with the increase in live expectancy due to higher living standards and better health
care. This means that the number of elderly people who pack an increasingly “powerful punch”
in important parts of the consumer market is on the rise. The result? The growth of the “silver
dollar” economy, the first element of our “3S” investment framework.
However, the accumulation of wealth is a process that takes place over time, linking the ageing
trend to another powerful demographic force – China’s wealthy “empty nesters” aged between
40 and 64. These are generally dual income households where the expensive burden of child-
raising either no longer exists or is about to be eased. For both spouses, it is time to spend
more on themselves, with the emphasis on the better things in life.
To us, one statistic based on HSBC research stands out – the number of empty nesters in
The number of empty nesters
with an annual household
China with an annual household income over USD50,000 nearly doubled in 2015-20. By 2033
income over USD50,000 this group will likely grow to over 83m, surpassing the number in the US. In our view, few groups
nearly doubled in 2015-20 of customers anywhere in the world can flex as much “muscle” as China’s empty nesters. And
remember, more members of this group move on to join the silver dollar cohort every year.
To the free-spending elderly and middle class we can add two other important demographic
forces to the new consumer mix: women and young people. China has one of the highest
female labour participation rates in the world (according to the World Bank), allowing more
women to become more economically independent. This has significant implications for
consumer spending: the “she-economy”, the second part of our framework. At the same time,
Generation Z – those born in 1995-2010 – are also starting to make their mark. They tend to be
well educated, tech savvy and have a strong desire to differentiate themselves.
The number of wealthy empty nesters in China to surpass the number in the US in 2033e
120
population aged 40-64 with annual household income over USD50,000
100
80
Million persons
60
40
20
0
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044
China Japan United States of America United Kingdom
Source: Global Demographics, HSBC Qianhai Securities
This is our latest report on the demographics theme. If you want to subscribe to any of
our nine big themes, click here.
For the full report, see China Consumer – Silver dollars, the she-economy, Gen-Z style,
15 September 2021.
37
February 2022
Electric Vehicles: Taking it up

a notch
 Demand for EVs continues to surprise on the upside …

 … with strong buying in the mass market where they offer value …
 … and in the premium market too on better content offerings
Yuqian Ding* We believe more drivers in China will increasingly switch to buying electric vehicles as their
Reg. No. S1700519090001) quality increases and due to the improving ownership costs. Generation Z will likely be the
Head of A-share Auto Research
HSBC Qianhai Securities Limited biggest car buying group for the coming decade as they are particularly open to owning an EV
yuqian.ding@hsbcqh.com.cn (see China Autos: China Electric Vehicle: Popularity of EVs continues to drive industry growth,
+86 10 5795 2350
9 July 2021). And from the supply side, we believe EVs are the way forward for most original
equipment manufacturers (OEMs) and remain the focus of R&D investment and capex. As a
Securities (USA) Inc. and not registered/ result, our 2025e and 2030e EV penetration estimates are 31% and 59%, up from 17% in
August 2021.
Still, we don’t rule out the shift to EVs happening even faster. EV conversion and adoption are
increasing rapidly, there are more young adults inclined to buy EVs, and the cost of EVs is
becoming more attractive. China is likely to reach so-called cost parity (where an EV costs the
same as a similar petrol-powered car) ahead of other markets, given its globally competitive
battery value chain and market scale. In our updated bull case scenario, our EV passenger car
penetration estimates for 2025e and 2030e increase to 42% and 89%.
Potential medium- to long-term catalysts

 Continuous m-o-m growth momentum in the coming months on strong consumer
conversion and adoption
 Supportive government policies such as more charging facilities and fewer restrictions on
daily usage
Potential industry risks

 Uncertainty on the subsidy cap at 2m units per annum. If there are no subsidies on cars
above 2m units, then there might mean be a negative impact on EV new car sales.
 Potential prolonged auto chips shortage that disrupts sales volumes. Despite the easing
auto chip supply in September and EVs getting relatively priority by OEMs’ chip allocations
as opposed to conventional petrol-powered cars, we believe a potentially prolonged auto
chip shortage disruption may pressure EV sales volumes in China.
38
February 2022
Our NEV sales estimates

12,000,000 130%
117%
120%
110%
10,000,000
100%
90%
8,000,000 80%
8% 70%
62% 60%
6,000,000 53% 53%
37% 50%
28% 24% 40%
4,000,000 19% 30%
-4.0%
20%
10%
2,000,000
0%
-10%
- -20%
2013 2014 2015 2016 2017 2018 2019 2020 2021e 2022e 2023e 2024e 2025e
NEV (incl. PV/CV) volume Govt. target
est. Compliance rerquired NEV (PV) volume Higher scenario (PV/CV)
y-o-y growth (RHS)
Source: IHS, HSBC Qianhai Securities estimates
Our overall market volume growth estimates for 2021-23e: +1%, +3% and +3%
30,000,000 80%
68% 70%
25,000,000 64%
60%
51% 50%
20,000,000
40%
32% 35%
15,000,000 30%
23% 23% 23% 20%
19% 18%
10,000,000 13% 12%9% 3.0% 10%
8% 9% 8%
4% 1.0%
5,000,000 -3% 0%
-6.6% 3.0%
-8.9% -10%
- -20%
2022e
2021e
2023e
2001
2003
2005
2008
2010
2012
2015
2017
2019
2000
2002
2004
2006
2007
2009
2011
2013
2014
2016
2018
2020
China car sales volume y-o-y growth
Source: IHS, HSBC Qianhai Securities estimates
Our 2025e and 2030e EV penetration estimates

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2018 2019 2020 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e
China NEV (passenger vehicle) penetration Previous est. Bull case senario
Source: CPCA, HSBC Qianhai Securities estimates
For the full report, see China Electric Vehicles – Take it up a notch, 24 September 2021.
39
February 2022
Internet: A new playbook
 A fresh look at China Internet amid the regulatory crackdown

 E-commerce and online games offer the best risk-reward
 We incorporate ESG factors and a regulatory risk premium
Charlene Liu*
Regulations and their repercussions …
Head of Internet and Gaming
Research, Asia Pacific
The Hongkong and Shanghai To understand the changed landscape for China Internet, we first examine key regulatory areas
Banking Corporation Limited, – from the anti-monopoly drive to the increasing protection of minors – and detail how we factor
Singapore Branch
charlene.r.liu@hsbc.com.sg all of this in to our coverage.
+65 6658 0615
Regulations will likely dent earnings through higher costs and lower revenue. On costs:
*Employed by a non-US affiliate of HSBC increased investment will be needed to monitor content and secure data, and wages will also
Securities (USA) Inc. and not registered/ rise. On revenue: there will be a lower take-rate due to efforts to better support smaller
merchants and small- and medium-size enterprises (SMEs); there is also likely to be less
revenue from advertising, subscriptions and minors, and Internet company will have to share
The main earnings impact
more revenue with content creators.
from the new Internet
landscape – higher costs and Still, some may benefit. The dominance by leading companies is easing, helping smaller and
lower revenue new platforms. Meanwhile, the increased emphasis on data security may lead to higher growth
in the cloud business. Video and online music platforms will likely also enjoy reduced content
costs with lower artist fees and a ban on exclusivity agreements.
Risks and impact of different regulatory aspects

e-commerce/food delivery Social/online ads Online game Video Live streaming Online music FinTech
Higher revenue sharing with content PBoC will start
Anti-monopoly Flat to lower take-rate
creators investigation
Higher cost due to more hiring, purchases of software and upgrading technology
Data security Higher demand for security PaaS and SaaS
Future listing overseas could get harder
Lower take-rate
Higher rider costs
Social fairness for SME
Higher investment in agriculture
merchants
Higher cost related to content auditing and technology to filter information
Content censorship
Weaker subscription and advertising revenue
Less revenue Less revenue Less revenue Lower Lower revenue
Lower advertising
User & minor protection Lower advertising revenue contribution from contribution from contribution from advertising from student
revenue
minors minors minors revenue loans
Lower content Lower content
Positive impact
cost cost
Note: The darker the colour, the higher the sub-sector risk.
Source: HSBC
40
February 2022
… and three other key variables
1) Where could regulations go next?

We have yet to see regulations targeting short video platforms despite this type of content
becoming popular and taking up about a third of time spent on the Internet by users (versus a
fifth for instant messaging). More protection of minors and further content censorship could also
be areas where we may see more regulatory attention. We have factored in higher content
auditing costs for short video platforms to partly account for this risk.
2) Economic slowdown
Retail spending is slowing down, exacerbated by concerns about unemployment, slowing wage
growth and uncertainty around the property market. As a result, we factor in slower online
transactions, including spending on retail, services and entertainment, into our numbers.
3) A potential tax rate hike to 25%

For years, China’s Internet industry has enjoyed tax breaks. We believe this will start to change,
however, as we see the government already revising up requirements for certain tax incentives.
The 15% tax rate for companies provides some buffer for our covered stocks. That said, we do
see a potential tax hike to 25% in the longer term, as the Chinese government shifts its support
more towards innovative industries such as integrated circuits (IC) and artificial intelligence (AI).
Finding the winners
We rank the sub-sectors; e- Having taken into account regulatory and non-regulatory changes into our models, we next
commerce, online game and identify which sub-sectors will likely outperform. We use three key metrics – revenue growth,
short video come out on top
margins and balance sheet liquidity – and score the sub-sectors on a scale of 1 to 5, with 5
being the best score. After that we apply a discount to factor in potential regulatory risks. e-
commerce ranks first, followed by online game and social video platforms (including short and
mid videos). Live streaming and long video platforms score among the lowest.
Scorecard for China Internet sector

E-commerce Social video Social
Online games Online music Long video Live streaming
/Food delivery platforms / Online ads
User growth potential 2 1 3 1 1 1 1
Topline ARPU growth 2 2 3 2 2 2 1
Overseas 3 4 3 1 1 1 2
OP leverage 3 2 3 1 2 3 1
Margin
Competition 1 3 2 2 2 3 1
Liquidity Liquidity 4 4 4 4 4 1 4
Potential regulatory discount 10% 20% 30% 10% 20% 15% 20%
Total score given regulation uncertainty 13.5 12.8 12.6 9.9 9.6 9.4 8.0
Note: Social video platforms include short video player, Kuaishou and mid video player Bili. Source: HSBC
Incorporating ESG into both our financials and valuations
Where ESG issues are quantifiable and weigh on company financials – such as minimum wage
requirements, social insurance and green bonds – we factor them into our financial models.
For qualitative ESG factors – like greenhouse gas emissions (E), job creation (S) and board
member diversity (G) – we include them in our evaluation framework, which drives our
evaluation approach and changes to terminal growth rates.
For the full report, see Spotlight – China Internet: A new playbook, 19 October 2021.
41
February 2022
Virtual Reality: Hitting its

stride
 Virtual reality is finally taking off after years of false starts as

headsets improve, prices fall and more content becomes available
 We’re more bullish than the market on sales as we expect social
networking via the metaverse to beat expectations …
 … and detail the technologies and opportunities all across the supply
chain including the displays, lenses, optics and cameras
Frank He* The tech industry hopes virtual reality (VR) will become the next category killer after the PC and
Reg. No. S1700517120005) smartphone. Just take a look at Facebook changing its name to Meta. Of course, we’ve been
Head of A-share Technology
Hardware Research here before, but this time we really do see signs that sales are finally taking off. Headsets are
HSBC Qianhai Securities Limited getting better, prices are falling and there’s an increasing amount of content available along with
frank.fang.he@hsbcqh.com.cn
+86 21 6081 3809 other innovations. The result is we believe the industry is set to be the next multibillion-dollar
market in the next two to three years.
Securities (USA) Inc. and not registered/ Why now? Facebook’s latest virtual reality headset, the Oculus Quest 2, has been a
blockbuster. We expect sales to hit 8m in 2021e, creating a critical mass and triggering more
interest in the industry, not just from consumers but content creators too. The cost is just
USD299 vs USD400-800 for competitors. Others are also reportedly planning new launches,
including Apple and an update to Sony’s PlayStation VR headset. While previous VR headsets
had a poor user experience and a lacking ecosystem, many of these problems are now solved
or significantly improved.
How are we different? Like everyone, we expect more successful game launches to attract
more players. But we also see new pillars of growth including fitness apps as well as social
networking, aka the metaverse. We forecast VR shipments to grow from 5.6m in 2020 to 50m in
2025e, much higher than IDC’s latest estimates of 28.6m by 2025e published in June 2021. And
while we believe augmented reality (AR) is still a few years behind VR, in the long run, we
believe lower-cost smartphones or PC-tethered AR devices will be the mainstream AR for the
consumer market and will boost demand. We foresee the total VR market size growing
exponentially to about cUSD45bn in 2030e, representing a CAGR of c30% in 2021-30e.
Where are the opportunities? In this report, we identify four major areas where we see
opportunities for major supply chain players: (1) displays, whose resolutions are improving as
well as their speed, providing a vivid immersive experience for users; (2) Fresnel lenses (named
after a French physicist) which reduce the weight, thickness and cost of a VR device − though
the manufacturing process is still in flux; (3) waveguide optics, which guide optical waves from
the display panel to human eyes; and (4) cameras, where we believe the number per device will
rise as more functions like eye tracking are introduced.
42
February 2022
Turning a multibillion-dollar market into reality

VR is expanding its footprint from gaming to the office, fitness and social networking
China is rolling out policies and guidelines to encourage technology innovation and target the huge opportunities in virtual reality applications,
hardware and software. We forecast the total VR market size to grow exponentially to cUSD45bn in 2030e
VR market size (USD)

30.2bn
15%
47% 25% 74%
CAGR 2021-30e
9.0bn
4.4bn
2.6bn 964m 1bn
597m 7m
2021e 2030e 2021e 2030e 2021e 2030e 2021e 2030e
Gaming Socialising Fitness Commercial

VR headsets could take a larger Social networking VR Smartwatch customers are VR can be used commercially too,
piece of the gaming market, well applications will represent c70% embracing VR given the including for education, healthcare,
beyond the size of consoles of total VR demand by 2030e home-fitness apps on offer and the industrials sector
Breaking down the VR headset: component supply chain and opportunities

Critical technology components Shipment (units) and
market size forecast (USD)
Camera / sensor: Simultaneous localization and mapping
Eye-tracking infrared camera
(SLAM) offers millimeter-level positional tracking. Adoption of
Shipment 2025e 2030e
infrared cameras to improve eye-tracking is imminent
VR 165m 705m
AR 9m 83m
Powerful application processor:
Market size
Qualcomm XR2 chip dominates headsets,
VR 509m 1.7bn
with XR3 and XR4 chips likely to come
AR 77m 380m
Display: Fast-LCD and micro-OLED SLAM camera

technology are popular, with micro-LED Shipment 2025e 2030e
showing promise too VR 201m 1.0bn
AR 20m 99m
Optics: Fresnel lenses are Market size
currently used but pancake VR 480m 2.1bn
folding lens and waveguide AR 102m 361m
are emerging as future
technology
Fast-LCD for VR and VR-type MR
2025e 2030e
Shipment 41m 137m
Market size 1.9bn 6.1bn
Fresnel lens in VR and VR-type MR Micro-OLED for VR, AR and MR

2025e 2030e 2025e 2030e
Shipment 91m 321m Shipment 21m 61m
Market size 602m 1.9bn Market size 2.0bn 5.2bn
VR visual system: Should
provide an adequate ‘field of Waveguide for AR and AR-type MR
view’ and render images with 2025e 2030e
matched depth and high Shipment 27m 68m
resolution Market size 3.7bn 7.1bn
Note: Fast-LCD display technology has a faster response time, a higher resolution and a cheaper cost. Micro-OLED is a type of microdisplay. MR is mixed reality
Source: Company data, HSBC Qianhai Securities estimates
For the full report, see Spotlight – Virtual Reality, Hitting its stride, 4 November 2021.
43
February 2022
44
February 2022
Our China coverage:

Depth, breadth, and big ideas
– Macro
45
February 2022
Economics: Stepping up
targeted easing
 Monetary and fiscal policy to be selectively eased to shore up growth

 Our full-year forecasts for 2022 and 2023 remain unchanged at 5.6%
and 5.8%, respectively
 Beijing is likely to boost public spending on technology, green and
new infrastructure
Qu Hongbin A slowing property sector, continued uncertainty from COVID-19, and electricity shortages are
Co-Head Asian Econ Research, putting pressure on the economy. We expect GDP growth to slow to 3.6% y-o-y in Q4 (vs our
The Hongkong and Shanghai previous projection of 4.6%, which will drag down full-year GDP for 2021 to 8.0% from our
previous forecast of 8.3%). This sharper-than-expected slowdown is raising labour market
+852 2822 2025 pressure and prompting Beijing to take more decisive action in easing both monetary and fiscal
Jing Liu policies selectively to shore up growth.
The Hongkong and Shanghai Following the latest cut in the required reserve ratio (RRR), we expect the central bank to take
jing.econ.liu@hsbc.com.hk more steps towards increasing credit support to higher end manufacturing, green projects and
+852 3941 0063 other targeted sectors. Meanwhile, Beijing is also likely to boost public spending on technology,
Jingyang Chen green and new infrastructure, and offer more generous tax incentives for corporates to upgrade
The Hongkong and Shanghai their technologies. This should help offset the growth headwinds and engineer a modest
Banking Corporation Limited recovery in GDP growth starting from Q2 2022 (see China in 2022, 16 December 2021). Our
+852 2996 6558 full-year forecasts for 2022 and 2023 remain unchanged at 5.6% and 5.8%, respectively.
Erin Xin
Policymakers have begun to fine-tune their property policy to allow housing demand for
The Hongkong and Shanghai accommodation (not the demand for investment) to still be met and to prevent a hard landing.
erin.y.xin@hsbc.com.hk However, their purpose is not to engineer a strong rebound in the property sector to support
+852 2996 6975 economic growth. Instead, they will likely increase policy support to technology development
Shanshan Song and industrial upgrading. Incentives for machinery upgrading, funding support for new
technologies, tax breaks for R&D spending, and relending facilities for manufacturing firms are
Banking Corporation Limited some of the measures we expect to be rolled out. This should add fuel to the ongoing upturn in
+86 10 5999 8234 capex in medium- and high-end manufacturing, which will likely rise by double-digit growth in
the next five years, making it a more important growth driver in the coming years.
Green investment is likely to be another driver of the recovery. The People’s Bank of China’s
(PBoC) recent decision to launch a new green relending tool, plus other concrete plans for
green financing, will likely kick start a new wave of green investment in China. We expect
Beijing will roll out sovereign green bonds amounting to RMB1trn, relending facilities at
preferential rates or loan guarantees for green investments, tax breaks for green investment,
and incentives to promote electrification and energy efficient processes. Investment in
renewable energy, grid system upgrading, and green technology is likely to surge by over 30%
pa in coming years.
46
February 2022
Policy issues
Beijing focused on de-risking and de-leveraging in 2021, where multiple sectors experienced
regulatory tightening. Going into 2022, regulations will likely continue, albeit in a more gradual
and transparent manner. With mounting downward pressure on economic growth, we expect
both monetary and fiscal policies to err on the loosening side, with fiscal policy to take the lead.
While the official budget deficit may stay at around 3.2% of GDP, we expect faster project
approvals and more directives for funding to flow towards new infrastructure like 5G stations
and EV infrastructure, as well as a likely step-up in the issuance quota to RMB4trn in special
local government bonds with front-loading of RMB2.2trn. Meanwhile, we expect up to RMB1trn
of green sovereign bond issuance in 2022 (see China easing, 17 November). More funding
support for manufacturing investment and core technologies, as well as tax breaks for R&D
spending and green investment, are also likely to be rolled out.
We expect a modest pickup in total social financing growth Monetary easing will likely focus on
quantity as opposed to price tools: We expect no change in the one-year LPR at 3.85%, which
is roughly in line with the natural LPR rate estimated by the PBoC and BIS. We expect two
broad-based RRR cuts totalling 100bp to help provide liquidity support in 2022. Moreover, the
central bank will increasingly rely on green and SME relending facilities to guide credit towards
targeted sectors, such as higher end manufacturing, green projects and SMEs. While the US
Fed is expected to start hiking next year, the PBoC will not be constrained by this, particularly
given the outlook of muted CPI inflation. In all, we expect a modest pickup in total social
financing growth from an expected 10.3% at end-2021 to 11.3% in 2022. The looser monetary
conditions may reverse the trend of a falling macro-leverage ratio, yet the distribution of
financing will be adjusted to facilitate more long-term quality and inclusive development while
mitigating macro-financial risk.
Risks
Risks to our forecasts are balanced. Downside risks are led by the management of defaulting
property developers and spill-over effects, including the impact on local government balance
sheets resulting from reduced land sale revenues. That said, should Beijing lend swifter policy
support, such as stepping up green investment and subsidising manufacturing upgrading
investment, capex spending in these two areas may improve more strongly than expected.
Key forecasts
4Q 20 1Q 21 2Q 21 3Q 21 4Q 21f 1Q 22f 2Q 22f 3Q 22f 4Q 22f 1Q 23f 2Q 23f
GDP (% y-o-y) 6.5 18.3 7.9 4.9 3.6 4.4 5.2 6.2 6.2 6.3 5.9
GDP sa (% q-o-q) 3.2 0.2 1.2 0.2 0.7 1.1 2.6 1.5 1.2 1.3 1.6
Industrial production* (% y-o-y) 7.1 24.5 9.0 4.9 3.3 3.6 4.9 5.9 6.1 5.8 5.4
CPI, (% q-o-q saar) -1.8 2.6 2.1 0.4 1.4 1.0 1.8 1.9 2.2 2.3 1.7
CPI, average (% y-o-y) 0.1 0.0 1.1 0.8 1.8 1.6 1.9 2.4 2.3 2.3 2.3
PPI, average (% y-o-y) -1.3 2.1 8.2 9.7 12.9 8.1 3.9 1.0 0.4 1.3 1.7
Exports, value (% y-o-y) 16.6 48.8 30.7 24.4 21.4 4.7 4.0 2.3 1.3 4.8 5.0
Imports, value (% y-o-y) 5.7 29.4 44.0 25.9 24.8 8.2 5.6 4.4 2.0 3.1 4.8
Trade balance (% GDP) 4.6 2.8 3.1 4.0 4.5 2.2 2.7 3.5 4.2 2.4 2.7
International reserves (USDbn) 3,216.5 3,170.0 3,214.0 3,200.6 3,258.9 3,404.6 3,327.5 3,327.5 3,353.4 3,404.6 3,327.5
Policy rate, end-quarter (%)** 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85 3.85
10yr lending rate, end-quarter (%) 3.14 3.19 3.09 2.87 2.70 2.60 2.60 2.80 3.00 3.10 3.20
RMB/USD, end-quarter 6.52 6.57 6.46 6.49 6.40 6.40 6.45 6.50 6.55 6.55 6.55
RMB/EUR, end-quarter 7.96 7.69 7.69 7.52 7.36 7.30 7.29 7.35 7.40 7.40 7.40
*Industrial production is the output of companies with annual sales over RMB20m. **Policy rate refers to one-year Loan Prime Rate (LPR)
Source: CEIC, HSBC forecasts. Note: n/a – not applicable/available, 1Q 2023 and 2Q 2023 FX numbers are assumptions and not forecasts.
For the full report, see Asian Economics – Ready for the next round, 17 December 2021.
47
February 2022
Economics: A switch-up in
investment
 Property investment has slowed sharply; policy fine-tuning is aimed

at cushioning the slowdown, not propping up the housing market
 Credit is moving away from the property sector to higher end
manufacturing, fuelling a pick-up in capex
 Combined with green investment, this rotation will not only pick up
the slack in the economy but also support productivity growth
Qu Hongbin While much of 2021 was consumed by property sector woes in China and the impact on the
Co-Head Asian Econ Research, wider economy, as we head in 2022 Beijing has started to fine tune its property lending policies
The Hongkong and Shanghai to cushion the slowdown. Regulators are now urging banks to clear up the backlog of mortgage
loan applications and resume lending to healthy developers. The government also appears to
+852 2822 2025 be preparing to encourage state-owned enterprises to buy projects from distressed developers.
Jing Liu This kind of policy fine-tuning has helped stabilise the overall financing conditions for the sector.
Senior Economist, Greater China October and November data suggest that the amount of new mortgages and developer loans
Banking Corporation Limited has started to recover sequentially. Net bond issuance by real estate developers saw a rebound
+852 3941 0063
in both sequential and year-on-year growth in November.
Jingyang Chen But this does not mean that the property sector is out of the woods yet:
The Hongkong and Shanghai  The overarching policy stance has remained hawkish for the sector with strict financing
jingyang.chen@hsbc.com.hk curbs in place such as the “Three Red Lines” policy;
+852 2996 6558
 Developers will face high offshore debt repayments in 2022 of around RMB356bn, with
Erin Xin
Economist, Greater China nearly RMB100bn in both Q1 and Q2; and
Banking Corporation Limited  The roll-out of property tax trials in more cities may put another dampener on property
+852 2996 6975 sales, which has been the largest funding source for developers. HSBC equity analysts
Shanshan Song expect a 5% contraction in property sales in both volumes and value in 2022.
The Hongkong and Shanghai Under these circumstances we expect property investment to trough in Q1, and the rebound to
shan.shan.song@hsbc.com.cn be gradual. On an annual basis, tight financing conditions together with a 5% contraction in
+86 10 5999 8234 property sales are likely to result in a contraction in floor space starts. Meanwhile, lacklustre land
transactions imply property investment will be weak. That’s because land transactions serve as
a good leading indicator for land purchases under property fixed asset investment (FAI) since
developers purchase land first and then make payments to the government in the following
months. Considering the leading indicator has been contracting on a y-o-y basis for about half a
year now, we expect land purchases to fall under property FAI in the coming months.
Having said that, Beijing’s priority to deliver pre-sold/under construction apartments will likely
support floor plan construction in 2022. We believe regulators will encourage healthy
developers to take over and complete unfinished construction from their distressed peers. We
48
February 2022
thus expect investment in property construction to maintain low single-digit growth in 2022.
Taking all these factors into consideration, we expect 0-2% growth in property investment in
2022, down substantially from c5.0% growth in 2021.
An upside risk may come from Beijing’s pledge on building affordable properties to allow for
actual housing demand to be met. China’s recent communication suggests that it is likely to shift
the focus from shantytown renovation to constructing public rental housing. Should authorities
seek to quicken the pace of affordable housing, which would put a floor on property investment,
it may rely on a more generous fiscal or monetary policy tools such as Pledged Supplementary
Lending facilities (see Where will the money come from? Funding China’s shanty town
renovation projects, 11 July 2018).
Property sales have plunged … … and so has property investment
% y -o-y ppt contribution, YoY%

20
120
15
100
10
80
5
60
0
40
20 -5
0 -10
2015 2016 2017 2018 2019 2020 2021
-20 Land Purchase
-40 Equipment Purchase
10 11 12 13 14 15 16 17 18 19 20 21 Construction & Installation
Other
Property sales volume Real estate investment growth
Source: CEIC, HSBC Source: CEIC, HSBC
An ongoing rotation in investment drivers Middle and high-end manufacturing

investment is leading the recovery
12 FAI, 2-y ear CAGR (2020/2021), % 2-y ear CAGR, 2020/2021, %

15
10
10
8
6 5
4
0
2
0 -5
-2
-10
Manufacturing Property Infrastructure
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
2019 FY July August
September October November All mf FAI Lower end Higher end
For the full report, see Asian Economics – Ready for the next round (page 23), 17 December
2021.
49
February 2022
Economics: The rising wealth

of China
 The total wealth of Chinese households will likely grow more than
50% in the next five years …
 … driven by the rising numbers of high-net-worth individuals and the
expansion of the middle class to 500m+
 The public sector’s net assets should also continue to grow,
reducing the risk from local government debt
Qu Hongbin Deng Xiaoping once said that “To get rich is glorious”, setting China on a new path. Well, the
Co-Head Asian Econ Research, country’s millionaires are on the march. China is now home to more than 2m high-net-worth
The Hongkong and Shanghai individuals (HNWIs), those with the equivalent of at least RMB10m (USD1.55m) in investable
assets. We think the number of HNWIs will rise to 5m by 2025. The middle class is expanding
+852 2822 2025 rapidly too, and the urban home ownership rate is the highest in the world, a remarkable 96%.4
Jing Liu We estimate that total household wealth will grow by more than 50% in the next five years,
Senior Economist, Greater China putting China on a very sound financial footing.
jing.econ.liu@hsbc.com.hk This report examines the structure of the three components of the country’s wealth5 – the asset
+852 3941 0063 portfolios of households, the government, and the external sector – and how they are changing.
Jingyang Chen We find that:
The Hongkong and Shanghai  China’s household wealth is set to grow by around 8.5% annually in the next five years,
jingyang.chen@hsbc.com.hk with household investable assets topping RMB300trn in 2025, equivalent to 300% of
+852 2996 6558
China’s GDP in 2020.
Erin Xin
Economist, Greater China  HNWIs have investable assets of around RMB70trn (USD10.8trn) – that’s approaching the
Banking Corporation Limited combined market cap of the Shanghai and Shenzhen stock exchanges at the end of 2020
erin.y.xin@hsbc.com.hk (RMB79trn). Based on our conservative forecasts, this number will increase by 60% to
+852 2996 6975
RMB111trn by 2025.
Shanshan Song
Economist, Greater China  The middle class already numbers 340m people – bigger than the population of the US –
Banking Corporation Limited and is on track to grow over 45% by 2025 to more than 500m. A USD20 increase in daily
+86 10 5999 8234
spending by the newly made middle class would increase consumption by cUSD1.1trn per
4 People’s Bank of China, “The 2019 survey of household assets and liabilities of urban residents in China,”
China Finance, Vol. 9, 2020.
5 Throughout this report we use the terms wealth and total assets interchangeably. For net wealth, we refer
to total assets minus total liabilities, or net assets.
50
February 2022
year, surpassing all but seven countries in terms of total middle class expenditure in 2020
(Kharas and Dooley, 2020).6
 An expanding middle class will underpin medium to long-term economic growth, and
stronger consumer spending boosts domestic demand, business confidence, and capital
expenditure. A rising middle class will also increase imports of goods and services, and
attract foreign companies to invest in China. It’s not an exaggeration to say that the middle
class can be the backbone of China’s dual circulation strategy and help the country avoid
the “middle income trap”.
 HNWIs and the middle class will invest more in financial assets, creating opportunities for asset
managers and financial services. These two groups will also boost high-end consumption.
 On the downside, the wealth gap is widening. The top 1% households now own 30% of
China’s wealth, setting policymakers the difficult task of the reducing income inequality.
 Despite worries about high debt levels, the government’s balance sheet is improving as
assets rise faster than liabilities.
 Foreign flows both to and from China will continue to accelerate as Beijing pushes ahead
with liberalising the capital account.
China has the highest saving rate among major economies in the world
sav ing rate, % of GDP
55
50
45
40
35
30
25
20
15
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
China High income country average Middle income country average World average
Source: World Bank, HSBC
Property still leads, but the allocation to financial assets has risen
% of total household w ealth
100%
80%
60%
40%
20%
0%
% of property assets % financial assets % cash & deposit % other non-financial assets
Note: Financial assets refers to financial holdings that are non-cash or deposits
Source: CASS, HSBC
For the full report, see The rising wealth of China – Millionaires and the middle class lead the
way, 21 May 2021.
6In 2011 purchasing power parity terms, the top ten countries by total middle class expenditure in 2020
were: China, the US, India, Japan, Russia, Germany, Indonesia, UK, Brazil, and France.
51
February 2022
Economics: Demographics –
three won’t make a crowd
 Beijing’s shift to a three-child policy …

 … is unlikely to alter China’s population challenges …
 … but other factors can help potential growth to hold up
Qu Hongbin
The relaxing of China’s policies over family sizes – to allow couples to have three children rather
Co-Head Asian Econ Research, than two (compared with just one up to 2016) – has gathered plenty of attention since it was
The Hongkong and Shanghai announced on 31 May.
hongbinqu@hsbc.com.hk But amongst demographers, the move brings little excitement, for two reasons. First, evidence both
+852 2822 2025
from within China and overseas suggests that the relaxation of such policies will have little impact
Erin Xin
on families opting to have more children. Birth rates have been falling for the past five years as a
The Hongkong and Shanghai result of a combination of socio-economic factors that are meaning smaller families – getting
erin.y.xin@hsbc.com.hk married later, having a first child later and the rising cost of raising a family – both for housing and
+852 2996 6975 otherwise. The pandemic and the drop in incomes and rise in house prices will likely have made the
last challenge far greater, as we outlined in Population and the pandemic, 6 January 2021.
Second, even if this policy relaxation was to be effective at raising the fertility rate, China’s
shrinking working-age population is already ‘baked in’ for the next 15-20 years. The only
question is how much the working-age population falls beyond that point. The size of the
population aged 16-64 looks set to drop by more than 100m by the time we get to 2040. What
happens to birth rates will determine whether the potential workforce drops by another 100m by
2050 or not.
And so, it seems likely that China’s demographic struggles won’t reverse with this policy
change. But it’s not all bad news. As outlined in China Economic Spotlight, Slowing population:
How worrying is it?, 12 May 2021, urbanisation and improving human capital can offset this
trend and improve the productivity of the population – to help keep potential growth rates
around 6.5%.
There is also a second demographic tailwind that could support Chinese growth, too. High
savings rates as well as other policies in the past – such as the opening of the housing market
in the late 1990s, and big improvements in education and productivity – means China is well
placed to reap the benefits of wealth accumulation as the population ages (see: The rising
wealth of China: Millionaires and the middle class lead the way, 21 May 2021). If this wealth is
put to work in the economy, or passed on to younger generations, the overall demographic drag
may not be as severe as we may initially fear.
52
February 2022
China’s birth rate has been low this century but has dropped further in recent years
Births per 1000 Mainland China: Birth rate Births per 1000
25 25
20 20
15 15
10 10
5 5
0 0
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021
Source: China Statistical Yearbook
The UN’s estimates show that fertility rate assumptions are key for population forecasts
mn Mainland China: Population under different UN fertility variants mn
1600 1600
1400 1400
1200 1200
1000 1000
800 800
600 600
400 400
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
Low Fertility Medium Fertility High Fertility
Source: UN Population Division
China’s fertility rate is likely to stay below 2.1 for the foreseeable future
Children per w oman Total fertility rate Children per w oman
7 7
6 6
UN projections, medium
5 5
fertility scenario
4 4
3 3
2 2
1 1
0 0
1955 1965 1975 1985 1995 2005 2015 2025 2035 2045
Mainland China Japan South Korea Thailand Germany US
Source: UN Population Division
For the full report, see China Economic Spotlight – Slowing population: How worrying is it?
12 May 2021.
53
February 2022
Economics: Climbing the

ladder of scientific research
 Our first in a series on innovation in China which explores how China

is becoming a scientific research leader in engineering
 But it still trails behind developed countries in the natural science,
medical science and life science fields
 Boosting R&D funding and expanding international collaboration are
key to narrowing the science gap
Qu Hongbin China’s decades-long strategy of investing heavily into research and development as well as
Co-Head Asian Econ Research, higher education is showing results. The country now leads the world in terms of the quantity of
The Hongkong and Shanghai scientific research paper publications and patent filings. Each year, there are more than 4m
STEM (science, technology, engineering and math) students graduating from Chinese
+852 2822 2025 universities, which is more than the US, Germany, Japan, Korea and UK combined. In
Erin Xin particular, China has become a global leader in fundamental research in engineering, topping
Economist, Greater China the global university academic rankings in more than half of all 22 engineering fields.
erin.y.xin@hsbc.com.hk But there are still substantial gaps in scientific research. For instance, in the natural science, life
+852 2996 6975 science and medical science fields, China’s global share in the top university rankings leads
Madhurima Nag other emerging economies but lags far behind Europe and the US. China generally holds 10%
Associate
Bangalore or less of the global top 100 university rankings within each field versus a roughly 40% to 50%
share for Europe and 30% to 40% share for the US. Since scientific research is the foundation
for technological advancement, closing the science gap is essential for China to further
strengthen its technology and innovation capacity in the years ahead.
The 14th Five-year Plan pledged to take a two-pronged approach to boost the country’s
scientific research capacity: doubling its effort to strengthen indigenous scientific research and
increasing international collaboration. Key policy initiatives include boosting funding support for
basic research, expanding national laboratories, improving the quality of STEM PhD and post-
doctoral programmes and offering more competitive salaries for scientists. And although China-
US scientific collaboration faces new challenges, Beijing is taking steps to make more trade and
investment deals with other developed countries and regions such as the EU, Japan and Korea.
This should help deepen international research collaboration. Further opening up and reforms,
such as Free Trade Zones, and strengthened intellectual property rights enforcement, can also
incentivise more corporations to invest and boost their R&D activity in China.
54
February 2022
China accounts for over 1/5 of global R&D, China’s R&D spending is on par with
ranking second after the US developed countries
% of global R&D spending, current PPP$ % GDP
40
6
35 Latest
30 5 20-Year Average
25
4
20
15 3 2.4%
10
2
5
0 1
0
China US Japan
Korea Germany
Source: OECD, HSBC Source: OECD, CEIC, HSBC. Note: Data from 2019, except for Mainland China,
which is from 2020. IL – Israel, KR – Korea, JP – Japan, DE – Germany, US – USA,
FR – France, CN – Mainland China, EU27 – EU, SG – Singapore, UK – United
Kingdom, CA – Canada, OECD – OECD.
China’s overall education levels have China is the only EM economy in the top
increased 20 of the Global Innovation Index
% of total population Global Innovation Index

40 65
2
35
30 35
4 7
25 60
20 8 9 12 1014
15
10 55 19 14
5 16
0
-5
-10 50
29
Univeristy High school Jr. high Primary
and above and school school
secondary 45
school US UK SG DE SK JP CH
2020 2010 Change in share, ppt 2020 2015
Source: NBS, HSBC. Note: Ranking denoted above country bar. Red – 2020 ranking, Black – 2015
ranking. CH – China, US – USA, JP – Japan, DE – Germany, SK – South Korea,
SG – Singapore, UK – United Kingdom. Source: WIPO, HSBC
China has topped the global rankings for … but the quality of applications
patent filings since 2019 … still lags behind developed economies
No. of PCT filings, thousands
80 80% Ratio of granted patents to applications
70 70%
60 60%
50 50%
40 40%
30 30%
20 20%
10 10%
0 0%
2010 2012 2014 2016 2018 2020 2009 2011 2013 2015 2017 2019
CH US JP DE SK CH US JP DE SK
Note: PCT = The International Patent System Source: WIPO, HSBC; CH- China, US – United States, JP – Japan, DE – Germany,
Source: WIPO, HSBC; CH- China, US – United States, JP – Japan, DE – Germany, SK – South Korea
SK – South Korea
For the full report, see Innovation in China 2025 – Part I: Climbing the ladder of scientific
research, 22 July 2021.
55
February 2022
Economics: Why technology

diffusion is so important
 China’s average productivity in manufacturing and services is still

less than a third of that of developed economies …
 … while the productivity gap between technology leaders and other
firms is also significant
 Spreading access to technology more evenly will be crucial to lifting
productivity growth in the coming years
Qu Hongbin
Spread the knowledge. Innovation is not just about the discovery and development of new
Co-Head Asian Econ Research, technologies. It is also about promoting the diffusion of technological improvements among
The Hongkong and Shanghai producers within a country and across international borders. Indeed, for an economy whose
Banking Corporation Limited technology still lags behind global leaders in a number of areas, adopting existing technologies
+852 2822 2025 can play a major role in lifting its levels of productivity.
Erin Xin Mind the productivity gap. Despite impressive progress in recent years, China’s average
The Hongkong and Shanghai labour productivity is still less that than a third of that of developed economies for the industrial
sector and less than a fifth for the services sector. More importantly, this gap exists in the
+852 2996 6975 majority of sectors, including medium- and low-tech sectors such as kitchen appliances and the
retail industry, so there is still significant potential for lifting productivity through increasing cross-
border diffusion of technology in both manufacturing and services. We estimate that if China
could halve the current gap with the average labour productivity of high-income economies it
would more than double total GDP.
Leaders and laggards. Within China, there are also notable technology gaps between industry
leaders and laggards. In fields like information and communication technology (ICT), financial
services, and the industrial sector, the labour productivity of the largest companies is above the
industry average. Meanwhile, smaller firms lag behind, due in part to their lack of access to
resources and credit. Spreading access to technology to more producers should boost overall
productivity.
What to expect. As innovation is a policy priority, we expect the authorities to step up efforts to
foster the diffusion of technology. At the cross-border level, this is likely to come through more
trade and investment deals, continued opening up through reducing restrictions and tariffs, and
incentives to upgrade machinery and equipment. At the domestic level, it will involve both direct
and indirect measures, including: (1) building up ICT infrastructure to speed up the adoption of
newer technologies like digitalisation; (2) the development of industry associations to increase
the spread of ideas; (3) promoting lifelong learning to allow the workforce to tap into new
technologies and techniques; (4) fiscal support through tax cuts or direct subsidies for innovation;
and (5) reforms to level the playing field for the private sector, in particular small and medium
enterprises (SMEs), to allow a fairer allocation of resources and credit to the more productive
and innovative firms.
56
February 2022
Plenty of room for China to play catch up … and China will continue to be a net
in productivity … importer of licences and patents
China's v alue added per employee as % of ctry USD mn
40 4,000
35 2,000
30 0
-2,000
25
-4,000
20
-6,000
15 -8,000
10 -10,000
5 -12,000
0 -14,000
SG CA DE UK SK JP US High 2011 2013 2015 2017 2019 2021
income Credits of IP Royalties Debits of IP Royalties
Industry Services avg Balance
Note: SG – Singapore, CA – Canada, DE – Germany, UK – United Kingdom, SK – Source: CEIC, HSBC
South Korea, JP – Japan, US – United States
Source: World Bank, HSBC
China’s labour productivity of leading SMEs still lag behind larger firms in terms
firms is above the industry average of productivity
Labour productiv ity, '000 RMB/employee Labour productiv ity, % of large industrial firms
700 100
600 90
500 80
400
70
300
200 60
100 50
0 40
30
20
10
0
Largest companies Industry Average Medium as % of large Jan-00 Small as % of large
Source: Fortune 500, HSBC Note: Among industrial enterprises
Source: CEIC, HSBC
The Frontier Technology Readiness Index shows China has strengths in R&D, industry,
and finance, but is lacking in the areas of ICT and skills
Total ranking ICT Skills R&D Industry Finance
0 1
10 7 6
20
25
30
40
50
60
70
80
90
100 99 96
Global ranking for frontier technology readiness and components (among 158 countries)
US UK Singapore South Korea Germany Canada Japan Israel China
Note: China’s ranking for the component is labelled. Source: UNCTAD, HSBC
For the full report, see Innovation in China 2025 – Part II: Why technology diffusion is so important,
18 August 2021.
57
February 2022

Solar panels
58
February 2022
China aims to achieve peak

emissions by 2030 and
carbon neutrality by 2060.
Huge investments are being
made in the green economy.
59
February 2022
Economics: A closer look at

technology imports
 Upgrading its technology is key for China to increase its productivity

and raise its growth potential …
 … so Beijing is raising its R&D spending and strengthening external
economic ties to boost its tech independence
 We look at which Chinese sectors are most reliant on international
tech to assess their sensitivity to policy shifts
Jing Liu Two-pronged tech strategy. With the international tech sector caught up in the broader trade
Senior Economist, Greater China tensions, China is redoubling its efforts in science and technology innovation using a two-
Banking Corporation Limited pronged strategy. The aim is to boost its growth and self-reliance in technology, as stated in the
jing.econ.liu@hsbc.com.hk 14th Five-year Plan.
+852 3941 0063
Qu Hongbin For the domestic prong, China plans to boosts its so-called basic research – a category of
research where it is weakest. This is also known as fundamental research, as further applied
The Hongkong and Shanghai research can be developed from it – by increasing government spending, including the
hongbinqu@hsbc.com.hk establishment of national laboratories and innovation centres. Beijing is also encouraging
+852 2822 2025 enterprises to make breakthroughs in core technologies by granting tax incentives and
broadening funding channels.
For the international prong, after closing a major trade deal (RCEP) last year with
neighbouring economies, Beijing aims to speed up negotiations on regional trade and
investment pacts to open more channels for cross-border technology sharing.
Computers, electronics and optical products have the highest foreign value added,
especially from the US and other economies with high-tech expertise
50 FVA, % share of economies with high tech expertise in FVA, % 100
40 80
30 60
20 40
10 20
0 0
D20T21 Chemical and D26 Computers, D27 Electrical D61 D62T63 IT and other
pharmaceutical electronic and optical machinery and Telecommunications servic es
products products apparatus, nec
USA EU15 APAC AE ROW % US & other economies with high tech expertise (RHS)
Note: The dotted line represents the average share of economies with high-tech expertise in the total foreign value added.
Source: OECD TiVA (2015), HSBC
60
February 2022
Five sectors. Against this backdrop, we zoom in on which of China’s industrial sectors have the
closest connections with the US and other economies with tech expertise.
We identify five sectors (see Table 2) in China that are most exposed to the foreign policy shifts
and find they constitute 11% of China’s gross output. Most of them have a higher share of value
added from overseas versus the average sector, meaning they are more reliant on overseas
technology. The ‘computers, electronic and optical products’ sector (50% foreign value add) is
most closely linked to international technologies.
The five sectors have output multipliers much larger than 1

Fabricated metal, except machinery and equipment
Motor vehicles, trailers and semi-trailers
Electrical equipment 2.8
…
Chemicals and pharmaceutic al products 2.6
…
Computer, electronic and optical products 2.5
…
IT and other information services 2.2
…
Telecommunications 1.5
…
Financial and insurance activ ities
Private households with employed persons
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
Note: Bars show the values of total backward linkages of sectors. When one sector expands its production, it boosts demand for intermediate goods from other sectors. Total
backward linkage of this sector measures the total output increase given one unit of increase in production by this focal sector, so it is also known as the output multiplier.
Source: OECD input output table (2015), HSBC
We then gauge the sensitivity to shifts in tech policy/exports from the US and other economies
with high-tech expertise. We find that there would likely be an impact on Chinese growth from
any shifts in tech policy and show how understanding the linkages could help quantify the risks.
Restrictions and impact on growth of each sector and the economy

Annual growth rate Chemical and Computers, Electrical Telecomm IT and other GDP
Pharmaceutical electronic and machinery & information
products optical products apparatus, nec services
CAGR 2006-10 21.6% 17.5% 21.7% 17.1% 17.6%
CAGR 2011-15 13.3% 8.7% 13.1% 16.9% 19.3%
CAGR 2021-25
Without restrictions 6.0% 6.5% 5.5% 17.0% 20.0%
With restrictions:
Case 1: 5.4% 3.4% 5.3% 14.3% 15.8% 0.4ppt↓
Case 2: 3.5% -3.0% 3.1% 13.0% 9.0% 1.2ppt↓
Note: nec = not elsewhere classified
Source: OECD, NBS, HSBC
For the full report, see Innovation in China 2025 – Part III: A closer look at technology imports,
1 September 2021.
61
February 2022
Economics: How worrying is

slowing population growth?
 Population growth has slowed to a record low and the labour force is
shrinking
 But a smarter workforce is replacing retirees, while faster
urbanisation helps to lift labour productivity
 We expect growth in human capital to gain momentum in the years
ahead, which is conducive to long-term economic growth
Qu Hongbin The census results are in, and the population is still growing, though at a slower pace. But many
Co-Head Asian Econ Research, are concerned about the population peaking in size soon and the impact of a smaller labour
The Hongkong and Shanghai force on China’s longer-term growth. Indeed, the latest data shows the population is aging fast
and the labour force is shrinking. But these concerns are overblown, in our view, as a smarter
+852 2822 2025 and more productive labour force is replacing the retirees. We believe human capital will
Erin Xin continue to grow strongly over the next decade or so as previous investment into education
Economist, Greater China pays off. Combined with a faster pace of urbanisation, this should more than offset the negative
Banking Corporation Limited impact on economic growth from a shrinking labour force. We expect China’s potential growth to
+852 2996 6975
stay above 6.5% in the years ahead.
Concerns about the negative impact on economic growth are overblown …

The headline results showed China’s population increased to 1.41bn people in 2020, a 72m
increase from the last census in 2010. The compound annual growth rate was 0.5% for the last
decade, which was the slowest pace since the census has been recorded. The data also
confirms that the population is aging fast. The share of the population over 65 years old saw the
largest increase, as the ratio rose by 4.6ppt, while those between 60 and 64 saw the ratio
increase by 0.8ppt from 2010.
Meanwhile, new births also stalled. In 2020, the birth rate fell to 0.85%, the lowest on record,
though this was most likely an outlier year due to the COVID-19 shock as previous years saw
modest growth rates averaging roughly 1.2% from 2010 to 2019. Nonetheless, even excluding
2020, the birth rate has shown a noticeable decline in pace, which also puts pressure on the
population growth.
As more people age and retire and the birth rate slows, this in turn means that the working age
population is shrinking. The working age population fell to 879m, down 37m from 2010, or a
CAGR decline of 0.3%. While the declining working age population has made many investors
concerned about the shrinking labour force and its negative impact on China’s longer-term
growth, this is overblown, in our view.
62
February 2022
… because the work force is getting smarter

Most importantly, a smarter and more productive labour force is replacing the exiting retirees. In
2020, there were over 218m people who had a university or higher level of education. This is a
73% increase from 2010, and shows the rapid gains in education levels of the population. The
share of the educated population with a university or higher level education saw the sharpest
increase, rising by 7.2ppt to 17% over the last decade. Meanwhile, the shares of primary and
junior high levels of education declined, showing a clear upgrading in education levels.
We estimate that for every two retirees that have less than eight years of education, they are
being replaced by 1.9 new graduates who have over 12 years of schooling (see Fewer workers,
more engineers, 11 October 2019). Moreover, university and post-graduate students are
choosing to specialise in more technical fields with over 40% concentrated in science, technology,
engineering, and maths (STEM). This should in turn support China’s drive for increased
technological development.
We believe the smarter workforce can more than offset the shrinking size of the labour force. In
fact, once adjusted by education, we find that human capital growth is still positive and likely to
continue to grow over the next decade, and is not likely to peak until 2029. This is one year
faster than our previous estimate of 2030 as the census data showed a slightly larger decline
than anticipated in the working age population. For more details on our forecast method for
human capital growth, see China Inside Out: Mind the gap, 15 April 2021).
Aside from education, there are also other drivers that would support human capital
development. Improvements in health care coverage and health care breakthroughs can
improve labour quality, while increased labour market protections and social security coverage
would also benefit more productive and satisfied workers.
An aging population … … but education levels have increased

% of total population % of educated population
100 50
90
40
80
30
70
60 20
50 10
40 0
30
-10
20 Univeristy High school Jr. high Primary
10 and above and school school
0 secondary
2005 2010 2015 2020 school
< 14 y.o. 15 to 59 60 to 64 >65 y.o. 2020 2010 Change in share, ppt
For the full report, see China Economic Spotlight – Slowing population: How worrying is it?
12 May 2021.
63
February 2022
Economics: Rising debt –

how big is the risk?
 China’s debt-to-GDP ratio has surged as Beijing has stepped up

stimulus after the outbreak of COVID-19
 But this is only temporary, as a strong growth recovery should help
stabilise the ratio
 Our analysis of local government debt shows most has been
invested in infrastructure and tangible assets that support
productivity
Qu Hongbin The stimulus measures Beijing introduced during the pandemic have prevented a prolonged
Co-Head Asian Econ Research, recession and the economy has recovered quickly since Q2 2020. But as with all counter-
The Hongkong and Shanghai cyclical policies, fiscal and monetary stimulus also comes with undesirable consequences. The
debt-to-GDP ratio surged 23.6ppt to 270.1% at the end of 2020, the fastest pace since the
+852 2822 2025 global financial crisis (GFC). Local governments have led the expansion in debt, accounting for
Jing Liu c34% of the increase.
The Hongkong and Shanghai With the recovery well on track, Beijing policymakers will naturally pay more attention to the
jing.econ.liu@hsbc.com.hk debt risks and strike a balance between sustaining growth and controlling these risks. Although
+852 3941 0063 the governor of the central bank recently hinted that stabilising the debt-to-GDP ratio is one of
his policy goals, we believe that concerns about rising debt levels forcing Beijing to tighten fiscal
and monetary policy are overblown.
First, the recent surge in the debt ratio is only temporary because it will stabilise as a result of
the anticipated strong recovery in GDP growth. This can stop the debt ratio from rising without a
material slowdown in growth in total social financing (13.3% in 2020).
Second, local government debt has become the focal point of these risks, given its size, rapid
growth and complexity. Yet a closer look shows that these debts have been used to finance new
investment in infrastructure and other tangible assets. In other words, rising debt is matched
with rising assets, so local government balance sheets are not necessarily deteriorating.
More importantly, both data analysis and case studies show that a majority of the investment in
infrastructure and commercial projects have a substantial positive spill-over effect on regional
productivity and economic growth. For example, Hefei has transformed itself from a backward
inland city to a high-tech industrial hub in the past decade and recently joined the trillion-yuan
GDP club, by investing through its local government financing vehicles (LGFVs). Analysis of
4,000+ LGFVs shows that the bulk of investment projects have generated decent returns and
boosted growth.
64
February 2022
China’s debt-to-GDP ratio has risen during the pandemic
350 Credit to the non-financial sector as percentage of GDP, ppt
300
250
200
150
100
50
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Q2
CN DM EM
Source: BIS, HSBC
Leverage ratios have grown in the corporate and government sectors

170 ↑ 10.4 ppt.
150
130
debt-to-GDP ratio
110
90
↑ 7.1 ppt. ↑ 6.1 ppt.
70
50
30
Non-financial corporations Government Households
2019 sectoral leverage 2020
Source: CNBS, HSBC
China’s corporate debt-to-GDP ratio is second-highest among the G20 (Q2 2020)
180 Credit to non-financial corporations as percentage of GDP, ppt

160
140
120 G20 average level: 102.3%
100
80
60
40
20
0
Russia
Indonesia
Japan
Germany
Saudi Arabia
South Korea
Turkey
Italy
Brazil
Mexico
France
India
Canada
EU
US
UK
Australia
Argetina
China
South Africa
Source: BIS, HSBC
For the full report, see China’s rising debt – How big is the risk? 26 February 2021.
65
February 2022
Economics: Time for a tech

and green stimulus package
 We think the central bank could provide over RMB1trn to banks to

encourage more green loans …
 … and central government could spend another RMB1trn supporting
core technologies, including green technology
 This would help offset the impact of the property slowdown and keep
GDP growth above 5.5% in 2022e
Qu Hongbin The backdrop: China’s economy continues to slow with rising pressure on the labour market.
Co-Head Asian Econ Research, The young are particularly impacted as many job-hungry graduates are struggling to find high-
The Hongkong and Shanghai skilled and well-paid jobs. At the same time, both business and consumer confidence is falling,
exacerbating the growth slowdown. All this calls for more decisive action to shore up economic
+852 2822 2025 growth. While Beijing has started to loosen restrictions on property lending, this is more aimed
Jing Liu at reducing contagion risks and cushioning the slowdown, rather than propping up the economy.
The Hongkong and Shanghai Going green, tackling tech: We believe that rolling out a tech and green-focused stimulus
jing.econ.liu@hsbc.com.hk package would be the best policy option for shoring up the economy and provide high-quality
+852 3941 0063 jobs. Doing so would (1) boost domestic demand, (2) offset the growth drag from the property
Jingyang Chen market, and (3) redirect capital towards high-tech and green projects. In addition, such
The Hongkong and Shanghai measures are aligned to the longer-term goal of technology self-sufficiency and decarbonisation
Banking Corporation Limited (China’s great transition: from construction to capex and consumption, November 2021).
+852 2996 6558
Calculating a potential RMB2trn package: We see a possible RMB2trn tech and green
stimulus package, equivalent to around 2% of GDP, and made up of two main components.
First, the central bank could release over RMB1trn in green re-lending, which translates into
over RMB1.7trn for new bank lending to green projects. Second, the central government could
increase public spending on core technologies and infrastructure by issuing green sovereign
bonds (up to RMB1trn) to support green investments, such as upgrades to the power grid.
Other large-scale initiatives like recent COVID-19 bonds have been around this size. We stress
that since most green projects involve upgrades to technology and equipment, investments in
such projects tend to have higher output multipliers than real estate. Combined with industrial
funds and more generous tax incentives for technology upgrading, such measures would attract
more private capital into medium and high-tech manufacturing and green projects. This would
not only help engineer a modest recovery in GDP growth to above 5.5% in 2022, but also
cultivate new drivers of growth for the years ahead.
66
February 2022
We expect a RMB2-3trn green and tech stimulus package

Policy tool Amount Details
Green relending tool Around RMB1trn National banks have been asked to extend green loans at market rates
benchmarked to the current loan prime rate (LPR, which is at 3.85%
for one year), and then they can apply for one-year funding from the
PBoC to cover 60% of the loan principal with an interest rate of 1.75%.
We expect the central bank to issue at least RMB1trn (Yahoo, Nov 9)
in green relending to support green investment over the next several
years, which could create over RMB1.7trn in additional new bank
loans to finance green projects.
Sovereign green bonds Up to RMB1trn Sovereign green bond issuance will also be a valuable tool to drive
public spending on decarbonisation and can catalyse the local
government green bond market. Other large-scale initiatives like
recent COVID-19 bonds have also been around this size.
Budget spending on Additional RMB100bn Budget spending on science and technology is estimated to rise 1.8%
science and technology (c.f. RMB900bn+ in 2021) to RMB925bn this year according to the government’s budget report.
Next year, we expect a bigger budget bill to support research and
development in science and technology.
More tax cuts and fee Notable increase from an Possible new tax incentives include increasing tax deductions for
reductions for tech and estimated RMB700bn this year equipment purchases used for green transformation and expanding
green transformation VAT refunds for R&D equipment purchases for all manufacturing
businesses.
Source: PBoC, HSBC
China’s outstanding green loans have Green bond issuance (esp. offshore) also
grown fast in the past several years increases steadily
16,000 RMB bn 70 USD bn

CAGR 21.6% 60
12,000 50
40
8,000 30
20
4,000 10
0
0 2016 2017 2018 2019 2020 2021/09
Green loans (outstanding)
2018/12 2019/12 2020/12 2021/09 RMB denominated USD denominated
Source: Wind, HSBC Source: Climatebond, Bloomberg, HSBC
For the full report, see China easing – Time for a RMB2trn tech and green stimulus package,
17 November 2021.
67
February 2022
Economics: Smart
manufacturing to fuel capex
 The COVID-19 pandemic has triggered an acceleration in

digitalisation and automation
 Policy support will likely reinforce the sustainability of this trend …
 … and fuel a long-lasting upturn in manufacturing investment
Qu Hongbin
Weakening PMIs and other key data points have raised concerns about the risk of a sharp
Co-Head Asian Econ Research, slowdown in y-o-y GDP growth to below 5% heading into next year. But we believe these
The Hongkong and Shanghai concerns are overplayed as we expect a long-lasting upcycle in manufacturing investment to
Banking Corporation Limited become a new growth engine in the coming years. On top of positive cyclical factors, such as a
+852 2822 2025 broad-based recovery in industrial profits and higher than normal capacity utilisation rates, the
Jingyang Chen pandemic-induced acceleration in digitisation and automation will likely fuel stronger
Economist, Greater China manufacturing investment in the years ahead.
Since the COVID-19 outbreak in Q1 2020, investment in digitalisation and automation has been
+852 2996 6558 accelerating. HSBC Qianhai’s industrial equity research team expects sales of industrial
Madhurima Nag automation production to record 20% growth in 2021, up from low single-digit growth in the last
Associate two years. The development of the Industrial Internet of Things has also speeded up. The China
Bangalore
Academy for Information and Communications Technology estimates the value-added of the
industry to rise 50% in 2021, reversing the deceleration trend in the last few years. All this has
led to a recovery in industrial capex spending, with the 2-year compound annual growth rate
(2-year CAGR) of listed manufacturers’ capex spending rising to 6.2% in H1 versus a small
contraction in 2019 before the pandemic. We expect the 5-year CAGR of manufacturing
investment to improve to 7-8% from 3.8% during the last five years. We expect this acceleration
in digitisation and automation to be sustained in the coming years for three reasons:
 There is still huge potential for China to play catch up with developed economies in this
area. Only 21% of manufacturing value-added in China is driven by digitalisation, much
lower than the 33% average for developed countries. China’s industrial robot density is also
only around one-fifth of leading countries such as Singapore and South Korea. Meanwhile,
within China, there is also a big gap in digitalisation between leading and laggard
companies.
 Beijing will likely double down on policy incentives to promote digitalisation and smart
manufacturing in the coming years as they are key components of China’s technology self-
sufficiency strategy. Likely measures include further tax cuts and exemptions for
manufacturers’ investments in technology upgrading, as well as favourable credit policies.
 An anticipated policy push under the 14th Five-year Plan to develop smart cities and other
digital infrastructure. This should generate more demand for domestic high-tech equipment
manufacturing, and lay the foundations for a faster digital transition by manufacturers in
more sectors and regions.
68
February 2022
Industrial digitalisation continued to The development of the IIoT quickened

deepen in 2020 despite the pandemic post COVID-19
22 % of industrial v alue-added generated from 6 RMB trn % 80

digitalisation
70
20 5
60
18 4
50
3 40
16
30
2
14 20
1
12 10
0 0
10 2017 2018 2019 2020 2021e
2016 2017 2018 2019 2020 Value-added of the IIoT industry (RMB trn)
y-o-y growth (RHS)
Source: China Academy for Information and Communications Technology (CAICT), HSBC Source: China Academy for Information and Communications Technology (CAICT), HSBC
Sales of key automation products are expected to have risen by 20% in 2021e
RMB bn
250 30%
Thousands
25%
200 20%
20%
150 15%
10%
100 5%
0%
50
-5%
0 -10%
2005 2007 2009 2011 2013 2015 2017 2019 2021e
China 's demand for indutrial automation products y-o-y growth (RHS)
Source: Bloomberg, Wind, HSBC Qianhai Securities estimates (see China Automation: Gear up for growth by Corey Chan et al, July 2021)
China accounted for around 44% of global new robotics installation in 2020
90% 45%
80% 40%
70% 35%
60% 30%
50% 25%
40% 20%
30% 15%
20% 10%
10% 5%
0% 0%
-10% -5%
-20% -10%
2013 2014 2015 2016 2017 2018 2019 2020
China as % of global robotics installation (RHS) YoY growth in China
Source: International Federation of Robotics (IFR), HSBC
For the full report, see China Inside Out – Smart manufacturing to fuel an upturn in capex,
9 September 2021.
69
February 2022
Economics: Common
prosperity and tax reforms
 Concerns that Beijing’s drive to promote common prosperity will lead

to higher taxes for the rich are likely overblown
 Personal income tax is already at the high end of global rates, so the
focus will likely be on addressing tax evasion
 We believe an annual property tax could be rolled out more broadly,
in line with international standards
Qu Hongbin Beijing’s new common prosperity initiative has raised concerns about the potential for higher
Co-Head Asian Econ Research, taxes on the rich. We believe the worry is likely overblown as China’s drive to narrow wealth
The Hongkong and Shanghai inequality is mainly about achieving a more equitable society through expanding the size of the
middle class (see China regulation: The roadmap to common prosperity, 16 August 2021).
+852 2822 2025 Senior officials have also clarified that “common prosperity” is not about bringing down the rich
Erin Xin to help the poor (Reuters, 26 August 2021).
The Hongkong and Shanghai A closer assessment of China’s system of personal income taxes also suggests Beijing is
erin.y.xin@hsbc.com.hk unlikely to hike rates or introduce more taxes. That’s because personal income taxes are
+852 2996 6975 already high at over 45% for the highest income earners, leaving them at the top end of global
Shanshan Song personal income tax rates, and likely little room to rise further. Instead, China may crack down
The Hongkong and Shanghai further on tax evasion. There has already been a slew of high-profile tax investigations into
Banking Corporation Limited celebrities and high-net worth individuals. As a result, we expect China to drive increased tax
+86 10 5999 8234 compliance among the ultra-high income earners with more investigations and increased
penalties.
A decades-long housing boom has been the major force behind widening wealth inequality, so
wealth taxes in China may naturally focus on real estate. In fact, there are already pilot
programs on non-primary homes in Shanghai and luxury residences in Chongqing. These
programmes have implemented an annual household property tax rate at around 0.5%, falling
within the typical range seen in household property taxes rates in other major economies. We
expect similar pilot programs to be rolled out gradually across the country in the coming years.
Meanwhile, we also expect Beijing to raise the threshold for charitable donation deductibles as
well as to spur a culture of giving.
Personal income taxes are already among the highest in the world
The current system of taxing individuals in China is mainly centred on personal income tax. Like
many countries around the world, China’s personal income tax follows a progressive model with
the tax rate ranging starting from 3% and rising to 45% on taxable income after taking out fixed
and special deductibles. While there is some concern that recent rhetoric by officials around
achieving a more equitable society could mean tax rates will be raised, in our view these
concerns are likely overblown.
70
February 2022
For one, the personal income tax code in China is already fairly comprehensive. Compared with
global standards, China’s top effective tax rate of 45%, while not the highest, is at the higher
end. The highest effective income tax rate among OECD countries is Austria at 55%, while the
average for the group is 36.5%, putting China’s tax rate at the higher end. After adjusting for
total personal income tax to include local government tax rates as well, China is still higher than
the OECD average. We believe this means there isn’t really much of a need for China to
increase its tax rates further for its wealthiest earners.
Additionally, recent income tax reforms have focused on lowering the tax burden as opposed to
raising it, also reducing the likelihood that we will see sweeping increases in income tax rates.
The most recent reform to the Individual Income Tax law came into effect at the beginning of
2019 and was aimed at lowering the tax burden for lower and middle-income earners. The
standard monthly income deductible was raised from RMB3,500 to RMB5,000, while special
deductibles included children’s education, continuing education costs, health care costs and
housing rent or mortgage interest. The lower levels of the tax brackets were raised or widened,
lowering the tax burden for lower level income individuals.
Tax compliance will be the focus

As most of the population is exempt from income taxes as they fall below the threshold for tax
payments after taking into account deductibles, the focus will likely be on the high income
earners to ensure they are paying their tax bills. The State Taxation Administration vowed it
would crack down on tax violations and increase supervision of high net worth individuals (State
Taxation Administration, 26 August). Recent high-profile tax investigation cases have centred
on tax evasion by celebrities or high-net worth individuals.
Income inequality in China has increased China’s top effective personal income tax
over the last few decades rate is fairly high compared with OECD
countries
income ratio Top effectiv e personal income tax rate, %
7 70
6
60
5
50
4 China
40 OECD av g
3
2 30
1
20
0
85 90 95 00 05 10 15 20 10
Economy wide (Urban vs Rural) Log labour productiv ity, current USD
0
Urban (top vs bottom quintile) 8.5 9 9.5 10 10.5 11 11.5 12
Source: CEIC, HSBC Source: TaxFoundation, World Bank, HSBC; OECD countries; Top effective
personal income tax rate is based on the sum of central and local government rates
on personal income tax.
For the full report, see Common prosperity – What does it mean for China’s tax reforms?
8 September 2021.
71
February 2022
Economics: What
decoupling?
 Despite COVID-19 and the Sino-US trade war, China’s trade and
investment ties with Asian economies have deepened …
 … underpinning the resilience of regional production networks
 Beijing’s tech upgrading and green initiatives will likely further boost
trade and investment flows with Asia in the coming years
Qu Hongbin The double whammy of the Sino-US trade war followed by the COVID-19 pandemic have
Co-Head Asian Econ Research, fuelled concerns about supply chain diversification away from China and even economic
The Hongkong and Shanghai decoupling. However, data shows that these twin events have enhanced, not undermined, the
integration of Asian supply chains.
+852 2822 2025
On the trade front, China’s exports to other Asian economies, especially to ASEAN, increased
Jingyang Chen
steadily during the Sino-US trade war and COVID-19. ASEAN now accounts for 14.8% of
The Hongkong and Shanghai China’s exports compared with 12.4% in 2017. More importantly, data shows that China has
jingyang.chen@hsbc.com.hk moved up the value chain across various sectors and has become a more important provider of
+852 2996 6558 intermediate goods for Asian economies’ manufacturing sectors. China has continued its efforts
to reduce trade tariffs and other trade barriers with non-US economies, with its weighted mean
tariff rate continuing to fall after the start of trade tensions. This has facilitated a further
reconfiguration of Asian supply chains that will support China’s efforts in industrial upgrading.
On the investment front, deeper regional integration is reflected in increased direct investment
between China and its Asian peers. In particular, Chinese manufacturers have been moving up
the global value chain and expanding or relocating part of their production capacity to ASEAN
economies to make use of their comparative advantages and local markets. Meanwhile, more
developed economies in Asia such as South Korea and Singapore have shown stronger interest
in investing in high-tech and high-value-added sectors in China such as IT and electronics.
Looking ahead, China’s regional partners are set to benefit from Beijing’s new policy initiatives
for its 14th Five-year Plan. Beijing’s carbon neutral initiative and desire to avoid heavily polluting
industries will likely lead to more imports of commodities from key Asian exporters such as
Indonesia and Australia. Meanwhile, Beijing is redoubling its efforts to achieve technological
upgrading and self-sufficiency, and that should boost the country’s demand for machinery and
equipment. The recently signed Regional Comprehensive Economic Partnership (RCEP) also
provides streamlined rules to facilitate further growth in China’s trade with neighbouring
economies. The profound damage from the pandemic on all regional players should incentivise
Asia to work together to achieve an inclusive and sustainable post-COVID economic recovery.
72
February 2022
China’s export markets in 2017 China’s export market in 2020
Korea 5% Korea 4%
16% 6% 6%
20%
Japan Japan
12%
15%
ASEAN ASEAN
16%
Rest of Asia Rest of Asia 15%
US
26% US
EU 23%
19% EU
17%
Others
Others
Note: Exports to Hong Kong are redistributed to other markets according to re- Note: Exports to Hong Kong are redistributed to other markets according to re-
export data export data
Import growth has been relatively slow Products from ASEAN now account for a
compared with exports in recent years larger share of mainland China’s market
20 % y -o-y 17 % of mainland China's imports

2017 2020
15
15
10
5 13
0 11
-5
9
-10
-15 7
-20
2012 2013 2014 2015 2016 2017 2018 2019 2020 5
Import price Export pric e ASEAN Taiwan Japan South Rest of EU US
Imports Exports Korea Asia
Chart 5: Import growth has been relatively Chart 6: Products from ASEAN now
slow compared with exports in recent account for a larger share of mainland
Share of manufacturing value-added contributed by mainland China in an economy’s exports
years China’s market
16 %
14
12
10
8
6
4
2
0
SI KR VN TH MA IN NZ PH JN TA AU ID SL
2012 2017 2019
Source: UNCTAD-EORA, HSBC
For the full report, see What decoupling? – China’s economic ties with Asia are getting stronger,
29 July 2021.
73
February 2022
Full page image to come:

Image: Woman and
microscope
74
February 2022
Over 4m science, technology,

engineering and math (STEM)
students graduate every year,
more than in the US, Germany,
Japan, Korea and UK
combined.
75
February 2022
Credit: Property HY – Survival

of the fittest
 We identify the pivotal issues for the sector in 2022 …

 … and the signals that could make us more constructive
 Our key investment strategy – to identify the survivors
Keith Chan Ouch! With defaults at record levels, the biggest correction in a decade, and -35% total returns*
Head of Asia Credit Research year-to-date, suffice to say we won’t miss 2021. We look ahead to what’s to come in 2022 and
Banking Corporation Limited the signals that may make us more constructive on China property high-yield (HY) bonds. Our
keithkfchan@hsbc.com.hk key investment strategy: to identify the survivors.
+852 2822 4522
Key 2022 themes: (1) The scramble for offshore liquidity, (2) a high concentration of
onshore/offshore bond maturity is a red flag, and (3) how to price in the likelihood of more
defaults – we highlight the issuers we see as being most at risk.
Five positive signals: (1) Rising property sales, together with a loosening of scrutiny over
presale escrow accounts; (2) improved access to refinancing for private-sector developers in the
onshore bond and asset-backed securities (ABS) markets; (3) state-owned enterprises taking
strategic stakes in large private-sector developers; (4) Country Garden’s increasing property
sales and land purchases; and (5) developers regaining access to the US dollar bond market.
2021: Biggest correction of China property HY bonds in a decade
450 Global COVID-19 outbreak

400
350 Kaisa defaults USD bonds
300
250
China onshore Ev ergrande
200 Global financial crisis debt de-lev eraging contagion
150
100
50 European sov ereign debt crisis
0
2006
2010
2011
2013
2015
2016
2017
2018
2020
2021
2007
2008
2009
2012
2014
2019
Markit iBoxx USD Asia ex-Japan China Real Estate TRI
Note: TRI stands for total return index. 30 December 2005 = 100. Total return = capital gains (losses) + interest accruals, in USD.
Source: Markit, HSBC
2021 at a glance: A painful year

The combination of synchronised onshore/offshore liquidity tightening as a result of the ‘three
red lines’ policy introduced in August 2020 and the capping of banks’ property-related loan
exposure by regulators in December has left the China property USD HY bond market heavily
scarred. Inevitably, the market has shrunk on the back of substantial repricing of credit risk
76
February 2022
during the year. From a total return perspective, China property HY bonds returned -35% y-t-d
(as of 9 December), with ‘B’ rated names hit hardest and most issuers generating negative total
returns in 11M2021. The repricing of risk started in June following the rapid deterioration of
Evergrande’s balance sheet liquidity and intensified when Fantasia surprisingly defaulted on its
USD206m bond that matured on 4 October.
China property HY space shrinks in 2021... . … with substantial repricing of credit risk
400 60% 100 Oct-21: Fantasia's
surprise default
90
300
40% 80
USDbn
200 70 Aug-20: Introduction Jun-21 :

20% 60 of "three red lines" Ev ergrande
100 policy contagion
50
0 0% 40
2011
2016
2012
2013
2014
2015
2017
2018
2019
2020
11M21
Mar-20
Jun-20
Feb-20
Feb-21
Mar-21
Jan-20
Jan-21
Jun-21
Jul-20
Jul-21
Sep-21
May-20
Aug-20
Sep-20
May-21
Aug-21
Apr-20
Oct-20
Apr-21
Oct-21
Nov-20
Dec-20
Nov-21
Dec-21
China property USD HY bonds outstanding
Asian HY corporate Markit iBoxx USD Asia ex-Japan China Real Estate High
China property % Asian HY Yield CPI
Source: Bloomberg, HSBC Note: CPI stands for Clean Price Index
Source: Markit, HSBC
Net redemption of CNY HY property bond Malfunctioning offshore USD HY market

15,000
0 650
-5 10,000
-10 600
5,000
RMBbn
USDm
-15
RMBbn
550
-20 0
-25 500 -5,000
-30
-35 450 -10,000
Feb-21
Jan-21
Jun-21
Mar-21
Jul-21
Aug-21
Sep-21
Nov-21
Apr-21
May-21
Oct-21
Feb-21
Mar-21
Jul-21
Jan-21
Jun-21
Nov-21
Apr-21
May-21
Oct-21
Aug-21
Net CNY HY property bond issuance (redemption) Sep-21
Outstanding CNY HY property bonds (RMBbn) Gross issuance Net issuance
Source: Wind, HSBC Source: Bloomberg, HSBC
China property HY: Record USD bond defaults in 2021

50.0 12
40.0 10
8
USDbn
30.0
6
20.0
4
10.0 2
0.0 0
2015 2016 2017 2018 2019 2020 2021e
Defaulted principal (notional) No of defaulted issuers
Source: Bloomberg, HSBC estimates
For the full report, see China Property HY – 2022 outlook: Survival of the fittest, 13 December 2021.
77
February 2022
Credit – AMCs: The wounds

are healing
 Bailout banishes the market blues – we think the worst is over

 Government support for Huarong will help support the bonds of the
other three big asset managers
 But weak standalone fundamentals need to improve
Helen Huang
A big sigh of relief. There’s nothing like a government bailout to settle the nerves of investors,
Head of China Onshore Credit particularly when it involves an ailing state-owned giant like China Huarong Asset Management
Research
The Hongkong and Shanghai Co (“Huarong”). The long-awaited announcement in August this year that a group of strategic
investors would inject equity into Huarong, China’s largest asset management company (AMC),
+852 2996 6585 was welcomed by a market concerned about a string of credit defaults. Sentiment perked up
once more in November when it was confirmed that the equity injection would total RMB42bn –
not massive given the circumstances, but enough for the time being – and that Huarong would
soon be allowed to issue bonds on the onshore market again.
2022 looks a bit better. While there’s no doubt that 2021 has been a roller-coaster year for the
AMC sector, things are looking up for 2022. The market jitters that started in April and spread to
China’s other three big AMCs – Cinda, Orient and Great Wall – have eased. As of early
December, the yields of the entire Huarong dollar bond curve, including its three remaining
perpetual bonds (perps), have returned to single digits. Cinda’s dollar bond curve has recovered
to a lesser extent, but it was not as badly hit as Huarong in the first place.
Hard work needed. Despite the bailout, a lot of hard work is needed to improve the credit
fundamentals of not only Huarong, but the entire sector. Remember, Huarong booked impairment
losses of RMB108bn in 2020, wiping out cumulative profits for the past 10 years and more. The
sector’s focus will be on the further divestment of non-AMC businesses and improving the
profitability of the AMC segment.
Government support at work

A government bailout goes a long, long way to easing the minds of investors in China’s state-
run asset management companies. After all, in a sector where the big four AMCs have been
highly leveraged for several years, the market has always put more faith in government support
than the standalone fundamentals of the companies.
For example, Huarong continued to issue bonds between 2018 and 2020 when technically
speaking, Huarong International, the issuing entity of Huarong’s dollar bonds, had negative
book equity if perps were excluded. No wonder the market turned jittery when the publication of
Huarong’s annual report was delayed, and the government stayed quiet for more than four
months about what the next step would be.
The bailout, when it came, had plenty of government financial muscle behind it – a group of
strategic equity investors, led by CITIC Group Corporation (CITIC Group), would make an equity
78
February 2022
injection totalling RMB42bn. We see the hand of the Ministry of Finance (MoF) at work here. It is
the controlling shareholder of the big four AMCs and also controls 90% of CITIC Group.
After the dust settles, Huarong’s ownership structure – that of a central SOE – will essentially
remain unchanged. And the same applies to the other three big four AMCs, whose common
largest and second largest shareholders are the MoF and the Social Security Fund. However, it
is important to note that the bailout was structured as a market-driven event rather than the use
of taxpayers’ money to rescue an SOE, although implicit support of the MoF is considered the
key factor from market participants’ perspective.
The RMB19.2bn committed by CITIC Group to the equity injection into Huarong is relatively
The first priority is to
streamline Huarong’s
small compared with the size of CITIC Group. But, in our view, the total RMB42bn equity
business segments injection is probably not enough to fully restore the stability of Huarong’s balance sheet. More is
probably needed. But the scale, format and timing of the next round of capital injection has yet
to be decided. The first priority is to streamline Huarong’s business segments, which we discuss
in the next section. In the meantime, confidence about further government support would be the
key supporting Huarong’s bond prices.
The market reaction has been encouraging

Other than government support, we think the second most important factor that will determine the
effectiveness of this bailout is the market reaction. If investors have persistent doubts about the
government’s ability to turn Huarong around, the chances of success should be significantly reduced.
So far, the market has been supportive. In both the onshore and offshore markets, Huarong’s
bond prices are now nearly back to where they were at the end of March 2021, before the delay
in publishing the annual report spooked the market. Moreover, Cinda and Great Wall have both
managed to tap into the onshore and offshore bond markets since August 2021, albeit at an
increased, but still reasonable, funding cost.
What worried us and the market before August 2021 was the possibility that the government
would not step in. However, with the bailout confirmed, we think support will continue, as the
reputational risk to the central government and the MoF would be even greater if it turned out to
be unsuccessful. We think this bailout will be an important milestone for the whole AMC sector
as it recovers from the shock of events in 2021; the next milestone should be Huarong getting
access to refinancing in the bond market.
Impairment losses: Huarong Impairment losses: Cinda, Great Wall,

Orient
120 18
16
100
14
80 12
RMBbn
RMBbn
10
60
8
40 6
4
20
2
- -
2017 2018 2019 2020 1H 2021 Cinda Orient Great Wall
Huarong 2017 2018 2019 2020 1H 2021

Source: Annual reports, HSBC Source: Annual reports, HSBC
For the full report, see China AMC – The wounds are healing, 22 November 2021.
79
February 2022
Credit: Bond markets – the

promise of diversification
 A tailwind helps. China’s bond yields have been falling towards US

levels, attracting the attention of global investors
 Improvements in liquidity and credit differentiation will help maintain
the trend
 We reaffirm our focus on fundamental credit quality in light of
defaults and a realignment of onshore ratings
Song Jin Lee, CFA Steady returns in the face of uncertainty

European & US Credit Strategist
HSBC Bank plc
China’s fixed income market has proved to be an effective diversifier for global investors. In
songjin.lee@hsbc.com 2020, its credit markets were a relative safe harbour and government bonds provided refuge
+44 20 7991 5259
from rising Treasury yields. Milestones such as index inclusion and the launch of the Bond
Helen Huang Connect programme will need to be built upon, and we identify two areas for improvement.
Head of China Onshore Credit
Research
The Hongkong and Shanghai Improvement #1: liquidity
Banking Corporation Limited Liquidity in China’s fixed income markets, whilst improving, has further to go. By one measure,
+852 2996 6585 the US Treasury market is six times more liquid than China Government Bonds (CGBs), but this
Steven Major, CFA is largely because of the narrow investor base. The majority of CGBs are owned by commercial
Global Head of Fixed Income banks on a hold-to-maturity basis.
Research
Banking Corporation Limited For foreign investors, two measures in particular would enhance market liquidity. Firstly,
steven.j.major@hsbc.com.hk opening up the onshore futures market will provide an additional hedging avenue to interest rate
+852 2996 6590
swaps. Similarly, access to the repo market will allow investors to manage liquidity risk by
swapping off-the-run issues with on-the-runs. Given the systemic importance of the repo rate to
China’s monetary policy framework, this may take time.
Improvement #2: pricing credit risks

There has historically been a lack of credit differentiation among issuers in China credit.
Policymakers are aware of this and have been pushing the market to better price credit risks for
the past few years. One approach is to curb the moral hazard by allowing selective defaults.
Another is to better align onshore credit ratings to reflect a firm’s probability of default.
In time, a greater emphasis on fundamental credit quality should attract foreign asset
management firms to China’s corporate bond market. Meanwhile, some volatility is to be
expected as the market navigates this paradigm shift. We prefer an up-in-quality investment
approach to China onshore credit.
80
February 2022
Investors generally playing catch-up
Global investors have been increasingly waking up to the opportunity provided by Chinese
bonds over the last few years. Now there is more demand for information to compare China’s
bond market, across both credit and rates, with Europe and the US. China bonds stand out as a
diversification opportunity for two connected reasons: (1) investors need to buy to match index
levels, and (2) there has been a tailwind, whereby performance of the aggregate index has
been consistently positive at a time of great uncertainty.
Tailwind
The Chinese bond market is no different from its global fixed income peers, in that total returns
Positive returns from China
fixed income …
have been dominated by the duration call and currency moves. USD-based investors have
been receiving positive returns from their China bond investments for most of the last five years.
Such a performance is no guarantee of future success, but it is at least encouraging for those
who require a track record.
Aggregate index performance masks what’s going on underneath

From the chart the grey bars show annual returns attributed to currency moves, and in this case
… driven mostly by duration
and FX …
they have been positive for the last nine months, reflecting the performance of the RMB. During the
same period there has also been mainly been a positive contribution from duration, shown by the
red bars, albeit smaller.
Excess return represents the performance (mainly) due to credit spreads for the aggregate index.
… but credit spreads played
a part, too
The contribution from credit spreads is not large, but as the chart shows, for most of the last five
years it has been positive.
This hides many developments within the aggregate index, with some sectors in the index
performing well and other less so. From 2017 to April 2021, the onshore RMB credit bond market
delivered an annualised total return of 5.3%, according to our calculation. The insurance, retail and
real estate sectors have outperformed, with annualised total return of 5.8% or more over the same
period. On the other hand, the telecommunication, pharmaceuticals and auto sectors were the
underperformers, with annualised total return of 4.7% or less.
China bonds’ total returns have been dominated by duration and FX
15%
12m trailing total returns
10%
5%
0%
-5%
-10%
2016 2017 2018 2019 2020 2021
Duration Excess returns FX China Agg USD

Note: Annual returns on a 12-month trailing basis. Impact of index rebalancing on total returns is recorded under duration. Total return measures price appreciation and coupon
accrual with reinvestment of coupons and index rebalancing at month end, taking transaction costs into account.
Source: Bloomberg, HSBC calculations
For the full report, see China’s bond markets – The promise of diversification, 25 May 2021.
81
February 2022
Credit: Internet – sailing into

the wind
 Regulatory risks will likely overshadow China Internet companies in

the coming year
 Credit profiles and bond prices are set to diverge based on operating
challenges and capex commitments
 We expect USD8-10bn gross issuance next year vs USD10bn y-t-d
Louisa Lam, CFA Regulatory risks persist. Regulatory risks have shadowed China’s Internet industry since
Credit Analyst, Asia Pacific March 2019, when Beijing first expressed concerns about children becoming addicted to online
Banking Corporation Limited games. In 2021, this regulatory oversight has expanded to cover market competition, personal
louisa.m.c.lam@hsbc.com.hk and national data protection, and network security. We expect regulatory risk to continue to play
+852 2996 6586
a key role in the sector next year as the government’s scrutiny of online operations is
broadening, affecting all the Internet companies under our coverage.
Credit profiles to diverge. Most USD bond issuers in the Internet sector have robust financial
and liquidity profiles that act as a buffer against market volatility, in stark contrast to the massive
repricing seen in the equity market. However, companies’ operating and credit profiles are likely
to diverge in 2022. A year-long crackdown on the consumer Internet segment has led to slower
earnings growth, higher operating costs, and larger investments to broaden companies’
business scope and products. Those with stronger liquidity, large monetising opportunities and
broader operating scope are better placed to withstand the headwinds.
Gross issuance: USD10-12bn in 2022e in China tech space

Gross issuance y-t-d in the tech space is lower than we expected at USD12bn y-t-d, vs our full
year forecast of USD15-17bn. Primary activity has quietened down since September due to a
combination of heightened regulatory risks, market volatility and adverse investor sentiment. For
2022e, we believe total issuance will be between USD10bn and USD12bn, flat or slightly below
2021e levels. Looking at the breakdown, we expect Internet companies to account for USD8-
10bn and hardware companies USD2-4bn. The lack of growth in issuance is attributable to
tighter regulations and less refinancing requirements (see Fig. 13). Our forecast includes the
potential refinancing and redemption of convertible bonds that mature in 2022. Despite the
headwinds, we think China’s tech sector will remain a key issuing group in the country’s primary
bond market. It had accounted for an average of 10% of overall China USD bond issuance in
recent years (9% in 2020 and 11% in 2021e).
82
February 2022
Gross issuance of China technology USD There are limited refinancing needs in the
bonds may be lower to flat vs 2021e pipeline
Primary issuance of China technology USD bonds China technology USD bond maturity profile
16 16% 10
14 14%
% to total China issuance

8
12 12%
USD bn
10 10% 6
USD bn
8 8%
4
6 6%
4 4% 2
2 2% 0
0 0% 22 23 24 25 26 27 28 29 30 31
14 15 16 17 18 19 20YTD 22e
Internet Hardware Internet Bond Internet CB
Others % China issuance Hardware Bond Hardware CB
Source: Bloomberg, HSBC estimates Source: Bloomberg
Online gaming: in decline since 2020 Active online education users peaked In
March 2020
600 80% 500 50%
500 60% 400 40%

Millions
300 30%
400 40%
Millions
200 20%
300 20%
100 10%
200 0%
0 0%
Dec 16
Dec 17
Dec 18
Dec 20
Mar 20
Jun 16
Jun 17
Jun 18
Jun 19
Jun 20
Jun 21
Dec 16
Dec 17
Dec 18
Dec 15
Dec 20
Jun 19
Jun 20
Mar 20
Jun 21
Online game players Online education users
% of Internet population (RHS)
Utilitisation rate (RHS)
Source: China Internet Network Information Centre (CINNIC) Source: CNNIC
E-commerce business has been growing Online video usage on the rise
steadily
1000 100%
900 100%
95%
800 90% 800 90%
85%
700 80%
Millions
75% 600 80%

600 70%
Millions
65% 400 70%

500 60%
55% 200 60%
400 50%
45%
300 40% 0 50%
Dec 16
Dec 17
Dec 18
Dec 20
Mar 20
Jun 16
Jun 17
Jun 18
Jun 19
Jun 20
Jun 21
Dec 20
Dec 18
Mar 20
Jun 18
Jun 19
Jun 20
Jun 21
Users on online purchase

User Utilisation rate
% of Internet population (RHS)
Source: CNNIC Source: CNNIC
For the full report, see China Internet: 2022 outlook: Sailing into the wind, 16 December 2021.
83
February 2022
Credit: LGFVs – 2022 outlook,

worried but not scared
 LGFVs outperformed the China dollar bond market in 2021 despite

rising debt levels
 We expect policies to remain supportive for most of 2022, but credit
events could accelerate in 4Q22
 We think the sector is too big to fail – LGFVs accounted for 46% of
gross corporate bond issuance in the first 11 months of 2021
Helen Huang So far, so good. We recently stated that we thought local government financing vehicle (LGFV)
Head of China Onshore Credit debt, given its size and complexity, was the problem Beijing could not afford to get wrong in
Research
The Hongkong and Shanghai 2022, especially after what has happened to the property market (Helen Huang, China LGFVs:
The next shoe to drop? 13 October 2021). Investors have reasons to be concerned about what
+852 2996 6585 lies ahead in 2022. After all, LGFVs are heavily involved in land development, making them
potential targets for the next round of deleveraging policies aimed at reducing the economy’s
reliance on real estate, and their debt levels and leverage ratios are still rising. Despite this,
LGFV bonds have outperformed the China USD bond market y-t-d, generating positive returns
based on what investors see as implied government support (unlike the property sector).
Concerning, but not scary. There has never been a default on a publicly issued LGFV bond,
but we think it’s only a matter of time. The good news is that we think defaults will be limited and
won’t trigger systemic risk, and restructuring will focus on extending payments rather than
haircuts or even bankruptcy. In our view, the sector is simply too big to fail. To put this in
context, the fall of Evergrande hammered the property sector partly because of its sheer size –
the company has RMB2.3trn in assets on its balance sheet. The LGFV sector has total assets
of RMB102trn as of 2020, about the same size as China’s GDP. At the same time, in the RMB
bond market, LGFVs accounted for 46% of gross corporate bond issuance in the first 11 months
of 2021.
Timing is key. We think stability will be prioritised over deleveraging in the first three quarters of
2022. After the property sector woes of 2021 and a tough outlook in 1H22e, we think the
economy and the financial system need some breathing room. Against this backdrop, we see
opportunities to buy LGFV names offering short duration, elevated yields, and a reasonable
chance of paying off their bonds. But we are worried about the deleveraging agenda picking up
momentum again in 4Q22, which has been a hotspot for high-profile defaults since 2019.
Having said that, every previous downturn in the LGFV sector has been a buying opportunity.
Overall, we expect LGFVs to continue to make a significant contribution to the incremental
growth in China’s corporate bonds in both the offshore and the onshore bond market.
84
February 2022
Total return, China LGFVs vs non-LGFV Total return, China LGFVs vs non-LGFV
dollar bonds, 2021 y-t-d dollar bonds, 2016-21 y-t-d
4.00%
12.00%
2.00% 10.00%
8.00%
0.00%
6.00%
-2.00% 4.00%
2.00%
-4.00%
0.00%
-6.00% -2.00%
-8.00% -4.00%
-6.00%
-10.00% -8.00%
Jan Mar May Jul Sep Nov 2016 2017 2018 2019 2020 2021
2021 2021 2021 2021 2021 2021 YTD
iBoxx USD Asia ex-Japan China LGFV
iBoxx USD Asia ex-Japan China LGFV
iBoxx USD Asia ex-Japan China ex-LGFV iBoxx USD Asia ex-Japan China ex-LGFV
Source: iBoxx, HSBC. Data as of 10 Dec 2021. Source: iBoxx, HSBC. Data as of 10 Dec 2021.
Total debt and leverage level, 144 LGFVs Leverage level, 2,148 LGFVs that have a
with a presence in the Asian dollar bond presence in the RMB bond market
market
10,000 67% 45,000 61.0%
9,000 66% 40,000 60.5%
8,000 35,000 60.0%
65%
7,000
64% 30,000 59.5%
6,000
RMBbn
RMBbn
5,000 63% 25,000 59.0%

4,000 20,000 58.5%
62%
3,000 15,000 58.0%
61%
2,000 10,000 57.5%
1,000 60%
5,000 57.0%
- 59% - 56.5%
2017 2018 2019 2020 1H 2017 2018 2019 2020 1H
2021 2021
Total debt Leverage level (RHS) Total debt Leverage level (RHS)
Note: leverage ratio is calculated as sum of total liabilities over sum of total assets of Note: data is calculated as sum of total liabilities over sum of total assets of 2,148
144 LGFVs that have presence in the Asian dollar bond market, excluding LGFVs LGFVs that have presence in the RMB bond market, excluding LGFVs that have
that have missing data missing data
Source: Bloomberg, Wind, HSBC Source: Bloomberg, Wind, HSBC
Gross and net issuance, LGFVs vs all mainland China corporates (USDm)
11M21 11M21 2022e gross 2022e gross 2022e 2022e net 2022e net
gross net issuance issuance redemption issuance issuance
issuance issuance (low end) (high end) (high end) (low end)
Mainland China LGFV HY 1,978 512 13,500 14,500 13,284 1,216 216
Mainland China LGFV IG 25,741 13,974 20,000 24,500 12,601 11,899 7,399
Mainland China LGFV all 27,719 14,486 33,500 39,000 25,885 13,115 7,615
Mainland China corp all 114,302 31,097 87,000 107,500 99,532 7,968 -12,532
% of LGFVs in mainland China corp 24% 47% 39% 36% 26% NM NM
Source: Bloomberg, HSBC
For the full report, see China LGFVs – 2022 outlook, Worried, but not scared, 16 December 2021.
85
February 2022
FX: The e-CNY prepares for

lift-off
 The focus on Central Bank Digital Currencies is rising …

 … with more progress expected in 2022, led by the e-CNY
 We track some of the recent developments in China
Paul Mackel It has been a busy time for Central Bank Digital Currencies (CBDCs). China has been leading
Global Head of FX Research the way with the e-CNY and we summarise some of the recent developments and comments by
Banking Corporation Limited senior officials.
+852 2996 6565 PBoC’s Mr Mu Changchun at the Hong Kong Fintech Week conference (3 Nov 2021)
Joey Chew
Senior Asia FX Strategist Recent developments: China increased the number of individuals with digital CNY accounts to
The Hongkong and Shanghai 140m (10% of the population), with 10m corporate accounts created (compared with more than
joey.s.chew@hsbc.com.hk 24m individual and enterprise users with e-CNY wallets at the end of June). Transactions in e-
+852 2996 6568 CNY reached CNY62bn (compared with CNY34.5bn at the end of June) in trials rolled out in
Zoey Zhou about a dozen regions. The volume of transactions totalled 150m.
Associate, FX Strategy
Anonymity and transaction limits: Digital yuan operators can open four types of e-wallets for
zoey.z.zhou@hsbc.com.hk customers. The least privileged only requires a phone number, so are anonymous even to the
+852 3945 2400
PBoC. Daily transaction values for this type of e-wallet holder are capped at CNY5k, with an
annual cap of CNY50k. The highest privileged e-wallet needs to be opened at a bank counter
with personal identification, with no transaction cap.
Privacy protection: Mr Mu reiterated that these e-wallets collect less transaction information
than traditional digital payment services. The PBOC would not provide the information to any
third-party or other government agencies unless stipulated by the law (Bloomberg, 3 November
2021).
FX conversion machine (8 Nov 2021)

The Bank of China has a machine that converts foreign currencies into e-CNY, the China Times
reported. Users need to link their passports to the transaction, but do not need a bank account,
according to the report. The machine, unveiled at China’s International Import Expo in
Shanghai, currently supports 17 foreign currencies.
Speech by PBoC Governor Yi Gang at the 30th Anniversary Conference of the Bank of
Finland Institute for Emerging Economics (9 Nov 2021)
To reduce the reliance on private digital payment providers: “Last year, mobile payment in
China increased by 25%, with a penetration rate of 86%... However, mobile payment services
are mainly provided by the private sector, brewing risks of market fragmentation and privacy
infringement. The CBDC allows central banks to continue to provide a credible and secure
means of payment in the digital era, while improving efficiency and integrity of the payment
system.”
86
February 2022
Latest developments: “As of 8 October, pilot scenarios have exceeded 3.5m, over 123m
personal wallets have been opened, with transaction volume totalling CNY56bn. The e-CNY
scenarios are wide-ranging, including green transportation to support carbon reduction.”
Development goals: “Efforts will be made to establish a management model with reference to
cash and bank accounts, enhance efficiency, privacy protection and anti-counterfeiting features,
increase interoperability with existing payment tools, and improve the e-CNY ecosystem.”
Financial stability: “CBDCs impact on monetary policy and financial stability mainly depends
on the design. If a CBDC is more like cash, the impact would be relatively limited. If a
CBDC has the attributes of deposits and other financial assets, deposit substitution is likely,
which could lead to disintermediation and less efficient monetary policy transmission.
International cooperation: “We would like to strengthen cooperation with other central banks
and international organisations on CBDCs. The PBOC, the BIS, the Bank of Thailand, the
Central Bank of the UAE and the Hong Kong Monetary Authority jointly launched the multilateral
CBDC bridge project, to explore the role of CBDC in cross-border payment. We also have
regular technical exchanges with the ECB. Going forward, the PBOC will continue to study the
standards and rules governing CBDCs in an open-minded and inclusive manner, in order to
promote the development of the international monetary system while addressing potential
challenges” (9 November 2021).
The e-CNY in the securities industry (26 Nov 2021)

“Beijing authorities recently unveiled several fintech innovation pilot programs in the capital
market, including one on digital yuan application in the securities industry.” Users can use e-
CNY to pay for financial services and invest in OTC products (Xinhua, 26 November 2021).
Beijing looks into setting up a digital asset exchange to push the e-yuan (26 Nov 2021)
China is exploring setting up a virtual asset exchange as the government lays out the next step
to complement its pilot of the digital yuan, according to a blue print published on the State
Council website on Friday. The idea is among a wide range of developmental plans for the
Beijing municipal administrative centre, an area situated in the north of Beijing which has been
carved out as a key plank of the capital’s development up to 2035. “The latest announcement is
likely to be related to the promotion of usage of the digital yuan. It shows the country’s
determination to push the digital currency,” said Tom Chan Pak-lam, chairman of the Institute of
Securities Dealers in Hong Kong (SCMP, 26 November 2021).
The e-CNY in Beijing Winter Olympics (2 Dec 2021)

“Consumers can use the e-CNY either through wallet apps installed on their mobile phones or
via physical wallets in the forms of cards and wearables such as smart watches and ski gloves
or badges to meet their diversified needs. Users can easily obtain or open digital yuan wallets at
branches of the Bank of China, self-service machines, and some hotels during the upcoming
Olympics” (China Daily, 2 December 2021).
The e-CNY to be fully convertible with HKD (9 Dec 2021)

PBoC’s Mr Mu Changchun said at a seminar that the PBoC is exploring connecting the e-CNY
system into Faster Payment System in HK, meaning that digital yuan will be fully convertible
with HKD. He also says that conversion between the e-CNY and HKD will happen in virtual
order in e-wallets and there will be no currency substitution (Yicai, 9 December 2021).
For the full report, see Currency Outlook, Dollar in the driver’s seat (page 42), 17 December
2021.
87
February 2022
The PBoC strikes back
 The Chinese authorities have clearly signalled their discomfort with

the recent pace of the RMB’s appreciation
 But the RMB is supported by a large current account surplus and
portfolio inflows
 We believe USD-RMB may stabilise for now, with a durable rebound
likely in 2022 when the Fed lifts rates
The People’s Bank of China (PBoC) has a message – the RMB’s recent appreciation has been a
Paul Mackel
Global Head of FX Research little over-extended. The authorities have communicated this in three ways:
Banking Corporation Limited 1 A statement by the China FX Committee (chaired by PBoC and SAFE officials) on
19 November in which the key points include: (i) the RMB will fluctuate in both directions;
+852 2996 6565
(ii) corporates should neutralise their FX risks and exposures; and (iii) market participants
Joey Chew
Senior Asia FX Strategist should not speculate on FX.
Banking Corporation Limited 2 An announcement of a 2ppt hike in the foreign exchange required reserve ratio (FX RRR)
joey.s.chew@hsbc.com.hk
+852 2996 6568
on 9 December (from 7% to 9%, effective on 15 December). Since there are around USD1trn
of FX deposits onshore currently, this regulation will likely lock up about USD20bn of USD
Zoey Zhou
Associate, FX Strategy liquidity. There could be some impact on banks’ liquidity management, since the FX loan-to-
The Hongkong and Shanghai deposit ratio is currently 94%. Theoretically, FX forward points should fall (implied USD
zoey.z.zhou@hsbc.com.hk yields should rise and become less negative) on the back of this regulation change – reducing
+852 3945 2400 the RMB’s carry.
3 A series of higher-than-expected USD-CNY fixings. Since 18 November, the fixing has come
in higher than the Bloomberg survey every single trading day, except for one day. The fixing on
10 December was 179 pips higher than the survey, the largest positive deviation on record
(since Bloomberg’s survey began in June 2018). Another way of thinking about policy bias in
the fixing is to analyse the beta to overnight broad USD changes. Based on our regression
analysis, we believe there is an asymmetric beta, whereby the coefficient is higher
(around 60%) when the USD strengthens (so USD-CNY will rise more than it would
otherwise), and lower (around 40%) when the USD weakens (so USD-CNY falls less). A
regression with a sample spanning November 2020 to April 2021 suggests the betas were
roughly the same back then (around 45%), regardless of broad USD direction.
The timing of all these policy signals suggests to us that the 6.35-6.40 range in USD-RMB
may be quite important to the authorities. Indeed, HSBC’s Little Mac Valuation Range
suggests that the “fair value” range for USD-RMB is 6.30-7.25. We also estimate that the
CFETS RMB index is about 6% overvalued currently, comparable to the overvaluation reached
just before the “fixing reform” on 11 August 2015.
Our forecasts for USD-RMB are 6.40 for end-2021 and 6.55 for end-2022 (see Asian FX
Focus: RMB: Overstretching, 28 October 2021).
88
February 2022
A history of the PBoC’s FX policy actions

106 Aug-15: Jan-18: Dec-21: 6.1
Fix ing reform Sep-17: CCF removed RRR hike on 6.2
104 reserv e FX deposits 6.3
charge
102 6.4
remov ed Aug-18:
Reserv e charge & CCF 6.5
100 Sep-15:
May -17: reintroduced 6.6
20% reserv e
98 charge on CCF 6.7
RHS introduced 6.8
96 forw ards May -21: 6.9
RRR hike on
94 FX deposits 7.0
RMB appreciation 7.1
Oct-20:
92 Reserv e charge &
RMB depreciation 7.2
CCF removed
90 7.3
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21
CFETS RMB Index USD-CNY fix USD-CNY spot (RHS, reverse scale)
A history of the deviation between USD-CNY fixings and Bloomberg’s survey numbers
200 6.30
150 6.40
100 6.50
50
6.60
0
6.70
-50
6.80
-100
6.90
-150
-200 7.00
-250 7.10
-300 7.20
Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21
Actual fixing - survey (in pips, LHS) USD-CNH (RHS, reversed scale) Fixing (RHS, reversed scale)
Asymmetric betas in the fixings recently Symmetric betas in the fixings previously
Y-ax is: Chg in USD-CNY fix from prev day 1630 close Y-ax is: Chg in USD-CNY fix from prev day 1630 close
0.4% y = 0.5875x + 4E-06 0.5% y = 0.4538x + 0.0002
sample: Aug to Nov R² = 0.91 0.4% sample: Nov 2020 to R² = 0.777
0.3%
2021 0.3% Apr 2021
0.2% 0.2%
0.1% 0.1%
0.0%
0.0% -0.1%
-0.1% -0.2%
y = 0.4247x + 6E-05 USD appreciates -0.3% USD appreciates
-0.2% R² = 0.7059 y = 0.4445x + 1E-05
-0.4% USD depreciates
USD depreciates R² = 0.7979
-0.3% -0.5%
-0.8% -0.5% -0.3% 0.0% 0.3% 0.5% 0.8% -1.0% -0.5% 0.0% 0.5% 1.0%
X-ax is: Chg in USD vs CFETS basket components X-ax is: Chg in USD vs CFETS basket components
Source: HSBC Source: HSBC
For the full report, see Asian FX Focus: RMB – The PBoC strikes back, 10 December 2021.
89
February 2022
Rates: WGBI inclusion the

last piece of the puzzle
 CGBs included in FTSE Russell WGBI over a 36-month period, from

November 2021 to October 2024
 We estimate China’s weight in WGBI at 5.9% with potential
indexation-related inflows of USD130bn into CGBs, i.e. average
monthly inflow of USD3.6bn
 We see minimal impact from Japan’s GPIF’s move to exclude CGBs
from its investment mandate
André de Silva, CFA The long-awaited inclusion of China government bonds (CGBs) in the FTSE Russell flagship
Head of Global EM Rates World Government Bond Index (WGBI) was confirmed, commencing on 29 October 2021 for the
Research
The Hongkong and Shanghai November 2021 index profile. This process will take 36 months and conclude with the October
2024 index profile. CGBs issued after 1 January 2020 will be included if they reach the required
+852 2822 2217 minimum size of RMB35bn, while CGBs issued before 1 January 2020 are eligible for inclusion
Pin Ru Tan only if the outstanding stock meets the threshold of RMB100bn. Given these criteria, we estimate
Asia-Pacific Rates Strategist there will be 50 CGBs eligible for inclusion, with an average modified duration of around 5-6 years.
Banking Corporation Limited, After assessing the market capitalisation of outstanding CGBs at 29 October 2021, we estimate
Singapore Branch
pin.ru.tan@hsbc.com.sg the weight of China in WGBI at about 5.9%, implying a monthly weight increment of 0.16%.
+65 6658 8782
Currently, the assets under management (AUM) of funds tracking WGBI is USD2.5-3trn (FTSE
Hazel Lai
Associate Russell, May 2021). With an estimated weight of 5.9% for China, we expect USD130bn of
The Hongkong and Shanghai indexation-related foreign inflow into the CGB market over the 36-month inclusion period. The
hazel.k.h.lai@hsbc.com.hk estimated monthly inflow of USD3.6bn is smaller than the monthly average foreign inflow of USD5bn
+852 2288 7467
seen surrounding the inclusion of two other key indices (Bloomberg Global Aggregate and GBI EM)
from April 2019 to November 2020.
On 29 September, Japan’s Government Pension Investment Fund (GPIF) announced that it will not
be investing in CNY-denominated CGBs despite China’s inclusion in WGBI. We believe that the
impact will be minimal. The GPIF commands a large AUM of close to USD1.74trn as of June 2021,
with USD435bn allocated to foreign bonds, and about USD222bn of GPIF’s investments mandated
to track WGBI (excluding JGBs) on a passive basis. The last disclosure by GPIF in March 2021
indicated that the ratio of passively managed foreign bond investments account for 76% (i.e.
USD331bn) of the foreign bond portfolio, and 67% (i.e. USD222bn) of this passive portfolio tracking
WGBI. Assuming these ratios remained at similar level, we estimate that GPIF’s decision would
result in foregone inflows of USD15bn for China’s bond market (i.e. 5.9% of estimated weight in
WGBI) over the inclusion period, or just USD0.4bn of foregone flows per month. We are mindful that
this could be an underestimate as other institutional investors in Japan might follow GPIF’s
move to exclude CGBs from their investment mandates. However, we think such downside risk
is low, given the attractive yields offered by CGBs compared with other low-yielding countries.
90
February 2022
Sizeable foreign inflow in September is unlikely a result of WGBI inclusion

Given the strong foreign inflows into CGBs after multiple index inclusions, the foreign ownership
of CGBs has climbed from 8.5% in December 2019 to 10.6% as of September 2021. There was
quite a large inflow of USD12bn into CGBs in September 2021 but we do not think this was
contributed by WGBI trackers as most of these funds are passively managed, so the index-
related inflow usually materialises only when the inclusion process begins. Instead, the inflows
in September are possibly triggered by intensifying concerns over China’s growth outlook
following the energy shortage. It is also likely that the central bank’s credible liquidity guarantee
in the money market has further convinced investors about CGB outperformance, particularly in
the recent environment of higher US rates.
Foreign inflows into China’s bond market
20
Feb 2020: China Nov 2020: Complete inclusion
inclusion into GBI-EM into BGAI and GBI-EM
15
Monthly foreign flows (USDbn)
Apr 2019: China inclusion

into Bloomberg Global
10 Aggregate Index (BGAI)
-5
Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21
China government bonds (CGB) Policy bank bonds (PBB)
Source: CEIC, HSBC
Weights in major bond indices and impact of China’s WGBI inclusion

Country WGBI weights as of WGBI weights after WGBI flow impact BBGA weights (%) Moody’s Issuer
30 Jun 2021 (%) China’s full inclusion (%) (USDbn) as of 30 Jun 2021 Rating
China - 5.87 133.83 6.86 A1
United States 37.93 35.70 (50.76) 42.20 Aaa
Japan 16.54 15.57 (22.14) 13.24 A1
France 8.40 7.91 (11.24) 0.00 Aa2
Italy 7.98 7.51 (10.68) 0.01 Baa3
Germany 6.27 5.90 (8.39) 0.00 Aaa
United Kingdom 5.36 5.05 (7.17) 4.99 Aa3
Spain 4.97 4.68 (6.65) - Baa1
Belgium 1.96 1.84 (2.62) - Aa3
Australia 1.71 1.61 (2.29) 1.47 Aaa
Netherlands 1.63 1.53 (2.18) - Aaa
Canada 1.65 1.55 (2.21) 2.87 Aaa
Austria 1.24 1.17 (1.66) - Aa1
Ireland 0.69 0.65 (0.92) - A2
Mexico 0.61 0.57 (0.82) 0.26 Baa1
Poland 0.53 0.50 (0.71) 0.20 A2
Finland 0.52 0.49 (0.70) - Aa1
Denmark 0.41 0.39 (0.55) 0.19 Aaa
Malaysia 0.40 0.38 (0.54) 0.29 A3
Israel 0.38 0.36 (0.51) 0.15 A1
Singapore 0.36 0.34 (0.48) 0.19 Aaa
Sweden 0.25 0.24 (0.33) 0.43 Aaa
Norway 0.21 0.20 (0.28) 0.10 Aaa
Source: FTSE Russell, Bloomberg, HSBC
For the full report, see China’s long-awaited WGBI inclusion – Last piece of the puzzle,
27 October 2021.
91
February 2022
92
February 2022
ESG
93
February 2022
HK SFC updates guidance for

fund disclosures
 HK adopts EU-style disclosure requirements for ESG funds

 Though less strict than the EU, HK tries to avoid ‘greenwashing’
 We think more regulators will adopt similar measures globally
Wai-Shin Chan, CFA ESG fund disclosures. Hong Kong’s Securities and Futures Commission (SFC) in June issued
Head, Climate Change Centre; its new guidance on enhanced disclosures for ESG funds. Funds that incorporate ESG
Head, ESG Research
The Hongkong and Shanghai considerations as a key investment objective will be required to disclose additional ESG-related
information from 1 January 2022. We view this as an ongoing attempt by the regulator to avoid
wai.shin.chan@hsbc.com.hk
+852 2822 4870 misleading “ESG labelling” as well as the perception of “greenwashing” for funds registered in
Polo Heung Hong Kong.
The Hongkong and Shanghai Chasing ESG quality. Hong Kong follows the EU’s Sustainable Finance Disclosure Regulation
polo.heung@hsbc.com.hk (SFDR). The HK rules will apply to locally authorised funds that claim ESG as a key investment
+852 2914 9861 focus. Disclosures include the area of “ESG focus”, the investment strategy that delivers this
ESG focus, asset allocation and benchmarks. Funds must also disclose how ESG is measured
and monitored, the methodologies used, relevant risks and details of the engagement
approach. These are to be given in offering documents as well as periodic reports. There is
also additional guidance for funds with a specific focus on climate change, but not any other
ESG issue.
What’s in a name? Given strong growth in ESG awareness in financial markets and the
commensurate rise in the number of “ESG-labelled” funds, more regulators are stepping in to
ensure the quality of ESG objectives (and analysis) is not diluted. In other words, to ensure that
“ESG-labelled” funds actually take ESG factors into consideration in a demonstrable
manner – although this can be difficult to verify independently. We expect other markets to
adopt similar measures in the near future.
HK’s ESG fund disclosures are less stringent than the EU’s (but a good start)
EU SFDR HK ESG Fund disclosure guidance
Effective date 10 March 2021 1 January 2022
Disclosure level Corporate and product level Product level
Funds that are “in-  All financial products (Art. 7)  SFC-authorised Funds that incorporate ESG
scope”  Products that promote “E” or “S” characteristics (Art. 8) factors in their investment strategy or focus
 Products that have sustainable investment as their  The SFC will maintain a list of ESG funds that
objectives (Art. 9) comply with the guidance
Documentation  Pre-contractual disclosure  Disclosure in offering documents

requirements  Periodic reporting  Periodic reporting
 Website product disclosure
Source: European Commission, SFC of HK
94
February 2022
New ESG fund guidance in Hong Kong

The guidance “applies to SFC-authorised funds which incorporate ESG factors as their key
authorised funds which incorporate ESG factors as their key investment focus and reflect such
in the investment objective and/or strategy”. It will be effective from 1 January 2022, such that
existing “ESG labelled” funds will have to ensure that disclosures meet the requirements by
2022. The SFC will maintain a list of all authorised ESG funds on its website – new funds will
have to apply for inclusion and demonstrate compliance with these updated guidelines.
Key requirements
Disclosure in offering documents

The ESG focus of the fund – such as “Climate change; Environment; ESG / sustainability;
Food security; Forestry; Social; Renewable energy; Sustainable transportation; Water; Others”
Criteria and methodologies used to measure this ESG focus
ESG investment strategy – such as “Best-in-class / positive screening; Impact investing;

Thematic; Other” as well as how the strategy is implemented
Associated risks – such as lack of data / taxonomy, limitations of methodology, reliance of
third party sources, or degree of “subjective judgment in investment selection”
Reference benchmark – which benchmark (if any) and how is it relevant
Engagement policies – such as voting policies and engagement strategies
Periodic assessment and reporting
Frequency – reporting “at least annually”, to asses if the fund “attained its ESG focus”
Allocation – proportion of investments that meet ESG focus i.e. were eliminated / included
Engagement – actions taken such as engagement activities and proxy voting records
Source: HK SFC
A step in the right direction … but revisions required in future

We think it is very positive that Hong Kong has taken a leaf out of the EU’s Sustainable Finance
Disclosure Regulation (SFDR) to make disclosures for ESG funds mandatory at this stage.
However, we believe this is clearly a first step for the SFC because we consider the guidelines
as much simpler than its SFDR equivalent. For example, the list of ESG issues is fairly narrow,
in our view, whereas the description and disclosure requirements are fairly broad. We think this
leaves a wide berth for interpretation.
As the number of registered ESG funds grows, we expect the SFC to further tighten the criteria
to avoid another round of “greenwashing”. As for now, we think it is a step in the right direction
to require fund managers to be more transparent in how they are considering ESG factors in
their investment decisions, especially if funds are being marketed with ESG labels. This also
propagates the ‘virtuous circle’ of investors demanding more ESG information from
companies – so that investors can meet disclosures requirements themselves. We expect
other regulators to release similar regulations in the near future – with the purpose of tightening
fund labelling, avoiding the perception of greenwashing and improving ESG integrity.
For the full report, see ESG Matters – HK SFC updates guidance for ESG fund disclosures,
6 July 2021.
95
February 2022
HK to embed more ESG in

revised governance code
 The Stock Exchange of Hong Kong has proposed further revisions to

its Corporate Governance Code for listed entities
 ESG issues such as culture, independence, diversity and
stakeholder engagement could become more prominent
 Although generally positive, we think the potential revisions still lag
behind global best practice in some areas, such as diversity
Wai-Shin Chan, CFA Revisiting Governance. On 18 June 2021, a public consultation on proposed revisions to the
Head, Climate Change Centre; Corporate Governance Code (CG Code) and related Listing Rules in Hong Kong by the stock
Head, ESG Research
The Hongkong and Shanghai exchange closed after two months. As public listings in the Hong Kong market continue to grow,
we think there should be a better balance between the interests of listed companies and those
+852 2822 4870 of investors and other stakeholders.
Polo Heung
Consulting with purpose. The consultation takes into account various issues that are rising up
The Hongkong and Shanghai the global governance agenda, including: corporate culture and its alignment with strategy, the
polo.heung@hsbc.com.hk independence of boards, and broader engagement. Gender diversity is now an issue with single
+852 2914 9861 gender boards to be deemed not acceptable. Hong Kong is behind other markets, in our view,
Yaryna Kobel as it proposes diversity implementation timelines but no formal targets.
Corporate Governance Analyst
HSBC Bank plc Better but not far enough. In our opinion, the proposals could bring incremental positive
yaryna.kobel@hsbc.com
+44 20 3359 6152 change to Hong Kong’s corporate governance practices. However, in some areas, the proposed
Anushua Chowdhury revisions still lag behind global governance practices. For example, whilst there is a focus on
Associate board effectiveness, there is no required timeframe for board effectiveness reviews. We have
Bangalore
already seen a rise in engagement on sustainability issues by investors and believe they, and
other stakeholders, will demand more comparable disclosures and higher transparency. As
other markets in the region update their own codes, we think Hong Kong needs to evolve further
to maintain its position as a leading destination for companies to list.
ESG regulation development in Hong Kong
Source: HKEX, HSBC
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February 2022
Consultation highlights
Source: HKEX, HSBC
For the full report, see ESG Matters – HK to embed more ESG in revised governance code,
21 June 2021.
97
February 2022
Climate Investment Update –

China’s 14th Five-year Plan
 China’s 2021-25 development plan lacked more detail on how to

achieve carbon neutrality by 2060
 No cap on total emissions but there are subtle changes to language;
commitment to coal remains
 We await more concrete plans as wrangling over targets and policies
between industries and regions continues
Wai-Shin Chan, CFA A new plan? On 5 March 2021, China released its 14th Five-year Plan (FYP) for the 2021-25
Head, Climate Change Centre; period. There were much fewer details than expected, with only modest insight into how China
Head, ESG Research
The Hongkong and Shanghai will achieve its long-term climate aims, most notably carbon neutrality by 2060. The FYP
reiterated many known goals with imperatives limited to aspirations such as we will: “focus on”,
+852 2822 4870 “vigorously implement”, and “formulate guidelines”. In our view, this highlights the enormity of
the task ahead, the coordination of so many moving parts within the planned economy, and
possibly the internal politics of officially setting targets and allocating responsibility.
The same plan? The headline climate-related targets for 2021-25 were lower than anticipated
and do not, at this stage at least, indicate any sudden change of course or accelerated policies.
For example, the climate intensity reduction target remains the same at -18% (2021-25),
whilst the decline in energy intensity is to be lower, at -13.5%, compared with the -15% of the
13FYP (though -18% was achieved). Water intensity of GDP is set at -14% compared with -23%
in the 13FYP. China will work on “an action plan for carbon emissions to peak by 2030.”
An updated plan? Although few new climate-related targets were set, we note subtle shifts in
the language used to describe certain issues. We believe this is a sign of the direction of travel
but without details of the precise routes. For instance, there will be “stricter policies and
measures to reach carbon neutrality by 2060” although no details were given in the 14FYP.
China did not set a cap on total emissions. We think this highlights the difficulty in gathering
accurate information, controlling then reducing emissions in the world’s largest carbon emitter.
The evolution of China’s climate targets

2020 climate Climate neutrality by 14 th FYP released (subtle language
targets set 2060 announced shifts; no cap on carbon emissions)
2009 2015 Sep 2020 Dec 2020 Mar 2021 Before 2030
2030 climate President Xi Jinping updates China’s emissions

targets set 2030 targets in speech to peak
Source: HSBC
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February 2022
Few new targets, but subtle changes in language
Climate pledges: Across the various reports, there were varying phrases to indicate a determination
to meet China’s 2030 climate pledge (nationally determined contribution, NDC). The Economic and
Social Development Plan indicated that NDC targets had already been raised – we acknowledge
remarks made by President Xi at the Climate Ambition Summit on 12 December 2020 although a
formal submission to the UN is yet to be made.
China’s 2030 climate pledge

Official pledge Xi Jinping speech HSBC comments
(30 June 2015) (12 December 2020)
Carbon intensity reduction 60-65% decline by over 65% China is well on the way to meeting this target; questions remain
(2030 vs 2005) over when China may move from intensity to absolute
Emissions peak around 2030 before 2030 It is widely acknowledged this is achievable and “before”
indicates this side of 2030 but with room to manoeuvre
Non-fossil fuels (as a % of 20% by 2030 25% by 2030 This element includes hydro and nuclear; a 75% reliance on
primary energy) fossil fuels makes the 2060 carbon neutral path challenging
Forest coverage 4.5bn m3 6bn m3 We think this is gearing up for a major part to play in the
carbon offset market as carbon neutrality involves sinks
Source: HSBC (based on Chinese Government and Xinhua)
Carbon consideration: Whilst China will continue to focus on reducing carbon intensity, there
was a mention that absolute emissions reductions should be brought into consideration. We
think this is a tacit acknowledgment that the rest of the world is slowly moving towards absolute
reduction targets, but that China is not ready for these at the moment.
Carbon transformation: China will deepen the low-carbon transformation of industry,

construction and transportation. We think this acknowledges the difficulty in balancing GDP
growth and decarbonising these parts of the economy. This balancing act, with GDP still a
priority, is not something that can be done quickly. There were specific mentions of the green
transformation for the steel, petrochemicals and building materials sectors.
Other greenhouse gases (GHGs): The FYP document also mentioned the control of other
greenhouse gases such as methane, hydrofluorocarbons and perfluorocarbons. We anticipate
some stricter rules to affect the sectors that produce these gases (e.g. agriculture and food
waste, etc.) however visibility on when changes could happen is low.
Carbon trading: Carbon and energy trading were mentioned (as expected) as a tool to achieve
climate targets, however we also note the improving of trading of “voluntary GHG reductions”
which implies that China is working on further developing its carbon offset market.
Renewable energy: Renewable energy was discussed with little fanfare although we note in
particular mentions of: waste-to-energy, hydrogen power and energy storage.
Finance: China is looking to introduce “special policies” that will contribute to the financial
support of green and low carbon development.
Fossil fuels: These continue to be the linchpin in China’s desire for energy security. Coal will
remain a significant part of the economy as the production, supply and storage of fossil fuels is
to be improved over the next Five-Year plan period. We note that China continues to promote
the “clean and efficient use of coal”.
For the full report, see Climate Investment Update – China’s FYP: more of the same, 8 March
2021.
99
February 2022
Green Bonds in China
 China has updated its green projects catalogue – removing ‘clean

coal’ and providing details on acceptable green projects
 The PBoC to mobilise more green investments by allocating green
bonds to reserves and developing market infrastructure
 We think policy support for green finance will accelerate as China
aligns its markets with sustainable development
Wai-Shin Chan, CFA

Aligning shades of green. China has updated its green bond projects catalogue to further
Head, Climate Change Centre; mobilise green investments and attract more foreign participation in its domestic green bond
Head, ESG Research
The Hongkong and Shanghai market. The revised catalogue (effective 1 July 2021) is now more aligned with international
standards. The most significant change was the removal of ‘clean coal’ as an eligible activity, a
+852 2822 4870 feature of the 2015 edition of the catalogue which was questioned by international investors.
Louisa Lam, CFA
Credit Analyst, Asia Pacific
Aligning carbon targets. In our view, the PBoC is aligning its financial oversight to China’s key
The Hongkong and Shanghai climate targets: reducing emissions intensity, peaking emissions and working towards carbon
louisa.m.c.lam@hsbc.com.hk neutrality. Besides the effort to mobilise green investments, the PBoC is evaluating the potential
+852 2996 6586 impacts of climate change on financial stability and monetary policy. For example, it has asked
pilot financial institutions to measure emissions and disclose associated climate risks. We think
this is a major step towards addressing climate change – both the risks and the opportunities –
within the financial system, and is in line with what other major economies are doing.
Aligning the future. We view this as the next step to a more focused alignment of China’s
financial system with sustainable development. For example, China can use policy to promote
greener financing and green investments by enhancing its supporting infrastructure. We expect
onshore green bond supply to increase 15-20% per annum in the coming three years. Over time,
this should improve the diversity and liquidity of the green capital markets in China. We expect
more guidelines and regulations that support and develop green finance and climate risk
management to be released in the future as China seeks to raise investor and issuer confidence.
Defining what counts as green
China’s Green Bond Project Catalogue

The Green Bond Project Catalogue was first developed in 2015 by the PBoC to provide specific
criteria for projects that may be eligible for green bond financing. At the time, the catalogue only
covered bonds issued by regulated financial entities, but now applies to all eligible green bond
issuers such as listed companies and other financial institutions.
This revised edition of the catalogue, jointly issued by the People’s Bank of China (PBoC), the
National Development and Reform Commission (NDRC) and the China Securities Regulatory
Commission (CSRC), is designed to do the following:
 provide further regulation to the domestic green bond market;
100
February 2022
 direct more capital flows (domestic and international) to green projects; and
 align more to international standards.
Changes in the 2021 edition

The catalogue now lists over 200 project types, up from the 38 from the previous edition. Many
of the categorisations have become more nuanced. Key changes to the revised edition are:
 the exclusion of activities related to clean coal and clean fossil fuels
 the expansion of activities to include green agriculture, sustainable building, water
conservation, green services;
 the introduction of a fourth level of classification.
Key revisions to China’s Green Bond Project Catalogue

203 project types 38 project types
Green Services (31) Ecological protection and climate

change adaptation (4)
Green upgrade of infrastructure (36) Clean transportation (11)
Ecological and environment-
Project Scope related industry (29) Use of resources (7)
Clean energy industry (26) Clean energy (7)
Clean production industry (19) Pollution prevention (3)
Energy saving and environmental

Energy efficiency enhancement (6)
protection industry (62)
Classification 4 levels 3 levels
Green Bond Project Catalogue (2021) Green Bond Project Catalogue (2015)
Source: PBoC
Banks are the largest group of domestic green bond issuers in China
55
50
45
USD bn (equv.)
40
35
30
25
20
15
10
5
0
Source: Bloomberg, HSBC calculations
For the full report, see Green Bonds in China, Aligning financial markets with climate targets,
5 May 2021.
101
February 2022
102
February 2022
Equity Strategy
103
February 2022
China Equity Strategy:

2022 outlook
 We forecast 9-16% index upside for A shares in 2022e on pro-

growth policies, improving earnings and ample liquidity
 We analyse the four big sentiment drivers – Sino-US trade talks,
COVID-19, US Fed and property – and turn more upbeat
 Highlight four themes: green economy, tech self-sufficiency, SME
champions, and mean reversion
Steven Sun*, CFA

A better year. After being cautious on the China indexes in 2021, we foresee healthy gains of
Reg. No. S1700517110003) 9-16% in 2022e, given these four key factors:
Head of Research, HSBC Qianhai
Securities Limited  The Central Economic Work Conference held in December 2021 released a clear signal to
stevensun@hsbcqh.com.cn stabilise growth pre-emptively in 2022;
+86 755 8898 3158
 HSBC’s China economists expect RMB2trn in stimulus for tech and green investments, one
Anakin Tang*
Reg. No. S1700521090001) half through monetary tools like green relending, and the other half fiscal. Moreover, the
Analyst, A-share Equity Strategy regulatory crackdown on the Internet, education and gaming sectors is priced in while local-
anakin.tang@hsbcqh.com.cn level policy fine-tuning for property will spread nationwide;
+86 21 6081 3876
 We expect 14-23% earnings growth for the major A-share indices on improving margins.
Jeffrey Xie*
Reg. No. S1700121100003) Moderating PPI and higher CPI in 2022e should provide further support to mid-stream
Associate
Shenzhen
manufacturers’ and downstream sectors’ profitability;
 Ample market liquidity should persist as Chinese households continue to diversify into
*Employed by a non-US affiliate of HSBC equities and offshore investors allocate more to A-shares. We conservatively estimate
qualified pursuant to FINRA regulations northbound net inflows could reach RMB300bn in 2022e. For the 10 trading days up to 14
December, we notice that net inflows to northbound and southbound reached cRMB76bn
and cRMB21bn respectively, indicating positive market sentiment.
Four key issues for the market. We see the risk of a further de-rating as limited after
analysing the major sentiment/valuation drivers: (1) Sino-US trade talks may resume in 1H22.
We also expect the set-up of working groups where there is more consensus than
disagreement; (2) China has the option to ease COVID-19 restrictions which could boost
consumption and market confidence; (3) the potential spillover risk from quicker-than-expected
Fed tightening will impact China much less than other EMs; and (4) a property sector soft
landing is still our base-case scenario.
Four themes: (1). Green economy: New infrastructure, EV (and its value chain batteries,
battery components + equipment), and new materials; (2) Tech self-sufficiency:
Semiconductor equipment, consumer electronics (notably AR/VR, innovative drugs); (3) SMEs
specialised in niche markets, especially high-end manufacturing and digitalisation; and (4)
Mean reversion: Selected agriculture, banking, consumer names, petrochemicals and media.
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February 2022
2022e year-end index targets and earnings forecasts

SHCOMP CSI 300 SZCOMP
Dividend yield 2.8 2.3 1.6
Index level (14 Dec 2021) 3,661.5 5,049.7 15,136.8
EPS growth YR1 13.7% 15.8% 23.3%
EPS growth YR2 11.8% 13.9% 20.1%
Growth in stage 2 10 12 16
No of years of excess growth 10 10 12
Perpetual growth rate 3 3 3
COE (%) 8.5 8.5 8.5
Payout ratio now (%) 33 32 32
Payout ratio at end of stage 2 33 32 32
Fair value 3994 5589 17435
Under/overvalued (%) -11% -12% -15%
HSBC end-2022 targets 4,000 5,600 17,500

HSBC target implied 12M FWD PE 12.9 15.1 23.7
Index upside 9.2% 10.9% 15.6%
Note: Upside is as of each market close on 14 December 2021
Source: Bloomberg, Wind, HSBC Qianhai Securities
The PBoC’s 3Q21 Monetary Policy Report (MPR) signalled an upcoming credit cycle
upturn, a positive signal for the A-share market
17.0% 6000
3Q18 MPR 1Q19 MPR reiterated 1Q20 MPR 3Q20 MPR reiterated “control the
removed “control the general valve removed “control general valve of money supply”
16.0% of money supply” the general valve of
5500
“control the
general valve of money supply”
15.0% 5000
money supply”
14.0% 3Q21 MPR removed 4500
“control the general
13.0% valve of money supply” 4000
12.0% 3500
11.0% 3000
Jul-18
Jul-19
Jul-20
Jul-21
Jan-18
Apr-18
Oct-18
Jan-19
Apr-19
Oct-19
Jan-20
Apr-20
Oct-20
Jan-21
Apr-21
Oct-21
Total debt outstanding (% y-o-y) CSI300
Note: Shaded area indicates when money supply was tighter. Total debt includes RMB loans, government bonds, and corporate bonds
Source: PBoC, HSBC Qianhai Securities
Average annual green investments to PBoC now offers cheap funding to banks
surpass RMB5trn in 2020-60, of which that extend green loans via re-lending
RMB2trn is gov’t driven (RMB1trn)
USDtrn
10.0% 3.00%
1.0 SHCOMP
2.50%
0.85.0%
2.00%
0.6
0.0% 1.50%
0.4
1.00%
-5.0%
0.2 0.50%
0.0 0.00%
-10.0%2016-20 2030 2040 2050 2060 1-year Green 7-day 1-year 1-year
May
Fuel Jul
Production Sep Nov
ElectricityJan Mar
Generation deposit financing reverse treasury MLF rate
Infrastructure
2020a Industry
2021e 2022e rate rate repo rate bond yield
Transportation Buildings
Source: IEA, HSBC Global Research Source: Wind, HSBC Global Research
For the full report, see China Equity Strategy – 2022: Moderate index gains as headwinds ease,
16 December 2021.
105
February 2022

Image: Crowded street scene
with lanterns
106
February 2022
China is now home to more

than 2m high-net-worth
individuals, those with the
equivalent of at least RMB10m
(USD1.55m) in investable
assets. We think this number
will rise to 5m by 2025.
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February 2022
Why we remain overweight on

mainland China
 Valuations have turned attractive; ample liquidity to extend support

 Eligible onshore institutional investors can invest in Hong Kong’s
bond market, subject to a daily and annual quota
 Consensus expects net profit growth of 15% for FTSE China in
2022e. We remain overweight mainland China
Herald van der Linde*, CFA We remain overweight on mainland China given (1) a decent earnings growth outlook despite
Head of Equity Strategy, Asia all the macro-economic uncertainties; (2) attractive valuations relative to other major markets in
Pacific
The Hongkong and Shanghai Asia; and (3) ample liquidity with global funds underweight Chinese stocks. We expect a shift in
policy tone from de-risking to pro-growth, with a focus on boosting green investments and
+852 2996 6575 containing real estate risks.
Prerna Garg*
Associate
Consensus expects net profit growth of 15% for FTSE China in 2022e. Meanwhile, earnings
Bangalore have become much more diversified. Unlike previous years, when it was the mainland Chinese
internet companies that spearheaded earnings growth in this market, earnings growth in 2022e
*Employed by a non-US affiliate of HSBC is likely to be more broad-based. We believe a new round of scientific and technological
qualified pursuant to FINRA regulations innovations, industrial upgrading and energy transition will be the new driving force of earnings
growth.
Earnings momentum, however, has remained weak. Mainland China experienced one of the
largest downward revisions to forward earnings growth in 2021, led by IT and consumer
discretionary names. Valuations have become attractive – FTSE China is trading at a forward
PE of 11.4x, 6% below its five-year average.
We foresee supportive liquidity at both the macro and the market level. Our house view expects
Beijing to introduce more targeted easing measures in coming months to cushion the economic
slowdown. This is likely to come in the form of increased credit support for green investments,
small businesses and manufacturers, and more tax incentives and subsidies devoted to
promoting innovation and technological upgrading. This should bode well for mainland China
equities. The ample market liquidity should persist as Chinese households continue to diversify
into equities and offshore investors allocate more to A-shares.
There’s the potential spill-over risk of an EM crisis if the US Fed tightens more quickly than
expected. We believe China is better positioned for potential Fed rate hikes given a higher trade
surplus and the government’s pro-growth tone. While there are signs of contagion risk from
Evergrande and investors are worrying about a potential property hard landing in 2022, we see
more supportive policy signals helping to prevent systemic risk.
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February 2022
1. Returns (%, LC) 2. Valuations

FTSE China HSCEI 2021e 2022e
3-month -16.5 -18.1 PE (x) 13.7 11.8
6-month -22.0 -25.0 PB (x) 1.58 1.43
12-month -11.4 -11.8 Dividend yield (%) 2.0 2.2
24-month 17.5 -17.1
3. 3-month sector performance (%) 4. Earnings (%)
Sector Perf Sector Perf 2021e 2022e
Oil & Gas 16.8 Consumer Services -25.2 Earnings growth (y-o-y) 34.2 15.9
Utilities 10.6 Tech -20.7 ROE 11.5 12.1
Basic Materials 4.8 Telecom -16.9 ROA 4.3 4.5
Net debt/equity ratio* 27.6 21.5
Note: Performance as of 8 October 2021. Return is the change in price index during various periods *ex-Financials.
Source: FTSE Russell, FactSet, HSBC estimates
Market performance Earnings momentum
150 30 FTSE China 3-month earning momentum

140 20
130 10
120 0
110
-10
100
-20
90
Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 -30
03
05
06
08
09
11
13
14
16
17
19
21
04
07
10
12
15
18
20
Cyclicals Defensive FTSE China
Source: FTSE Russell, FactSet, HSBC Note: Earnings momentum = 3-month % change in 12-month forward EPS.
Economy Valuations
70000
10% Consensus forecast on real GDP growth
9% 60000
8% 22x
7% 50000
6% 18x
5% 40000
4% 14x
3% 30000
2%
1% 20000 10x
0%
10000
Jan-18
Jan-19
Jan-20
Jan-21
Sep-18
Sep-19
Sep-20
Sep-21
May-18
May-20
May-19
May-21
0
03 05 07 09 11 13 15 17 19 21
2019 2020 2021 2022
Price index
Source: Consensus Economics, HSBC Source: FTSE Russell, FactSet, HSBC
Earnings Foreign flows
40 FTSE China 600

30 500
400
USDbn
20
300
% y-o-y
10
200
0
100
-10
0
Jan-14
Jan-15
Jan-17
Jan-18
Jan-20
Jan-21
Jan-13
Jan-16
Jan-19
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jul-21
-20
2001
2003
2006
2008
2010
2012
2014
2016
2018
2020e
2022e
Foreign flows to mainland China

Source: FTSE Russell, FactSet, HSBC Note: Data as of June 2021
For the full report, see Asia Equity Strategy Quarterly, 6 January 2022.
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February 2022
Ageing and pensions
 In the era of common prosperity, pension reform is attracting greater

attention from policymakers
 Policies supporting the development of the private pension market
set to redirect other forms of savings towards pension products
 Chinese pension funds will exert greater market influence as assets
grow and converge with global asset allocation practices
Amir Hoosain*
China’s Seventh National Population Census revealed 264m people were aged 60 and over –
Asia Equity Strategist 18.7% of the population, from 13.3% a decade earlier. Against a backdrop of rapid ageing,
Banking Corporation Limited China’s pension system is undersized at about 9% of GDP, or 12%, including strategic reserve
amir.hoosain@hsbc.com.hk assets; this compares to 92% across the OECD area in 2019. Recent policy messages and new
+852 2996 6566
pilot schemes suggest an increased focus during the 14th Five-year Plan on tackling the issues
Kailesh Mistry*, CFA
Head of Financials Research, of underfunding, under-penetration and underdevelopment across Pillars 1-3 of the nation’s
Asia Pacific pension system – the public system, workplace pensions and private pensions.
kailesh.mistry@hsbc.com.hk Balancing the pillars. Public pension (Pillar 1) benefits are the primary source of income for
+852 2822 4321 many retirees; however, the main scheme for urban staff receives a significant level of fiscal
subsidy and replaces only about 45% of the average wage. The pension scheme for rural
residents and flexible economy workers offers much lower income replacement to its 542m
qualified pursuant to FINRA regulations participants (while relying more heavily on subsidies). Only 63m people in the country are
covered by supplementary (Pillar 2) occupational pension plans. As wider system reform is
being planned, development of the private pension (Pillar 3) market offers the most immediate
path forward.
Expansion of the private pension market. The need for longevity funding is a key factor
shaping the development of China’s wealth management industries. New pilot schemes aim to
broaden the range of products and financial institutions in the market. These include flexible
contribution products suited to informal workers and a pilot launched by the wealth management
subsidiaries of four major banks to provide retirement savings products in four cities. A new
National Pension Company is in a preparatory phase, with 11 banks’ wealth management
subsidiaries holding a combined stake of 72.5%. The eventual blueprint for the Pillar 3 system is
expected to centre around an individual account-based national infrastructure with incentives to
spur participation.
Market implications. The rise of pension funds as an investor group supports the development
of institutional financial services by increasing the pool of long-term capital. We expect to see a
higher proportion of equity investment and potential allocation towards overseas markets over
time. We estimate that less than 7% of total pension assets – ex-funds managed by the
National Council for Social Security Fund (NCSSF) – are invested in equities vs. 43% in the
seven largest pension markets. Pension funds also have a tendency to rebalance portfolios
towards higher-risk assets during times of market downturn, providing a counter-cyclical impact.
110
February 2022
We discuss our positive long-term thesis for financial institutions along the pensions value chain
that stand to benefit in different ways from an expanding market.
Share of total population: Now and in the Climbing old-age dependency*

future
16% 2020 2030 2040 2050 90

Child (<15Y)
14% 80
Elderly (65 and up)
12% 70
60
10%
50
8%
40
6% 30
4% 20
2% 10
0% 0
60-69 70-79 80+ 1980 1995 2010 2025 2040 2055 2070 2085 2100
Source: UN Population Division, HSBC Source: HSBC, UN Population Division

*Ratio of population per 100 persons aged 15-64
Accumulated pension balances
10,000 Basic Employee Pension Rural and Urban Resident Pension

Enterprise Annuity Occupational Annuity
8,000 Target Funds NSSF
6,000
RMB bn
4,000
2,000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: MOHRSS, Ministry of Finance, Refinitiv Lipper Research, Morningstar, HSBC
For the full report, see Spotlight – Ageing and pensions in China: Anticipating reform and the private
pension opportunity, 21 October 2021.
111
February 2022
‘East, West, Home Best’:

ADRs and VIEs
 New disclosure rules in the US have put renewed focus on Chinese

ADRs and their VIE structures
 We look at the implications – Hong Kong is an attractive option, but
not all ADRs meet local listing requirements yet
 This is transforming the Hong Kong market into ‘the Nasdaq of the
East’, attracting many more mainland Chinese investors
Herald van der Linde*, CFA Hong Kong calling. New disclosure rules in the US are making life difficult for mainland
Head of Equity Strategy, Asia Chinese companies with American Depository Receipts (ADRs). Their Variable Interest Entity
Pacific
The Hongkong and Shanghai (VIE) corporate structures may also come under greater regulatory scrutiny. They have to
decide whether to comply with the new regulations or delist and move elsewhere, highlighting
+852 2996 6575 the merits of the Hong Kong market, an increasingly attractive alternative.
Nishu Singla*
Associate
Potential new HK listings. There are 37 mainland Chinese companies with a market cap of
Bangalore >USD1bn that are listed in the US, but not in Hong Kong. They have until 2024 to decide what to
do. It’s a big deal. They have a combined market cap of USD278bn and total trading value in the
*Employed by a non-US affiliate of HSBC US of USD3.7bn. Not all of these companies meet Hong Kong’s listing requirements yet and
qualified pursuant to FINRA regulations might have to do a primary listing there.
Total liquidity. Companies with a dual listing can opt to cancel their US listing and move all
trading to Hong Kong. There are 23 companies in this situation, with a combined market cap of
USD1.6trn and total trading liquidity of USD11bn on both exchanges. As trading in these stocks
in the US is typically at least twice as big as in Hong Kong, total combined liquidity is likely to fall
upon delisting in the US.
New shareholders. A new listing changes the shareholder structure, in particular for companies
that are part of the Stock Connect programme as their shareholders may become increasingly
concentrated in mainland China. And that might impact how the companies think about paying
dividends. There are nine such companies, with a combined market cap of USD831bn and
trading liquidity of USD2.3bn in Hong Kong.
‘Nasdaq of the East’. This ‘homecoming’ trend is leading to a radical transformation of the
traditionally financial-centric Hang Seng Index. Tech now accounts for 17% of the total index
and consumer discretionary 19%, up from 12% and 6% in 2019. If all remaining ADRs relist in
Hong Kong and are included in the Hang Seng Index, these numbers would rise to 18% and
23%. Market liquidity could rise from USD22bn to USD27bn.
112
February 2022
‘East, West, Home Best’
Many Dutch proverbs have their origins in 16th century maritime history, when galleons
navigated the oceans in search of spices and gold. ‘East, West, Home Best’ means that
regardless of where you are, home is always best. These days, many Chinese companies with
a listing in the US might be feeling a bit homesick, just like those old Dutch sailors.
Due to renewed focus on US-China tensions, Chinese companies listed in the US have come
under scrutiny again. There are, broadly speaking, two issues that dominate the discussion.
First, new listing requirements in the US make it more difficult for Chinese companies to list in
the US; some have decided to list in Hong Kong instead. Second, these companies often have
a distinct corporate structure as Variable Interest Entities, or VIEs, which may also come under
greater scrutiny. VIEs operate in a regulatory grey area. Their purpose is to access foreign
capital, despite national restrictions on foreign ownership. Risks can be separated into three
broad categories – regulatory, operational, and related to profit extraction.
A new look for the Hang Seng index
We have seen a major transformation in the Hang Seng Index as US-listed mainland Chinese
companies increasingly seek a secondary listing in Hong Kong. Alibaba was the first in 2019,
but there’s a continued focus driven by uncertainties around new US accounting regulations. Over
a three-year horizon, we assume that most of the largest mainland Chinese companies listed in
the US will re-list entirely in Hong Kong and delist themselves from the US.
This is already happening and has altered the make-up of the HSI in the last two years, with the
weights for the consumer discretionary sector jumping from 5.5% to 18.5% and tech rising from
12% to 17%. This has come at the expense of the financial sector, which traditionally dominates
the index, with its weight falling from 49% to 36%. The HSI could see higher multiples and faster
growth in earnings.
Composition of the Hang Seng Index in . … by 2021, it had changed significantly

2019 …
IT IT
FN FN 4%
4%
5%2% 12% 2%4% 17%
CD CD 3%
5%
7%
CS CS
11% 5%
TC TC
3%
RE 5% RE
EN 2%
EN 36%
5% 49% 19%
ID ID
UT UT
HC HC
Key: EN = Energy, ID = Industrials, TC = Telecoms, UT = Utilities, FN = Financials, Key: EN = Energy, ID = Industrials, TC = Telecoms, UT = Utilities, FN = Financials,
CS = Consumer Staples, IT = Tech, CD = Consumer Discretionary, HC = Healthcare CS = Consumer Staples, IT = Tech, CD = Consumer Discretionary, HC = Healthcare
Source: FTSE Russell, FactSet, HSBC Source: FTSE Russell, FactSet, HSBC
For the full report, see The Flying Dutchman – East, West, Home Best,: ADRs and VIEs,
10 January 2022.
113
February 2022
Hong Kong Equity Strategy:

2022 outlook
 Expectations for the Hong Kong market in 2022 are low due to policy
fatigue; this may lead to better-than-expected gains
 Eight themes: the metaverse, transformers, ESG, greener energy,
consolidators, rate hikes, roaring back, and global recovery
 We think H-shares offer the most potential upside
Raymond Liu*, CFA After a challenging year for the Hong Kong market, we believe 2022 will be better. Expectations
Hong Kong Equity Strategist, are low, given many new government initiatives have been announced, leading to policy fatigue,
Real Estate Analyst
The Hongkong and Shanghai but this may lead to better-than-expected performance. Given some 80% of companies listed
today in Hong Kong today are based in mainland China, our starting point is to divide the Hong
raymond.w.m.liu@hsbc.com.hk
+852 2996 6743 Kong market (represented by the Hang Seng Index) in two. There are local companies (FTSE
Herald van der Linde*, CFA HK index is the key proxy) and mainland China firms listed in the city (HSCEI index is the key
Head of Equity Strategy, Asia
Pacific
proxy). We detail the specific catalysts for the two major different segments of the market below.
Banking Corporation Limited Hong Kong-focused stocks. We expect US interest rate hikes to serve as a catalyst as these
heraldvanderlinde@hsbc.com.hk stocks are highly sensitive to US Treasury 10-year yields. Our house view is for three US rate
+852 2996 6575
hikes in 2022 and another two in 2023. This would be positive for certain sectors like banks,
*Employed by a non-US affiliate of HSBC despite the higher cost of equity, and bode well for the overall market, given the large financial
Securities (USA) Inc. and not registered/ sector. The real estate market may also see a modest improvement and gradually return to its
pre-pandemic state.
Mainland China stocks in Hong Kong (H-shares): The catalysts here are different and
include stimulus measures like targeted policy easing by Beijing and certain sectors receiving
policy support. The extensive selling of these stocks over the past few months has made them
attractive, given (1) low PE valuations, (2) an improving growth outlook, and (3) funds are
underweight these stocks (Back to the old order, 17 November 2021). They offer more potential
upside than local Hong Kong stocks.
Eight themes to follow in 2022: (1) The metaverse; (2) greener energy; (3) ESG; (4) transformers;
(5) market consolidators, (6) interest rate hikes; (7) roaring back; and (8) a global business
recovery.
Index forecasts. We are constructive on Hong Kong equities with an end-2022e Hang Seng
Index (key representative index) target of 28,030 and an end-2022e FTSE HK (local Hong Kong
stocks) target of 1,180, implying 17% and 13% upside, respectively. The Hang Seng Index trades
at an 11.4x 2022e PE, below its five-year average of 12.4x. Alongside the investment themes, we
see sectors such as financials, hardware technology, industrials and real estate as attractive.
114
February 2022
The Hang Seng Index (HSI) PE multiple is … making it attractive from a valuation
down at an 11.4x 2022e PE … perspective
17 18
17
15 16
15
13 14
13
11
12
11
9
10
7 9
Jan-10 Apr-12 Jul-14 Nov-16 Feb-19 Jun-21 8
12m fwd PE(x) +1 SD FTSE HK Hang Seng Index HSCEI
5-yr avg. -1 SD 5 year SD band Latest 3m ago
Source: Bloomberg, FactSet, HSBC (priced at close of 14 December 2021) Source: Bloomberg, FactSet, HSBC (priced at close of 14 December 2021)
We expect the EPS integer of the HSI to be … with financials driving earnings growth
stable in 2022e … for the HSI in 2022e
3,500
10.0%
3,000 8.0%
6.0%
2,500
4.0%
2,000 2.0%
1,500 0.0%
ICBC
Ping An Insurance
CCB
Others
AIA Group
Hang Seng
Meituan
1,000
Jan-18 Oct-18 Jul-19 Apr-20 Jan-21 Oct-21
2019 2020 2021 2022

Source: Bloomberg, FactSet, HSBC Source: FactSet, HSBC
HSCEI forward PE multiples Stock-level earnings contribution in 2022e
19 16.0%
14.0%
17
12.0%
15 10.0%
8.0%
13
6.0%
11 4.0%
2.0%
9 0.0%
ICBC
CCB
Ping An Insurance
Others
Meituan
Alibaba group
HSCEI
7
5
Jan-10 Apr-12 Jul-14 Nov-16 Feb-19 Jun-21
12m fwd PE(x) +1 SD
5-yr avg. -1 SD
Source: FactSet, HSBC (priced at close of 14 December 2021) Source: FactSet, HSBC
For the full report, see Hong Kong Equity Strategy – 2022: A new narrative, 17 December 2021.
115
February 2022
116
February 2022
Equities
117
February 2022
Aluminium: Going green –

challenges vs opportunities
 Government decarbonisation initiatives will make China’s aluminium

industry greener and more energy efficient …
 … but this will come with increasing production costs, higher capex,
and disruptions to demand and supply
 We don’t think aluminium prices will exceed near-term peaks
Howard Lau*, CFA We assess the impact of decarbonisation and energy transition on China’s aluminium industry
Analyst, China Basic Materials by looking at five themes: (1) the upside to aluminium consumption driven by energy transition
Banking Corporation Limited may be lower than expected; (2) diversifying the energy mix in favour of renewables will be
howard.h.b.lau@hsbc.com.hk delayed due to recent power shortages, but the trend will continue; (3) Beijing’s recent energy
+852 2996 6625
controls have kept aluminium supply tight but not enough to offset the decline in demand;
Evan Li*
Head, Asia Utilities & (4) aluminium recycling will increase supply; and (5) the viable options to decarbonise aluminium.
Conglomerates Research
The Hongkong and Shanghai Tying it all together – our conclusions
evan.m.h.li@hsbc.com.hk  We don’t expect the growing demand for aluminium driven by energy transition to offset the
+852 2996 6619
fall in demand caused by the slowdown in construction activity in China. As a result, we
Harikrishna C S*
Associate expect aluminium prices to decline in 2022-23e to more normalised levels.
Bangalore
 We expect higher capex and production costs due to the change in the energy mix. This
should eventually benefit leading players with the scale and balance sheets to lower
Securities (USA) Inc. and not registered/ emissions swiftly when more structural supply changes take place due to carbon emission
controls, such as carbon trading platforms and coal consumption targets.
 We don’t think the price of aluminium stocks in China will return to the peaks of September
2021 in the near term for the following reasons: (1) a lack of potential share price catalysts;
(2) aluminium prices expected to come down; (3) despite power restrictions that cap
production, we don’t expect substantial demand growth and rising imports and quantities of
scrap to offset lower supply; (4) rising production cost from higher power tariffs; and (5) rising
capex from diversifying power usage and stricter standards in energy consumption.
This is our latest report on the Energy Transition theme. If you want to subscribe to any
of our nine big themes, click here.
118
February 2022
Aluminium and alumina prices Aluminium inventory (kt)
3,500 700 2,500
Thousands
3,000 600 2,000
2,500 500
1,500
2,000 400
1,000
1,500 300
1,000 200 500
500 100 0
Jan-20
Jan-21
Jan-18
Jan-19
Jul-21
Jul-18
Jul-19
Jul-20
0 0
2017 2018 2019 2020 2021
Aluminium (USD/t) Alumina (USD/t) China (Total reported) LME SHFE
Source: Bloomberg, HSBC Source: BBG, Refinitiv DataStream, HSBC
HSBC aluminium price forecast (USD/t) Aluminium market balance

3,400 2.0
3,100
Market balance (mt)

1.0
2,800
2,500 0.0
USD/t
2,200
(1.0)
1,900
1,600 (2.0)
1,300
(3.0)
Jun-17
Jun-18
Jun-19
Jun-20
Jun-21
Jun-22
Dec-19
Dec-22
Dec-16
Dec-17
Dec-18
Dec-20
Dec-21
2017
2016
2018
2019
2020
2021e
2022e
2023e
2024e
2025e
Spot prices Average spot
Estimated average World China World ex-China
Source: Refinitiv DataStream, HSBC estimates Source: LME.com, HSBC
Aluminium demand by industry in China Aluminium prices vs share prices (rebased

to 100 as of 2015)
3,700 250.0
Electrical 3,200 200.0

12%
Packaging 2,700 150.0
Transport 13%
25% Appliance 2,200 100.0
s
4%
Machinery 1,700 50.0
8%
1,200 0.0
Other
2015 2016 2017 2018 2019 2020 2021
Constructi 10%
on LME Aluminium price (USD/t) - LHS
28% China Hongqiao - RHS
Chalco - H - RHS
Source: Wood Mackenzie, HSBC Source: Bloomberg, HSBC
For the full report, see China Aluminium – Going green: more challenges than opportunities,
2 December 2021.
119
February 2022
Autonomous driving: Smart

cars need smart sensors
 The number of sensors in cars – like cameras, radars and laser-

based LiDAR – is rocketing higher as autonomous driving improves
 We take a deep dive into this rapidly emerging market, map out the
technology and profile some of the key players …
 … and see the autonomous driving sensor market jumping from
USD7.3bn in 2020 to USD41.4bn in 2030e
Frank He* The dream of cars that can fully drive themselves is getting closer. It’s largely thanks to a wave
Reg. No. S1700517120005) of innovations in hardware, software and algorithms together with the boom in electric vehicles.
Hardware Research But for autonomous driving to become a reality, cars are going to need a lot more sensors –
HSBC Qianhai Securities Limited especially cameras, radars and an emerging laser-based technology called LiDAR – which is
+86 21 6081 3809 the focus of this report. These devices collect all sorts of data from outside, and even inside the
Yuqian Ding* car, to enable the complex decision making required today for vehicles.
Reg. No. S1700519090001)
Head of A-share Auto Research Before we get too excited, we’re clearly still some years away from fully automated cars, but we
yuqian.ding@hsbcqh.com.cn are getting closer as cars begin to migrate to the next level in autonomous driving. But even for
+86 10 5795 2350 this jump, the technology needs to ratchet up a lot and which is why we’re so bullish on the sensor
Sijie Ma* sector. We forecast the auto sensor market to double from USD7.3bn in 2020 to USD18.9bn in
Reg. No. S1700517120003)
Head of A-share IT Software 2025e and then to double again to USD41.4bn in 2030e. We focus on the three main sensors:
Research
HSBC Qianhai Securities Limited Cameras: These are the most commonly adopted sensors in cars. We forecast the average
sijie.ma@hsbcqh.com.cn
+86 10 5795 2342
number of cameras per car to increase from 1.7 today to 5.3 in 2030e. And they’ll get smarter,
too – with higher pixel counts, technology that prevents nuisance flickering, and improved
*Employed by a non-US affiliate of HSBC images. Humans are the viewers today, but increasingly the images will be used by machines.
Securities (USA) Inc. and not registered/ We see lenses and image sensor makers as the key beneficiaries and forecast the addressable
market size for these devices to increase from over USD2bn in 2020 to over USD11bn in 2030e.
Radars: These are improving their long-range functions and precision by using new frequency
bands, materials, and becoming more integrated. Less than one radar was in each car in 2019,
but we forecast that to rise. A few Chinese radar companies are starting to supply auto makers
and are mainly focused on design, system integration and algorithms.
LiDAR: This provides high-precision 3D images for more advanced levels of autonomous
driving and generates the highest incremental value for the smart car sensor system. It’s in the
process of moving from mechanical to solid-state technology with cost reduction the key priority
to increase the adoption rate. Still, it’s an emerging technology with over 100 companies
working on it.
120
February 2022
Sizing up the car sensor market

Technology roadmap to autonomous driving to fuel demand for sensors in cars …
We project the automotive sensor market size will increase significantly (USD)
41.4bn
Implying a CAGR of
18.9bn
7.3bn 19%
during 2020-30e
2020 2025e 2030e
… supported by three major pillars – cameras, radars and LiDAR (similar to radar but uses laser pulses) …
Camera
Average cameras per car to increase
from 1.7 currently to 5.3 in 2030e.
Upgrades such as anti-flickering and
higher pixel counts to increase the value Camera
of cameras and widen their use Park assist and surround view
Short/medium-range radar Short-range radar
Addressable market size by 2030e:
Blind spot detection Park assist
Short/medium-range radar
Rear collision warning
USD16.4bn
Radar
With improved long-range functions and
precision from new frequency bands and
more advanced materials, radar can be
Short-range radar used for automatic emergency braking
Camera
Camera Park assist and pre-impact warnings
Surround view
Traffic sign recognition and
lane departure warning
Short/medium-range radar
Cross traffic alert
LiDAR USD13bn
Generating 3D information of the internal
and external environment in real time
LiDAR
Will be used in vehicles equipped for conditional
automated driving (driver still required, but not required
Long-range radar to monitor the external environment) from 2021e,
Cruise control followed by rapid adoption from 2025e
USD11.9bn
… raising the value of sensors per car (USD)
2020 46 50 0
2025e 86 96 18
2030e 155 123 113

Camera Radar LiDAR
Source: TSR, Yole Development, Magna, HSBC Qianhai Securities estimates
For the full report, see Spotlight – Autonomous driving sensors: Smart cars need smart sensors, 4 June 2021.
121
February 2022
Banks: A new playbook for

wealth management
 As China gets richer, individuals need more advanced wealth

management products and services
 We see this fast-growing business as a powerful earnings driver for
banks
 We look at the different models banks use as well the growing
importance of private banking
Angel Sun* Wealth management is an enormous growth opportunity for banks in China. For the entire
Reg. No. S1700519080001) wealth management industry – including brokers and mutual fund managers – total assets
Head of A-share Financials
Research under management already exceed RMB100trn – about the same size as China’s GDP in 2020.
HSBC Qianhai Securities Limited But despite its size the reality is that the industry is still at an early stage of development. The
angel.y.sun@hsbcqh.com.cn
+86 21 6081 3815 products on offer are fairly rudimentary and advisory services pretty limited. We think the days
of a one-size-fits-all wealth management model are over. After all, China is now home to more
*Employed by a non-US affiliate of HSBC than 2m high net worth individuals (HNWIs), those with the equivalent of at least RMB10m in
qualified pursuant to FINRA regulations investable assets. HSBC thinks this number will rise to 5m by 2025e.
This report explains to equity investors what needs to be done for banks to move to the next
level of the wealth management industry. Success will help to boost revenues at a time when
their traditional growth model is flagging. An important part of the story centres on private
banking, a relatively new service that can help these banks strengthen their brands and make
them much more competitive.
This is an important time for the industry; 2021 is the final year of a policy transition covering
wealth management products (WMPs), part of a major overhaul of the asset management
industry. The aim is to lower systemic risk by curbing off-balance-sheet shadow banking by
stopping banks from guaranteeing returns on WMPs. While the regulators are closing some
doors they are opening others, creating huge opportunities for banks to stand out from the
crowd in this extremely competitive market. New, more sophisticated, risk-adjusted products
and top-level advisory services represent the future of this industry. In this report we:
 Introduce a three-dimensional framework for a successful wealth management franchise:
(1) identifying clients; (2) understanding their needs – what are they saving for, when will
they need the money, what’s their risk appetite; and (3) providing the right products and
services.
 Explain the different business models and the growing importance of having sophisticated
private banking services, either as a standalone business or as part of the wealth
management department.
 Compare A-share banks’ wealth management services with developed western banks.
122
February 2022
A fresh approach
We think China’s wealth management industry is following in the footsteps of developed

markets, which evolved in three phases: (1) the sell-side model led by brokerages; (2) the buy-
side model with a focus on asset allocation; and (3) a more all-round, comprehensive service.
We believe China is in transition from phase one to phase two.
 Phase One: Sell-side one-size-fits-all approach
 Wealth managers focus on transaction volumes, the scale of clients’ assets and
transaction frequencies to earn a commission.
 Products are selected based on their investment track records or pre-determined yield
of guaranteed return WMPs. There is little product differentiation.
 Risk appetite is generally not part of the conversation. Wealth managers tend to stress
the ability of the fund portfolio manager.
 Phase Two: Buy-side service with risk-return oriented products
 Products are combined with services and the income of wealth managers is based on
both AUM and investment performance. The intense price competition and low margins
of agency sales and brokerages will push the industry to enter phase two.
 Asset allocation that is aligned with investment goals becomes a more important part of
the equation, bring the interests of wealth managers and investors more into alignment.
However, deficiencies still exist. Wealth managers’ income increase significantly with
exceptionally strong performances but there are no penalties for poor returns. This
encourages wealth managers to take more risks.
 Phase Three: A comprehensive service
 Wealth managers’ remuneration depends on how well they meet the needs of their clients.
They provide a wide range of wealth management services, including liability
management, pensions, and investments to cover health care, education, and inheritance.
 The liquidity and tenor of products become more important to reflect investment
horizons and risk appetites.
Number of HNWIs in China (‘000s) HNWI professional mix

3,500 100%
CAGR-UNHWIs (2008-18) = 33%
3,000 CAGR-NHWIs (2008-18) = 21%
CAGR-HNWIs (2008-20) = 20% 80%
2,500
2,000 60%
1,500
40%
1,000
500 20%
0
2008
2010
2012
2014
2016
2018
2020
2021e
0%
2009 2013 2017 2019 2021
HNWIs UHNWIs Business owners Gold-collar professionals Others
Source: Bain & Company estimates, China Merchants Bank, HSBC Qianhai Source: Bain & Company, China Merchants Bank, HSBC Global research, HSBC
Securities Qianhai Securities
For the full report, see Spotlight – A-share Banks: A new playbook for wealth management,
26 November 2021.
123
February 2022
Construction: Buying time to

build new businesses
 Despite a short-term boost, growth in traditional infrastructure

investment is set to decline to 4% a year during 2022-25e
 While sector consolidation helps, the future lies in building green,
high-tech businesses
 Smart city and carbon neutral strategies are likely to be the future of
municipal investment in China
Lesley Liu* The transition is underway. While fixed asset investment (FAI) in infrastructure should enjoy a
Analyst, Infrastructure & moderate rebound in 1Q22e, long-term growth is set to slow down. Growth was below expectations
Industrials Research
The Hongkong and Shanghai in 10M21, so the Ministry of Finance announced that it would use up its full-year bond quota to
provide a gentle stimulus to infrastructure FAI. Policy support is likely to continue in 4Q21e, which
lesleylliu@hsbc.com.hk
+852 2822 4524 may lead to a rebound in infrastructure FAI growth in 1Q22e. Longer term, we believe FAI in
Sunny SUN* traditional infrastructure – i.e. roads, rail and airports – will slow to 4% y-o-y during 2022-25e,
Associate consistent with HSBC Economists’ view that China’s decade-long boom in infrastructure is coming
Guangzhou
to an end (see China’s great transition: From construction to capex and consumption, 9 Nov 2021).
*Employed by a non-US affiliate of HSBC Given the change in outlook, all the major construction companies are looking to build new
qualified pursuant to FINRA regulations businesses like green investment and upgrading technology, which currently generate little
revenue. The contribution to FAI by advanced industries, including high-end manufacturing,
electricity, and environmental protection, has been rising since 2019. We see this as the next
growth driver – so the business models need to change.
Traditional infrastructure investment is no longer a major driver of GDP

The past decade was the golden period of traditional infrastructure investment. Annual investment
in transport infrastructure increased 5x during 2004-19. As one of the three drivers of China’s GDP
growth, infrastructure FAI grew rapidly, especially after the 2008-09 Global Financial Crisis when
the government launched a huge infrastructure stimulus programme. Based on our calculations, the
average transportation infrastructure growth multiplier to China GDP growth was about 1.5x in the
past 15 years. This multiple hit a historical high at 5x in 2009, when RMB4trn infrastructure stimulus
package was launched.
As China shifts to digital and green investment, we think traditional infrastructure will be replaced as
the major driver of economic growth entering the 14th Five-year Plan (FYP). However, investment
in traditional infrastructure will still be an important part of the economy. While this should result in
less volatile infrastructure spending, its growth rate may decline to low single digits. In 2022-25e, we
expect the GDP growth multiplier for traditional infrastructure (transport infrastructure) spending to
decline to 0.6-0.8x and the average spending growth for traditional FAI could be around 4% a year.
124
February 2022
New infra and green investment partially offsetting the softness in traditional infra
The FAI contribution of advanced industries – including high-end equipment manufacturing,
computer and communications, electricity, gas and water production and supply – to total FAI has
been rising since 2019 and we expect advanced industry FAI to maintain high levels of growth in
the 14th FYP. New infrastructure and green investment should become the new driver for
infrastructure FAI. The HSBC Economics team has set the average annual growth rate of total
infrastructure investment at 5-7%, vs traditional infrastructure FAI growth at 4%, lifted by new infra
and green investment.
What is new infrastructure in the construction sector?

In China’s 14th FYP, new infrastructure will be a key driver of growth in infrastructure spending,
including 5G networks, big data centres, artificial intelligence (AI), the industrial Internet, ultra-high
voltage power transmission, intercity and new energy vehicle charging stations. While traditional
infrastructure mainly covers railways, roads and airports, new infrastructure is “digital, smart and
innovative”. The investment is likely to focus on R&D spending and equipment procurement rather
than pure construction.
In terms of new infrastructure investment, traditional construction companies can contribute through
the construction of intercity/high-speed railways, which is already their existing business, and
building the base for other new infrastructure sectors.
Contribution from advanced industry FAI has been increasing since 2019
7,000 16.0%
13.3%
6,000 12.0% 14.0%
5,000 10.2% 12.0%

8.1% 8.0% 7.9% 8.0% 8.2% 8.2% 8.0% 8.2% 10.0%
4,000
8.0%
3,000 6,304
5,287 5,700 5,305 6.0%
4,634 4,999 5,146
2,000 4,076
3,543 4.0%
2,520 3,006
1,000 2.0%
- 0.0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 9M21
Advanced industry FAI (RMBbn) - LHS % of advanced industry FAI as total FAI - RHS
Source: NBS, HSBC; We calculated advanced industry FAI include high end equipment manufacturing, computer and communication, electricity, gas and water production and supply and etc.
For the full report, see China Construction– 2022 outlook: Buying time to build new businesses,
24 November 2021.
125
February 2022

Image: High tech – man in
mask loading disc
126
February 2022
China accounts for more than

20% of global spending on
research and development,
second only to the US.
Investment in high-tech
manufacturing is rising sharply.
127
February 2022
Cosmetics: Time to shine for

local brands
 Cosmetics is a fast-growing corner of China’s vast consumer market;

we see per capita spend doubling to US99 by 2025e
 Up to now, foreign brands have dominated, but local competitors are
gaining traction, especially in the mass market …
 … driven by a better insight into what local buyers want and
increased brand loyalty
Joseph Zhou* China is already the world’s second-largest cosmetics market, it is also the fastest-growing
Reg. No. S1700520040002) major cosmetics market, and at home it’s one of the fastest-growing consumer segments.
Analyst, A-share Consumer
But big and rapidly expanding markets are nothing new for China. What sets it apart for
joseph.yj.zhou@hsbcqh.com.cn
+86 755 8898 3401 investors in China is that domestic brands are gradually taking off and appealing to fashion-
Katharine Song* conscious buyers. Foreign brands have long dominated, especially in high-end products, but
Reg. No. S1700517120001)
Head of A-share Consumer
local leaders are emerging and recording success in products like skincare to makeup. China is
Research also creating unique products like those with extracts from some of the 17,000 natural plants
kathy.l.h.song@hsbcqh.com.cn found in Yunnan Province with supposed health benefits.
+86 21 6081 3807
A major attraction of the cosmetics segment is that it is relatively resilient during an economic
downturn thanks to affordable small-ticket items such as facial creams and lipsticks. In 2020 as
Securities (USA) Inc. and not registered/ COVID-19 rocked the economy, retail sales of cosmetics grew 9.5%, significantly higher than
overall consumer goods, which fell 1.0%.
Another trait is that users are increasingly buying beauty care products online from sites like
Alibaba’s Taobao or the new Tiktok shops, and COVID-19 has only accelerated this trend.
Social media is also a big influence where celebrities and key opinion leaders (KOLs) share
their skincare experiences and encourage users to make purchases.
Then there’s the long-term growth story. China’s per capita cosmetics consumption is just c19%
of Japan and c20% of the US, suggesting significant growth potential ahead. We expect per
capita cosmetics spending in China to almost double to USD99 in 2025e from USD53 now on:
1) Trading up. Consumers are spending more on premium cosmetics as their incomes rise.
2) A large consumer base: Gen-Z and millennials are getting interested in cosmetics from a
younger age.
3) Diversifying: Consumers are getting more sophisticated and want variety. Brands often
focus on niche segments of the market. Digitalisation is speeding up this process with new
product launches being more rapidly rolled out.
128
February 2022
Local brands to take foreign share … starting with the mass market
Yet for all its promise, China’s market has mostly been dominated by foreign firms. In the premium
cosmetics market, the top five overseas companies include L’Oréal, P&G, and Estée Lauder. We
estimate, that when combined, domestic companies have a market share of c10% (2020). But the
mass market is a different story as two domestic companies are among the top five operators and
together domestic companies held a market share of 38% in 2020, up c9ppt vs. its 2015’s level.
The reason for this is that local players have grown quickly in lower-tier cities thanks to early
moves and cost-effective products. Now they are increasing investment in R&D to improve their
quality and brands, raising their market share in certain segments, and using online methods to
take on higher-tier cities. Importantly, they react faster to market changes, are more adept at
digital marketing, and have a deeper understanding of changing consumer preferences. Overall,
we expect the market share of domestic brands to rise to 36% by 2025e from 31% in 2020.
China cosmetics market share by global + Market share of top 10 players by

domestic firms (2010-30e) domestic/overseas in three Asian
countries (2020)
100% 50%
20% 43%
29% 31% 36% 40%
80% 40% 40% 36%
60% 30%
20%
40% 20%
20% 10% 6%
4%
0% 0%
2010 2015 2020 2025e 2030e Korea Japan China
Share of domestic companies % Domestic players in top-10
Share of global companies % Overseas players in top-10
Source: Euromonitor, HSBC Qianhai Securities estimates Source: Euromonitor, HSBC Qianhai Securities
China’s cosmetics market value forecasts
1,000 (RMBbn) 15-20 CAGR

900 Skincare 11%
800 Makeup 19%
700 Fragrances 15%
600 13% Overall cosmetics 10%
500
400 20-25e CAGR
300 11% Skincare 14%
54%
200 Makeup 17%
8%
100 52%
50% Fragrances 22%
- Overall cosmetics 13%
2015 2020 2025e
Skin care Make ups Fragrances Other categories Overall cosmetics growth
Source: Euromonitor, HSBC Qianhai Securities estimates
For the full report, see China Cosmetics – Initiate coverage: Time to shine for local brands,
25 August 2021.
129
February 2022
Financials survey: Anatomy

of a financial consumer
 Our third proprietary survey gauged consumer preferences towards

financial products and services as we emerge from the pandemic
 Internet giants are preferred for payments, but not for borrowing,
saving or insurance
 The desire to buy insurance protection significantly outstrips savings
for the first time
Kailesh Mistry*, CFA We present the findings from our third proprietary survey of attitudes and preferences of Chinese
Head of Financials Research, individuals towards China’s financial services sector, and how they are changing due to the
Asia Pacific
The Hongkong and Shanghai pandemic and growing online penetration. Our survey sample of 2,031 is skewed towards
individuals with income levels above the national average, more developed cities and/or regions,
kailesh.mistry@hsbc.com.hk
+852 2822 4321 and those of working age. Highlights include:
Gary Lam* 
Head of Greater China Banks
Only 12% of the respondents increased borrowing over the past year, with nearly 60% not
Research changing borrowing levels. In addition, almost half of the individuals save for precautionary
Banking Corporation Limited reasons such as unforeseen events and health issues, with the allocation to health rising
gary.lam@hsbc.com.hk among more wealthy individuals and unforeseen events falling in more developed areas.
+852 2996 6926
Angel Sun*  Internet platforms continue to be preferred for money transfers across all age groups and
Reg. No. S1700519080001)
Head of A-share Financials
income levels. However, individuals’ propensity to borrow is not materially impacted by whether
Research they use credit cards, personal loans or internet platforms, while consumers remain most
angel.y.sun@hsbcqh.com.cn sensitive to factors favouring traditional financial institutions such as lending rates for loans,
+86 21 6081 3815 diseases covered for health insurance and critical illness, brand for motor insurance, and fund
strategy for investments.
Securities (USA) Inc. and not registered/  Individuals still trust banks most for advice on financial products, but only one third see them as
most trustworthy vs two-thirds in our previous surveys; the ranking of online has dropped below
friends & family and agents. Where individuals do use online to purchase financial products,
they tend buy money market funds, health products, and banks’ wealth management products.
 Individuals’ desire for protection is greater than savings for the first time, with health insurance
the most preferred product; only 17% are now focused on buying savings products compared
with c60% in 2018. Demand for critical illness increases as individuals get older, with around
two-thirds preferring sum assured below RMB500k (c3.5x the average earnings of the
sample), while the preference for purchasing fast-growing short-term health is through
insurers vs internet channels.
 Commission rates have become the main factor in choosing between brokers, while banks
and brokers remain the key distribution channels. The preference for internet platforms has
slipped.
130
February 2022
What surprised us
 70% of the respondents indicated no fall in income and 20% reported a rise in income over
the past year.
 There is a greater risk aversion around COVID-19, highlighted by an increased desire to
allocate funds towards bank deposits, health insurance and critical illness products vs less
towards market-sensitive products such as bonds, securities and trusts.
 However, there is a preference for increased spending on financial products to be allocated
to wealth management products and bank deposits over the next three years.
 The bank channel remains most trusted for advice on financial products, but only 32% of
the respondents rank it as the most trusted vs 67% in 2019 and 72% in 2018.
 Friends & family and insurance agents are ranked second and third most trusted for advice
on financial products, respectively, while internet platforms have dropped to fourth from
second in our 2019 survey.
 Internet giants are preferred for payments but not borrowing, saving or insurance.
 Individuals’ propensity to borrow does not appear to be materially impacted by whether they
use credit cards, personal loans or internet platforms.
 Consumers prefer to use insurance channels over internet players to purchase short-term
health products, with “million-dollar” short-term medical insurance purchased through
insurer websites/apps at 30% (21% in 2019), followed by Alipay at 22% (26% in 2019).
Destination for savings over the next three years
Bank deposits
8% 2%
WMPs
9% 28%
Health ins
Critical illness 12%
Annuity ins
Mutual funds 16% 25%
Other
Source: HSBC, Toluna. Note: Health ins – health insurance. WMPs – wealth management products. Annuity ins – annuity insurance.
Most trusted financial institutions

Bank 32%
Friends/family 11%
Insurer 10%
Securities company 8%
Asset manager 8%
e-commerce platform 7%
IFA (e.g. Noah) 6%
Agent 6%
WeChat blogs 3%
Trust company 3%
Newspapers 2%
Short-videos (KOL) 2%
Live streaming (KOL) 1%
0% 5% 10% 15% 20% 25% 30% 35%

Source: HSBC, Toluna. Note: IFA – independent financial advisors.
For the full report, see Spotlight – China Financials Survey: Anatomy of a financial consumer –
back to basics, 3 March 2021.
131
February 2022
Hong Kong Real Estate:

Building back better in 2022
 We expect housing prices to resume growth of 3-5% in 2022e …

 … and now prefer retail landlords over office landlords
 Five themes for 2022: (1) “Northern Metropolis,” (2) growth via
acquisitions, (3) luxury retail, (4) buybacks, (5) dividend growth
Raymond Liu*, CFA

A “triple whammy”. Hong Kong’s property market has been recovering well from a “triple
Hong Kong Equity Strategist, whammy” of an economic recession, COVID-19 and rising geopolitical tensions over the last
Real Estate Analyst
The Hongkong and Shanghai two years. We expect the property market to gradually return to a pre-COVID-19 environment,
pushing valuations higher, with housing prices to resume growth of 3-5% in 2022e.
raymond.w.m.liu@hsbc.com.hk
+852 2996 6743
2022 – focusing on growth. We are constructive on Hong Kong’s property developers given their
Michelle Kwok*
Head of Real Estate Research, current depressed valuations and the renewed clarity over the direction of government housing
Asia Pacific policy. Many real estate companies are actively looking for growth by acquiring property projects,
Banking Corporation Limited which should lift their earnings above pre-COVID-19 levels. The strategic development of the city’s
michellekwok@hsbc.com.hk “Northern Metropolis” should eventually solve the housing woes in Hong Kong and offer developers
+852 2996 6918
opportunities to scale up their business with better growth visibility. The sector currently trades at a
Ganesh Siva*
Associate 60% NAV discount and 9.0x FY22e PE, 1.0 SD below its five-year average.
Bangalore
Five themes in 2022. We expect the pace of recovery to vary among companies and identify
five drivers of share price outperformance: (1) “Northern Metropolis,” (2) new growth engines via
Securities (USA) Inc. and not registered/ acquisitions, (3) luxury retail spending, (4) share buybacks, and (5) dividend growth. We also
discuss Hainan’s duty free business, a potential threat for retail landlords in Hong Kong.
Sub-sector preference – Residential > Retail > Office. We continue to view developers as the
most attractive from a risk-reward perspective, and now prefer retail landlords to office landlords. We
expect housing prices to regain momentum starting from 2Q22e following a mild adjustment of -5%
since August 2021, given the impact of the negative wealth effect. In the retail segment, our base
case includes the assumption that international travel will remain largely limited and that the re-
opening of the border between mainland China and Hong Kong will be gradual. While this might offer
some support to the retail market, we think much of the good news has been factored in. Central
office rents returned to positive growth in 2H21, driving a re-rating for some office landlords, so we
are cautious about how much share prices can rally from here.
132
February 2022
Focus charts – the big picture
We expect housing prices to grow by 3-5% in 2022e
15 Recovery GDP grow th (% y -o-y) Expansion
10
1Q21
2Q21
5 3Q21
0
Residential price growth (% y-o-y)
-5
-10
-20 -15 -10 -5 0 5 10 15 20 25 30 35
Recession Over-expansion
Source: Rating and Valuation Department, Census and Statistics Department, HSBC estimates
A resumption of tourist spending could support retail sales growth
40% Worst month in 2020:

Feb 20: -44.0%
30%
20%
10%
0%
(10%)Jan-09 Apr-10 Jul-11 Oct-12 Jan-14 Apr-15 Jul-16 Oct-17 Jan-19 Apr-20 Jul-21 Oct-22
(20%)
(30%)
(40%)
(50%)
Retail sales (% y-o-y chg) Retail sales (3MMA)
Source: The Census and Statistical Department of the Hong Kong SAR Government, HSBC. Note: Retail sales are till October 2021
Office rents have started rising following a cyclical adjustment in the past two years
500 3.5%
400
2.5%
300
200 1.5%
100 0.5%
0
(100) -0.5%
(200) -1.5%
(300)
-2.5%
(400)
(500) -3.5%
Jan-19
Mar-19
Jan-20
Mar-20
Mar-21
Jan-21
Jul-19
Jul-20
Jul-21
Sep-19
Sep-20
May-21
Sep-21
May-19
May-20
Nov-19
Nov-20
Overall net absorption (000s sqft, LHS) % mom change in monthly rent (RHS)
Source: Real Estate Intelligence Services (REIS), Jones Lang LaSalle, HSBC
For the full report, see Hong Kong Real Estate – 2022 outlook: Building back better,
9 December 2021.
133
February 2022
Internet data centres:

Regulated growth
 Data generation is forecast to rise at a 2016-30e CAGR of 64%

 The industry’s growth prospects outweigh the policy risks
 We assess what drives this fast-growing industry – location, price
competition, client mix, connectivity, and power use
Helen Fang*
From policy darlings to policy risk. When China announced in 2020 that big data centres
Head of Industrials Research, were one of the seven categories of “new infrastructure”, share prices of leading companies
Asia Pacific
The Hongkong and Shanghai soared on the news of policy support for this fast-growing industry. Prices corrected due to the
clampdown on internet companies, price competition, and difficulties in acquiring permits in
helen.c.fang@hsbc.com.hk
+852 2996 6942 prime locations. This report looks at industry growth drivers, weighs the risk-reward outlook, and
Kenneth Chin* identifies where we see value emerging.
Associate
The Hongkong and Shanghai Location. The prime sites for data centres in China are in the heart of big cities. This
kenneth.t.k.chin@hsbc.com.hk guarantees the fastest connection speeds and in turn means data companies can charge clients
+852 2822 4521 the highest fees. But these locations are becoming scarcer and permits harder to acquire, often
due to limited electricity supply or regulations, and with more data centres being developed on
the outskirts of cities. Although this means average selling prices (ASPs) will fall, we think this
qualified pursuant to FINRA regulations will be offset by cheaper land acquisition costs, protecting investment returns.
Client mix. The client base is split between wholesale (cloud service providers and internet
companies) and retail customers (financial institutions, large enterprises, and public services).
The wholesale business (GDS is a major player) is larger in scale, and lower in terms of monthly
service revenue (MSR) as customers have greater bargaining power. The retail business is
smaller in scale and higher in terms of MSR as more value-added services are required.
Connectivity. Better interconnection is a key competitive advantage as it allows customers to

connect directly within or between data centres, increasing client stickiness and boosting
margins. Operators in mainland China offer fewer interconnected services in order to maintain
relationships with the big three telecom carriers.
Electricity and ESG. Data centres use a huge amount of electricity and the government is
imposing new standards to address the issue; the results so far look promising. We think that if
the market leaders succeed in hitting the power targets, this will support their strong growth
prospects, driven by the exponential rise in data use.
Growth forecasts
This report assesses the level of policy risks against a backdrop of strong industry growth, as
demand booms as a result of cloud services, 5G, virtual reality (VR), augmented reality (AR),
big data, and AI applications used in e-commerce, autonomous driving, and computer gaming.
Based on data from iResearch, Qianzhan, and Mordor Intelligence, growth forecasts for data
generation in China, cloud services, and the carrier-neutral IDC market are.
134
February 2022
 China’s data generation: A 2016-30e CAGR of 64%.

 Cloud service providers: The largest customers for IDCs are expected to expand at a
CAGR of 34% over 2019-24e, with the value of the market reaching RMB645bn by 2024e.
 The carrier-neutral data centre market: This excludes carrier-operated data centres run
by China Telecom, China Mobile, and China Unicom. The market is expected to grow at a
CAGR of 32% over 2019-24e and reach RMB75bn by 2024e.
The market
China’s IDC market can be divided into two categories – carrier-operated and carrier-neutral.
The three largest operators, all carrier operated, are run by the major telecom companies and
accounted for 63% of the market in 2019. They are generally located in non-core cities and do
not compete directly with carrier-neutral IDCs, which mainly serve customers in Tier-1 cities.
Carrier-neutral IDCs are considered to have a competitive edge in terms of service standards,
customisation capability, and data centre stability as they have access to all three major telecom
networks
Wholesale business model

Cloud service providers and large internet companies usually require a large net floor area per
facility and a high level of customisation to house their own proprietary servers and racks. Under
the wholesale model, data centre service providers commit a significant portion of a data centre
to these customers. The contract term is usually 5-10 years and the churn rate – the annual
percentage rate at which customers stop subscribing to a service is low.
 Cloud service providers: Large-scale cloud service providers, who serve large
enterprises, internet companies, and the government, need large data centre capacity to
meet customer needs. They often require custom-designed specifications for IT hardware,
server racks and computer rooms.
Example: Ali Cloud
 Internet companies: Some large internet companies are also cloud service providers.
They use their cloud platforms for internal IT needs and also provide services to external
customers.
Example: Alibaba
Retail business model

Financial institutions, large enterprises, and public service providers usually require less
capacity and little customisation. The retail model allows multiple customers to co-locate in the
same data centre facility and contracts are usually shorter with a higher unit price.
 Financial institutions: Industry regulations require banks, insurance companies, and
securities firms to house their IT systems in data centres that guarantee reliability and
security. Outsourced data centre providers must meet high design and operational
compliance requirements to host their IT systems.
 Large enterprise and public services: As government services move online, demand for
data centres is increasing.
This is our latest report on the Automation theme. If you want to subscribe to any of our
nine big themes, click here.
For the full report, see China Internet Data Centres – Regulated growth in a booming market,
11 October 2021.
135
February 2022
Meat products: The need for

speed
 Growth opportunities led by lifestyle demand for faster, more

convenient, often home-delivered meals
 We see this as a great chance for industry leaders to boost their
revenue in a hugely fragmented market
 Declines in pork and chicken prices set to improve profitability; the
development of online channels to drive sector consolidation
Andy Li* Meat products are on the move. The need for speed – faster, more convenient, often home-
Reg. No. S1700519070001) delivered meals for the time-strapped younger generation – is driving demand for product upgrades.
Head of A-share Agriculture
Research Against a backdrop of flat industry growth, we believe three niche sub-sectors offer annual growth
HSBC Qianhai Securities Limited rates of more than 10%: (1) processed meat products; (2) fast-frozen food dishes; and (3) the 3Rs –
andy.j.li@hsbcqh.com.cn
+86 21 6081 3812 ready-to cook, ready-to-heat, and ready-to-eat. We expect the leaders in the hugely fragmented
Yihui Sha* meat product market to outpace industry revenue growth over the next three years.
Reg. No. S1700519100001)
Analyst, A-share Agriculture Growth is flat
Research
HSBC Qianhai Securities Limited Meat processing is in the midstream of the industrial value chain, between livestock and
yihui.sha@hsbcqh.com.cn slaughtering upstream and supermarkets, wet markets and catering services downstream.
+86 21 6081 3804
Products include pre-processed chilled meat, frozen and fresh meat, as well as further-
processed categories such as sausages, preserved and cured meat.
qualified pursuant to FINRA regulations According to the National Bureau of Statistics, China’s total meat consumption stayed largely
flat over 2014-20. In 2020, China’s meat consumption was around 85.4m tonnes, implying a
market size of cRMB4.6trn. We forecast that the size of the market will increase at a CAGR of
1% over 2021-23e, average selling prices (ASPs) will fall 1%, and total consumption will
increase 2% over the same period. It is clear that fresh growth drivers are needed.
What’s changing
Demographic shifts, the rising incomes of the younger generation, and changes to consumer
preferences are driving demand for product upgrades. The emphasis is on speed and
convenience. Against a backdrop of flat industry growth, three niche sub-sectors offer annual
growth rates of more than 10%: (1) processed meat products; (2) fast-frozen food dishes, and
(3) the 3Rs – ready to cook, ready to heat and ready to eat.
 Processed meat: We estimate this market was worth RMB250bn in 2020, about 5.5% of
the total meat product industry. We anticipate rapid growth to RMB275bn in 2021e,
RMB305.3bn in 2022e, and RMB341.9bn in 2023e, up 10%, 11% and 12% y-o-y.
 Fast-frozen dishes: This market was worth about RMB48.4bn in 2020, around 1.1% of the
meat product industry. We expect it to expand rapidly thanks to the popularity of the hot pot
136
February 2022
market. We forecast that this sub-sector will grow to RMB53.8bn in 2021e, RMB59.7bn in
2022e and RMB66.3bn in 2023e, up 11% y-o-y each year.
 The 3Rs: The young generation work long hours and do not want to spend time cooking.
The ready-to-cook, ready-to-heat and ready-to-eat market is the fastest growing industry
sub-segment. We estimate that it was worth RMB200bn in 2020, c4% of the meat product
industry, and we forecast a 2021-23e CAGR of c15%, supported by online food delivery
Lower pork and chicken prices to improve industry profitability

Hog capacity in China has been rising since September 2019 as the impact of African swine
fever faded. At the end of June 2021, the inventory of breeding sows had recovered to 45.64m,
surpassing the pre swine-fever level of 44.72m at the end of 2017. This inevitably leads to an
increase in hog production and in turn a decline in pork prices. We estimate weighted average
hog prices will fall from RMB20/kg in 2021e to RMB17/kg in 2022e and then rise to RMB19/kg in
2023e (unchanged). As pork is a major raw material for the meat product industry, a decline in
hog prices should boost profitability.
After chick prices peaked in 2019, the white-feather broiler capacity has continued to increase.
Since it takes around 15 months for the industry capacity to ramp up, we believe broiler supply
will continue to grow and chicken prices will stay low over 2021-23e. We estimate white-feather
broiler prices will be RMB7.3/kg in 2021e, RMB7.1/kg in 2022e and RMB7.2/kg in 2023e. Again,
this should improve the profitability of meat producers use chicken as a raw material.
Industry consolidation likely to accelerate

China’s meat product industry is highly fragmented. The top 10 operators have a combined
China’s meat product
industry is highly fragmented
market share of only 3.65%, led by Shuanghui (1.65%). The main reasons for this are:
 The low concentration of the upstream farming industry. The slaughtering market is very
fragmented as plants are usually built near farms;
 Entry barriers are low and there is little product differentiation, so it is easy for small players
to survive and for local brands to establish a presence by relying on offline channels;
 Diverging consumer demand for meat products makes it difficult for companies to fully meet
market demand. These enterprises usually target specific parts of the market, making the
industry highly fragmented.
We expect the processed meat market to … along with the fast-frozen meat market
keep growing rapidly …
4000 14% 700 12%
3500 12% 600 12%
3000 10% 500
2500 11%
8% 400
2000 11%
6% 300
1500
4% 10%
1000 200
500 2% 100 10%
0 0% 0 9%
2015 2016 2017 2018 2019 2020 2021e 2022e 2023e
2016 2017 2018 2019 2020 2021e 2022e 2023e
market siz e (bns) growth rate
market size (bns) growth rate
Source: Wind, HSBC Qianhai Securities estimates Source: Wind, HSBC Qianhai Securities estimates
For the full report, see China Meat Products – The need for speed: How to deliver fresh growth,
29 October 2021.
137
February 2022
Olefins: Strong home base,

big home run
 China, the main driver of olefin demand, is rapidly expanding

domestic capacity via …
 … light hydrocarbon cracking, a process which has cost and
environmental benefits and higher margins
 We project that downstream olefin demand in China will grow
strongly in 2021-23e, with stable spreads
Yi Ru*
Building a home base. Olefins are the chemical building blocks used in everything from
Reg. No. S1700520120001) plastics, autos and home appliances to garments, construction and consumer electronics. There
Analyst, A-share Petrochemicals
& New Materials is huge and growing demand in China but the industry is still heavily reliant on imports. That is
HSBC Qianhai Securities Limited changing as the domestic olefin industry expands and we believe leading domestic companies
yi.ru@hsbcqh.com.cn
+86 21 6081 3808
have the potential to become giants in the olefin industry. We think 2021 will be a pivotal year in
its transition and forecast a 28% EPS CAGR over 2021-23e. We look at how much of this story
Eric Shen*
Reg. No. S1700519030001) is already in the price.
Head of A-share Petrochem &
New Materials Research Margin expansion. The best route for growing capacity is the light hydrocarbon cracking
eric.shen@hsbcqh.com.cn
process, which has cost and environmental benefits and which will make Chinese companies
+86 10 5795 2343 highly competitive in the global market, reducing the reliance on imports. Margins should also
expand in line with the higher price of crude and improved integration along the domestic
*Employed by a non-US affiliate of HSBC industry value chain.
qualified pursuant to FINRA regulations Olefin 101. Olefins − petrochemicals produced by cracking feedstock from gas, crude oil, and
coal, are important raw materials used in basic chemicals such as ethylene, propylene and
butadiene. They are often used to produce olefin derivatives such as polyethylene (PE),
polypropylene (PP), ethylene glycol (EG) and acrylic acid (AA). These downstream products are
widely used in plastics, autos, garments, construction, and chemicals. This report looks at four
segments of the olefin industry: (1) raw materials (crude oil/ethane/ propane/coal) for
production; (2) intermediate olefin for processing, (3) the sale of olefin derivatives (PE and PP);
and (4) sales of modified plastic and other new materials.
Import dependency an opportunity for China’s olefin players

China is a large consumer of global chemical products but olefin products rely heavily on
imports. In recent years, Chinese companies have been building olefin projects to ease the
supply shortage in the domestic market, leading to a sharp decline in olefin imports from the
Middle East and South-East Asia. Although this capacity expansion in China may have an
impact on the global olefin market, we are not concerned about oversupply as we think robust
demand in China will support the booming olefin industry, led by the following factors:
 Polyethylene (PE): We forecast an 8% CAGR in demand for PE in China over 2021-24e

vs. an 11.3% CAGR rise in capacity. We see China’s contribution to global PE capacity
rising from 18% in 2020 to 22% in 2024e, with import dependence falling from 49% in 2020
138
February 2022
to 40% in 2023e. We expect utilisation rates in China to climb from 90% in 2020 to 93% in
2023e.
 Polypropylene (PP): We expect demand for PP in China to increase at a 10% CAGR over
2021-24e, vs a 12% CAGR rise in capacity. This will raise China’s contribution to global PP
capacity from 34% in 2020 to 44% in 2024e. We expect import dependence to drop from
20% in 2020 to 8% in 2023e, with utilisation rates remaining above 80% in 2021-23e.
Cost advantages
Light hydrocarbon cracking, which offers advantages in terms of energy saving, product purity
Light hydrocarbon cracking
offers advantages in energy
and investment returns, will be the key source of olefin capacity expansion in China in 2021-
saving, product purity and 23e. Compared with traditional naphtha cracking, we think China’s ethane to olefin (ETO)
investment returns facilities have strong cost advantages in the global market.
China’s ETO equipment is about USD100/tonne more expensive than equipment in the US as a
result of the higher cost of obtaining ethane. However, our HSBC global chemicals team
believes that the growth model has moved from feedstock to capital costs (Global Chemicals:
Growth is not on the menu, 16 September 2020, by Sriharsha Pappu). The fixed investment of
Zhejiang Satellite’s 2.5mt ethane cracker is below USD5bn – a 4x relative capital cost
advantage compared with a typical US gas cracker. This can completely offset the disadvantage
of the higher cost of raw materials and drive up ROIC.
Similarly, based on our comparison of different propylene facilities, we think propane

dehydrogenation (PDH) facilities outperform naphtha cracking. Naphtha cracking remains the
most important source of global olefin production (70%) and offers stable costs, but the cost
benefits of light hydrocarbon cracking will be further expanded by higher oil prices. Based on
HSBC’s global oil price forecast of USD65/b for 2021-23, we expect the ETO/PDH cracking
spread to grow in line with oil prices.
We expect China’s PP-propane spread to rise from RMB4,360/t in 2020 to RMB4,600/t in

2023e and the PE-ethane spread to rise from RMB4,550/t in 2020 to RMB6,000/t by 2023e.
We expect spreads of PE to widen over We expect PDH facilities to have higher

2021-23e (RMB/t) spreads than naphtha cracking (RMB/t)
8000
5000
7000 4500
4000
6000
3500
5000 3000
2500
4000
2000
3000 1500
2013 2015 2017 2019 2021e 2023e 2013 2015 2017 2019 2021e 2023e
China PE-Naphtha spread China PP-Naphtha spread
China PE-Ethane spread (ETO) China PP-Propane spread(PDH)
Source: IHS, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities estimates
For the full report, see China Olefins Industry, Strong home base, big home run, 5 July 2021.
139
February 2022
Passive Components:
Getting aggressive
 China is catching up in passive components; they are relatively simple

but vital parts found in all electronic goods; sector is fairly defensive
 They are also in demand due to complex 5G smartphones and EVs
 We prefer inductors over multilayer ceramic capacitors (MLCCs) as
this segment is less cyclical and more resilient
Chase Ding*
Small parts, big market
Reg. No. S1700520010003)
Analyst, A-share Technology
Hardware After our report on printed circuit boards (The global leader with more room to run, 8 July 2021),
HSBC Qianhai Securities Limited we look at another fundamental tech hardware sector: passive components. These are
chase.ding@hsbcqh.com.cn
+86 755 8898 3409 relatively simple but vital parts found in all consumer electronics. Inside every 5G smartphone
Frank He*
there are 200 inductors and 1,000 multilayer ceramic capacitors (MLCCs). Surprisingly China
Reg. No. S1700517120005) has up to now been relatively small in this low-end segment, but like so many other parts of the
Hardware Research tech landscape it is looking to become more self-sufficient and to make more complex types too
frank.fang.he@hsbcqh.com.cn Why passive components?
+86 21 6081 3809
Across the entire tech supply chain, passive components are the most upstream as they are the
farthest away in terms of production from end-demand such as smartphones, PCs, and servers.
Securities (USA) Inc. and not registered/ Our analysis shows this makes the sector defensive, especially when there’s a demand down
cycle (such as 2018 when smartphone shipments fell 4.1%, per IDC) or during supply
disruptions (such as Japan’s earthquake in 2011, or more recently, COVID-19).
Looking into 2022e, with demand for PCs, monitors, and TVs set to moderate given a high base
Passive components deserve
more attention, as a
in 2021, we think passive components are a sector that deserves more investor attention. In
defensive sector, given an addition, we expect these components to become more expensive and more of them to be in
uncertain 2022 each device as they enable more complex functions like 5G, driving up prices and volumes.
We prefer inductors over multi-layer ceramic capacitors (MLCCs)

The two categories we think investors should focus on are inductors (used to resist changes in
a current and convert voltages) and MLCCs (used to temporarily store and discharge electricity)
as they are big enough for the major players to significantly grow in. Their combined size was
USD33bn in 2021e, roughly two-thirds the size of the PCB market and, based on our estimates,
we expect them to grow at a CAGR of 7% over the next five years.
Of the two, we prefer the inductor sector as: (1) it’s less competitive vs MLCCs, (2) there are no
excessive capacity expansion plans over the next three years, and (3) it’s less cyclical than
MLCCs. Therefore, we see the inductor market as more resilient in 1H22e vs MLCCs.
By contrast, we are cautious on MLCCs, as (1) order lead time peaked at the end of 3Q21,
suggesting prices will soon peak in 1Q22e, (2) vendors and distributors have increased their
140
February 2022
inventory in 3Q21, and (3) most importantly, vendors in China, such as CCTC and Fenghua,
plan to triple their capacity by 2023e implying price competition in the more commoditised
segments.
China’s passive component market to Chinese MLCC vendors are trying to catch
grow at a CAGR of 12% in 2020-25e, above up with peers
the 7% for the global market
60 Capacity expansion in 2023e vs 2020
Global: 7% CAGR
USDbn China: 12% CAGR 4x
50
Chinese vendors
CCTC
40
Fenghua Tech
Japan, Korea, Taiwan
30 region based vendors
Yageo SEMCO Murata

20 1x Viiyong
10 Eyang
Taiyo Yuden
0 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
2017 2018 2019 2020 2021e 2022e 2023e 2024e 2025e
Market share in 2020
Global passive component market China passive component market
Source: Technavio, Qianzhan, HSBC Qianhai Securities estimates Note: Dotted area presents market share in 2020.
Source: Company data, HSBC Qianhai Securities
Why do Chinese companies have a chance now?

China is the largest and fastest-growing market for the two passive component segments we
highlight above. The entire passive component market is expected by us to grow at a CAGR of
12% over the next five years, 5ppt more than the global market.
We see five reasons why Chinese companies can increase their market share over the long
term: (1) overseas peers are retreating from low-end and mid-market passive component
markets, (2) clients are moving from “just-in-time” to “just-in-case”, opening the door to more
suppliers, (3) Chinese brands are using more local goods as part of their “localisation” push,
(4) China is achieving technological breakthroughs in basic materials and production equipment,
and (5) there’s cheap and abundant capital for companies thanks to a buoyant A-share market.
Order lead times to decline with inductors Order lead times suggests MLCC prices to
increased resilient vs MLCCs peak in early 2022e, then fall
40.0 (MLCC ASP, JPY/unit)
week 0.70
35.0
0.65
30.0
+0.5%
25.0 0.60 +2.0%
+0.2%
+7.8%
20.0 0.55
+6.5%
15.0 0.50
10.0
0.45
5.0
0.40
-
Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 0.35
1Q18 3Q18 1Q19 3Q19 1Q20 3Q20 1Q21 3Q21 1Q22e
Capacitor Inductor Resistor
Source: Paumanok Research, HSBC Qianhai Securities estimates Source: Japan METI, HSBC Qianhai Securities estimates
For the full report, see China Passive Components – Initiate on the sector: Getting aggressive in
passive parts, 2 December 2021.
141
February 2022
Printed circuit boards: Global

leader with more room to run
 China dominates the market for printed circuit boards (PCB) and
despite worries, we see it increasing its share more than consensus
 Copper clad laminate (CCL), the raw ingredient for PCB, is our
preferred sector as we see short-term and long-term catalysts …
 … as leaders have strong bargaining power and product upgrades
Chase Ding* China’s dominates this niche hardware tech sector

Reg. No. S1700520010003)
Analyst, A-share Technology
Printed circuit boards (PCB) are an important part of the tech supply chain as they’re used in
Hardware every electronic device. The major producers are based in mainland China and Taiwan with the
chase.ding@hsbcqh.com.cn industry situated somewhere between upstream materials and downstream electronics sectors.
+86 755 8898 3409 While there are some concerns that the industry might move to Southeast Asia, we spell out
Frank He* why we think China still has many advantages and can grab 60% of the global market by 2025
Reg. No. S1700517120005)
Head of A-share Technology (versus consensus for 55%) even as the growth rate slows down.
Hardware Research
HSBC Qianhai Securities Limited Chinese PCB makers are expanding their production into higher-end products and eyeing
+86 21 6081 3809
opportunities in supplying more to sectors including servers, smartphones, 5G and EVs. This
will boost the number and value of Chinese PCBs in each electronic device.
Securities (USA) Inc. and not registered/ Still, it’s not all rosy, as we also conduct supply-side analysis and find there’s a risk of
qualified pursuant to FINRA regulations overcapacity as many Chinese PCB makers are expanding into multi-layer PCBs used in more
complex electronic devices and low-end high-density interconnects used in smartphones and
laptops even though these markets are already very competitive.
Our preferred segment is copper clad laminate (CCL)

The upstream raw material that PCBs are made from is standardised copper clad laminate
(CCL), which as the name suggests, is principally made from copper. It’s this segment that we
most favour for a number of reasons:
1. Consolidated competitive landscape. The top CCL makers have strong pricing power
over their main PCB customers. It’s a concentrated industry with the major CCL makers
specialising in different products, so price competition among suppliers is low.
2. High entry barriers. New entrants struggle as they aren’t able to compete in the mass
market given prices are already so low there, and struggle to enter the high-end given a lack
of chemical know-how and client licensing.
3. Upgrade cycle. Demand is moving from ordinary CCLs to high-speed and high-frequency
CCLs, all suggesting higher prices in the future.
4. Localisation. CCL is increasingly made in China which helps PCB makers take advantage
of the cluster effects in the tech supply chain.
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February 2022
Six charts that tell the story
China dominates the PCB market and will … but is still lagging in high-end PCBs
have 60% share in 2025e … such as IC substrate and HDI
100% 100%
90% 90% 20% 15%
31%
80% 80% 11%
8% CAGR 48%
70% 15%
2020-2025 70%
60% 60% 14% 27%
50% 50% 7%
14% 49%
40% 40% 16%
30% 60% 30% 17%

52% 54% 54%
20% 45%
20%
10% 31%
17%
10%
10%
9%
8% 0% 4% 0%
0% // //
China America Japan Asia
2000 2018 2019 2020 2025e
China's market share in global PCB market Rest of the world IC substrate HDI Flexible Multi-layers Single/double-layer
Source: Prismark, HSBC Qianhai Securities estimates Source: Prismark, HSBC Qianhai Securities
Note: IC = integrated circuits, HDI = high-density interconnects
Servers, smartphones, 5G, and EVs will be CCL makers Shengyi, Kingboard have
the PCB growth areas handled copper price cycles well
1200% 80%
Server
Smartphone 60%
1000%
Auto
40%
800%
Wireless communication
20%
Wire communication
600%
PC 0%
Consumer electronics 400%

-20%
Industrial
200%
Medical -40%
Aerospace
0% -60%
Other
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Shengyi (600183 CH) share price performance (%, LHS)
2020-2025 CAGR by application Kingboard(1888 HK) share price performance (%, LHS)
LME Copper price performance (%, RHS)
Source: Prismark, HSBC Qianhai Securities estimates Source: Company data, HSBC Qianhai Securities
CCL makers’ GPMs have steadily Shengyi has a unique product strategy
increased over the past 10 years and better profitability
30%
12,000 50%
25%
10,000 40%
Average GPM
8,000 30% 20%
6,000 20% 15%
4,000 10% 10%
Average NPM
2,000 0% 5%
- -10% 0%
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
4Q12
2Q13
4Q13
2Q14
4Q14
2Q15
4Q15
2Q16
4Q16
2Q17
4Q17
2Q18
4Q18
2Q19
4Q19
2Q20
4Q20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
GPM NPM
LME Copper price per tonne (USD, LHS) GPM of Kingboard (%,RHS) GPM of Shengyi (%,RHS)
Source: Company data, HSBC Qianhai Securities Source: Company data, HSBC Qianhai Securities estimates
For the full report, see China PCB Industry – The global leader with more room to grow, 16 July
2021.
143
February 2022

Image: Real estate_Residential
144
February 2022
While residential living space

per person has doubled since
2000, the country can no longer
rely on the housing boom to
drive the economy forward.
145
February 2022
Railways: Let the train take

the strain
 High-speed rail is going from strength to strength

 We expect the share of railway passenger transport rising from 64%
in 2019 to 80% by 2025e
 Rail freight is bouncing back, thanks to policy support
David Wu*
Several billion passengers are whisked across China every year at speeds of up to 350km per
Reg. No. S1700518110001) hour on environmentally friendly high-speed railways, easing the pressure on congested roads
Head, A-share Transportation &
Logistics Research and highways. While less glamorous, the country’s rail freight network is also extensive and
HSBC Qianhai Securities Limited vitally important to the economy.
david.wu@hsbcqh.com.cn
+86 21 6081 3802
Passenger transport: High-speed rail (HSR) is now mainstream
According to the National Bureau of Statistics (NBS), China’s high-speed rail carried 64% of all
Securities (USA) Inc. and not registered/ railway passenger traffic in 2019 – up from 0.5% in 2008 – and we believe that number will
continue to grow. In 2019, the HSR network expanded to 35,400km – from 672km in 2008 – and
is by far the largest HSR network in the world; the government’s target is to hit 70,000km by
2035. HSR operators in the more populous, wealthier eastern areas of the country have
sustained strong profitability due to large scale, improving efficiency, and lower construction and
labour costs. We expect this to continue, driven by increased urbanisation, and government
policies designed to boost rail travel to reduce pollution levels.
The business model used by Chinese HSR operators is similar to that of Japanese peers. Apart
from ticket sales, they generate revenue from fees charged for using their railway lines and
renting retail outlets at stations.
Freight rail: Light at the end of the tunnel

A comparison with the US is useful here. The US has a well-established railway system,
covering more than 200,000km in 2017 (US Department of Transportation), which has long
carried a large portion of the country’s freight. China also has a large rail network – 140,000km
as of 2019 (China Railway) – but until recently road transport dominated the freight market.
This was because railway transport had been slow to adopt market-driven practices and many rail
companies were not efficient. As a result, the market share of rail freight declined to 10-15%, well
below the around 20-30% level in the EU and the US (US Department of Transportation,
Eurostat, 2018). With dwindling volumes, declining utilisation rates and regulated prices, Chinese
railway freight operators were far less profitable than global peers.
The market started to change in 2017. As part of the fight against pollution, China introduced
policies to shift more freight from trucks to railway lines. The result was a V-shaped recovery in
rail freight – annual growth was above 9% over 2017-19, its fastest pace since the 1980s. We
believe the worst is over and there is ample room for growth. As growth in capacity slows and
146
February 2022
freight rates become more market-driven, as a result of reforms, we see utilisation rates and
profitability continuing to climb.
Industry outlook
Passenger rail transport: 2020 was a tough year. According to the National Bureau of
Statistics (NBS), railway passenger volume grew at a CAGR of 9.2% in 2015-19 but dropped
55.5% y-o-y in the first four months of 2020 because of COVID-19. The fall has narrowed to
19.1% y-o-y by October. The long-term picture is much brighter, in our view. China will continue
to expand the national HSR network, the urbanisation rate keeps rising, as does the average
number of journeys people take each year. This growth story is underpinned by government
policies that encourage the shift from conventional railways and road transport to high-speed
rail. We expect high-speed rail passenger traffic to grow at a CAGR of 10-11% in 2020-25e, with
the share of railway passenger transport rising from 64% in 2019 to 80% by 2025e.
Railway freight: NBS data show that, after declining in 2014-16, freight volume recovered in
2017-19, with a CAGR of 9.6%. Rail freight was also resilient in 2020, with volume up 3.2% y-o-
y between January and October. Supported by transport policies, including the shift from road to
rail, we expect volume to rise at a CAGR of 7-8% in 2020-25e, with improved balance between
supply and demand pushing up capacity utilisation and freight rates.
Two key positives: High dividend yields and railway reforms

Dividends: A-share companies in the railway industry recorded an average dividend yield of
5.2% in 2019, way above that of airlines, airports, shipping and other transport sub-sectors. This
trend has been in place since 2015.
Reforms: Between September 2016 and June 2018 the railway sector traded at a premium of
over 20% to the CSI 300, driven by a recovery in railway freight volume and ongoing railway
reforms. China State Railway Group introduced mixed-ownership reform in 2018, with asset
securitisation as one of the key tools. The trend accelerated in 2020 – Beijing-Shanghai High-
speed Railway and Tieke Shougang went public.
Rapid growth in HSR passenger volume Significant upside in per capita travel in
China
2500 120% 100 8
100%
2000
80
80% 6
1500 60% 60
40% 4
1000
40
20%
500 2
0% 20
0 -20%
0 0
China USA
High speed rail passenger transport volume (mn)
% in tot al rail passenger transport (RHS) urbanization rate (%)
% y-o-y (RHS) Per capita disposable income ('000 USD)
No. of travel per capita (RHS)
Source: National Bureau of Statistics, HSBC Qianhai Securities Source: National Bureau of Statistics, Wind, HSBC Qianhai Securities
For the full report, see China Railway – Initiate coverage: Let the train take the strain,
15 January 2021.
147
February 2022
Telemedicine: A RMB1trn
market by 2030e
 China’s online pharmaceutical market is set to grow almost 10-fold

to RMB1trn by 2030e
 We see 15% of prescription drugs moving online driven by sales of
drugs for chronic diseases, which are c75% of outpatient demand
 But there are also risks, including regulatory changes, which could
disappoint the high-growth expectations of many in the industry
Charlene Liu* Even before COVID-19 emerged, Chinese consumers were starting to purchase medical drugs
Head of Internet and Gaming from telemedicine platforms, switching out of hospitals and physical pharmacies where they
Research, Asia Pacific
The Hongkong and Shanghai used to buy. That trend is now accelerating, but it’s unclear how far or fast it will go. We set out
Singapore Branch
to find out as it’s critical to anybody investing in the sector. Our extensive analysis finds that the
charlene.r.liu@hsbc.com.sg online pharmaceutical market will grow from RMB125bn in 2019 to RMB1trn in 2030e. That
+65 6658 0615
means the online penetration will jump from 5% to 24%. It’s all part of Beijing’s efforts to reform
Jessie Lu*
the medical industry and allow chronic disease patients in particular to benefit from better
Associate
The Hongkong and Shanghai accessibility to healthcare services and lower prices.
jessie.x.lu@hsbc.com.hk Part I: Sizing up and projecting the online market potential
+852 2996 6570
We estimate the online pharmaceutical market will jump almost 10-fold over the next decade
fuelled by (1) growing demand for medicines amid an ageing population, high levels of obesity,
Securities (USA) Inc. and not registered/ and a high percentage of smokers, and a lack of exercise, and (2) as consumers switch to buying
medicines online given cheaper prices in some cases and the convenience that comes with
complementary health management and medical services provided by telemedicine platforms.
China’s online pharmacy market to grow to RMB1.1trn in 2030e
Source: Menet, HSBC estimates
148
February 2022
Part II: A deep dive into the prescription drug market

Prescription drugs have been a major laggard in the move to online, making up just 1% of sales
in 2019. But we see this changing given more supportive regulatory changes; we forecast 15%
of prescription drug sales to move online by 2030e. We believe getting chronic disease patients
to buy online is key to growing prescription drug sales.
Rx drug sold in different channels Chronic diseases are a leading the cause
of death (2018)
Source: NHC, Menet, IQVIA, HSBC Source: NHC, HSBC
Part III: ESG and risks

The key environmental, social and governance (ESG) issues for the sector are the mountains of
packaging waste from the delivery of drugs and the potential misuse of personal data. Making
medical services more accessible and affordable, and raising health awareness, are positives
for the industry. Still, there are plenty of regulatory risks, while provincial governments and user
adoption are some of the factors that could slow down the rapid growth that’s expected by many
in the industry.
Estimated annual outpatient drug cost for patient X in 2020 (in Guangzhou under UEBMI)
Metformin __________________ Second drug ___________________ Total annual Eligible for Under BMI scheme Out-of-pocket
annual cost Type name Rate Annual cost drug cost reimbursement BMI Self-paid
792 Insulin secretagogues Glimepirid 100% 219 1,011 1,011 859 152 -
792 AGI Acarbose 100% 1,627 2,419 2,419 2,056 363 -
Main
792 TZDs Pioglitazone 100% 1,144 1,936 1,936 1,646 290 -
therapy
792 DPP-4 inhibitor Vildagliptin 95% 3,240 4,032 3,870 2,400 586 1,046
792 SGLT2 Dapagliflozin 95% 934 1,726 1,679 1,427 252 47
Alternative 792 Basic insulin Insulin Glargin 95% 3,613 4,405 4,224 2,400 604 1,401
therapy 792 GLP-1RA Liraglutide 95% 9,720 10,512 10,026 2,400 910 7,202
Average (excluding GLP-1RA) 2,588 2,523 1,798 374 416
% of total annual drug cost 69% 14% 16%
Note: Metformin is 100% reimbursable, BMI reimbursement ratio is 85% with an annual cap of RMB2,400 in Guangzhou
Source: NHC, HSBC
For the full report, see Spotlight – China Telemedicine: A RMB1trn market by 2030e, 24 March
2021.
149
February 2022
Titanium dioxide: Batteries

now included
 LFP, the next mainstream EV battery material, offers a new growth

driver for top titanium dioxide (TiO2) makers
 We expect China to dominate the global supply of LFP; we forecast
that demand will rise at a CAGR of 50% over 2020-25e
 The TiO2-LFP manufacturing process offers a clear cost advantage
Eric Shen* We turn more bullish on producers of titanium dioxide (TiO2), which is traditionally used in paints
Reg. No. S1700519030001) and coatings, as they enter the lithium ferrous phosphate (LFP) market, the fastest-growing
Head of A-share Petrochem &
New Materials Research battery cathode material used in China’s booming electric vehicle (EV) battery industry and
HSBC Qianhai Securities Limited energy storage market. We estimate that LFP capacity will rise at a CAGR of 40% over 2020-
eric.shen@hsbcqh.com.cn
+86 10 5795 2343 25e, supported by a demand CAGR of 50%.
Yuqian Ding*
Reg. No. S1700519090001)
LFP can be produced by using by-products of TiO2 which currently generate little value. This
Head of A-share Auto Research process will be at least 10% cheaper than mainstream LFP production techniques, creating a
yuqian.ding@hsbcqh.com.cn “trash to treasure effect”, cost advantages and economies of scale. According to Lithium
+86 10 5795 2350 Australia, China supplies 98% of the global LFP supply and we believe LFP’s emergence as a
Yi Ru* new battery cathode material will help support plans to make the country more self-sufficient in
Reg. No. S1700520120001)
Analyst, A-share Petrochemicals high-end manufacturing.
& New Materials
HSBC Qianhai Securities Limited The new growth driver
yi.ru@hsbcqh.com.cn
The growth of China’s real estate market has been the major driver of the TiO2 business for
+86 21 6081 3808
years, but the recent tightening of property regulations has clouded the outlook for traditional
*Employed by a non-US affiliate of HSBC TiO2 demand. We think the emergence of LFP as a growth driver is a very big deal, given the
Securities (USA) Inc. and not registered/ rapid growth of the EV battery market. For example, Tesla recently announced that it will start
using LFP batteries in its standard range vehicles. LFP technology is regarded as being
cheaper and safer than nickel-based batteries, although it comes with lower energy density,
which means the driving range on a single charge is shorter.
We think the days of big cyclical swings in TiO2 are over

The market has a long memory of the TiO2 downturn between 2011 and 2016 which hit the
industry hard. The explanation is straightforward. From 2000, global TiO2 price levels were
pretty flat until 2011, when capacity in China grew 82% y-o-y, and then 50% y-o-y in 2015.
During that period, TiO2 prices fell 40% from RMB20,000 to RMB12,000, while the spread
dropped from RMB12,000 to RMB8,000, close to the breakeven point.
Unlike the market, we think the days of high levels of volatility are over. We expect TiO2 prices
to fluctuate in a narrow range in 2021-23e and forecast that the average industry spread will rise
slightly from RMB10,000 in 2021e to RMB10,500 in 2022-23e. Our view is based on the
changes in industry policy and the market environment since 2015 which have structurally
constrained TiO2 capacity. For example:
150
February 2022
 Supply-side reforms launched in 2015 accelerated the pace of industry consolidation;

 Carbon neutrality initiatives, which began in 2020, have led to a huge rise in EV battery
production; and
 The TiO2 process upgrade from the sulfate to the chlorination method has increased
technical barriers.
On the demand side, the downstream TiO2 market is led by coating products, where demand
has remained steady, although the long-term growth potential is still significant from the global
perspective. We believe a steadier, less volatile market will improve market expectations. In our
view, China will remain the key source of global TiO2 capacity growth.
We expect 2020-25e global LFP capacity and demand CAGRs to be 40% and 50% (tonnes)
5,000,000 120%
4,500,000
100%
4,000,000
3,500,000 80%
3,000,000 60%
2,500,000
2,000,000 40%
1,500,000 20%
1,000,000
0%
500,000
- -20%
2016 2017 2018 2019 2020 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e
Capacity Output y-o-y (RHS, %) Utilization (RHS, %)
Source: Baiinfo, HSBC Qianhai Securities estimates
We expect 2030e global EV to contribute around 70% of LFP demand, and energy storage
22%
100%
10%
90% 24%
80% 22%
70%
60% 30% 21%
50% 31%
0%
40%
30%
46% 52%
20% 37%
10%
0%
2019 2020 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e
China EV(%) Overseas EV(%) Energy Storage(%) Other(%)
Source: Baiinfo, HSBC Qianhai Securities estimates
For the full report, see China TiO2 Industry – Batteries included: A big deal for LB Group and
CNNC, 5 November 2021.
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Vocational Education: Driven

by job-hungry graduates
 Rising competition for jobs is pushing students to turn to vocational

training, a market we see doubling by 2025e compared with 2020
 Unlike after-school tutoring this segment has policy support
 Leaders to benefit from strong brands, teaching and research
Jing Han*
Market to double. We take a differentiated look at vocational education in China, a corner of
Reg. No. S1705518080001) China’s vast education market that’s backed by government policy as it helps university
Head of A-share Media & Internet
Research graduates find jobs. Using demographics and examining China’s economic structure, we show
HSBC Qianhai Securities Limited there will be an oversupply of highly educated students for years to come. And where there are
jing01.han@hsbcqh.com.cn
+86 10 5795 2344 high-quality jobs on offer, they are concentrated in just a few areas. The result is the scramble
to find jobs is getting tougher. That means demand for vocational training – which includes
*Employed by a non-US affiliate of HSBC preparation for civil service exams and teaching qualifications – is heading higher as graduates
qualified pursuant to FINRA regulations look to find an edge to make them stand out. We see the market doubling by 2025 to
RMB180bn from 2020.
Market size and growth estimates of key segments in vocational training industry (RMBm)
100,000
85,000
80,000
1.8x
60,000 1.9x 2.0x 2.6x 2.4x 47,000

40,000 31,000
27,000 23,000
14,000 17,000
20,000 9,000 13,000
8,300
-
Civil service exam Public institutions Teacher recruitment exam Postgraduate entrance IT training
recruitment 2020 2025e exam
Source: Company website, Offcn, Huatu, HSBC Qianhai Securities estimates
While vocational education can refer to education that provides academic qualifications, this
report focuses on training that provides skills or professional knowledge for job-hunters. We look
at three major segments: (1) recruitment exams that target fresh graduates; (2) improvement
training which includes postgraduate entrance exams and exams to get students into colleges and
universities; and (3) vocational skills training which offers IT, finance, judicial and other exams.
We also show how the vocational training market is more concentrated than K12 training given
many of the entrance exams they train students for are seasonal which is a model that favours
larger players. Plus, vocational education is frequently changed faster than K12 so trainees
gravitate to large institutions with brand strength and who can develop their materials faster.
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China education industry breakdown
Secondary
Higher vocational school
vocational school
Academic
education Primary Middle
Kindergarten High school Undergraduate school
school school
Primary Secondary Higher

education education education
0-6 years 6-15 years 15-18 years 18 years and above
Early education K12 tutoring Non-academic education
Recruitment exams training：

Civil servants, Teachers
Non-
academic Vocational improvement training：
education Postgraduate entrance exams，Exam
of upgrading from colleges to
universities
Vocational skills training：

IT, finance
Source: HSBC Qianhai Securities
Learnings from Germany and the US

To provide an international perspective we looked at two developed markets, Germany and the
US. In Germany, the use of a “dual system” where corporates and schools team up to train staff
is popular and plays an important role in youth employment. In the US vocational education
depends more on the free market with listed companies offering boot camps and online
universities. Our takeaway is that partnerships between schools and corporates are an
important driver of developing vocational education, while the private market is an effective way
to improve the supply of job-oriented training which helps to keep unemployment down.
A corner of the education sector that’s strongly supported by policy

Strict regulations have largely put the brakes on China’s education sector, especially the K12
tutoring segment since the spring of 2021. But for vocational education it’s a different story as
policy has been supportive given it is a part of the education sector that has a positive impact on
enhancing the quality of the labour force and facilitating employment. To be more specific,
regulations for vocational education are more relaxed in terms of asset securitisation, school
permits, approving authorities and teacher certificates.
Could K12 after-school tutoring companies muscle into vocational education?

As has been widely reported, since the start of this year the after-school K12 tutoring industry
has become strictly regulated. The result is some companies operating in this sector are
planning to transform their business models and move into other educational segments, with
vocational education being one of the options. However, we believe it is hard for these K12
tutoring companies to transform fully into vocational education companies.
For the full report, see Spotlight – China Vocational Education: Backed by policy, driven by job-
hungry students, 11 August 2021.
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Notes
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering
analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or
issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other
views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect
their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Dilip Shahani, Eliot Camplisson, Steven Sun, CFA, Qu Hongbin,
Paul Mackel, André de Silva, CFA, Wai-Shin Chan, CFA, Frederic Neumann, Herald van der Linde, CFA, Keith Chan, Jing Liu,
Shanshan Song, Jingyang Chen, Pin Ru Tan, Helen Huang, Louisa Lam, CFA, Polo Heung, Amir Hoosain, Raymond Liu, CFA,
Howard Lau, CFA, Evan Li, Frank He, Yuqian Ding, Angel Sun, Lesley Liu, Katharine Song, Joseph Zhou, Kailesh Mistry, CFA,
Gary Lam, Michelle Kwok, Helen Fang, Andy Li, Yihui Sha, Eric Shen, Yi Ru, Chase Ding, David Wu, Charlene Liu, Jessie Lu,
Jing Han, Erin Xin, Joey Chew, Corey Chan, Dun Wang, Amy Hu, Li Quan, Himanshu Malik, CFA, Song Jin Lee, CFA, Steven
Major, CFA, Zoey Zhou, Hazel Lai, Yaryna Kobel, Anakin Tang, Sijie Ma, Kenneth Chin and Thomas C. Hilboldt, CFA
Important disclosures
Foreign exchange: Basis for financial analysis
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the
clients of HSBC and is not for publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to
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Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may
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HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
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HSBC’s currency trade ideas on deliverable FX forwards (DF) or non-deliverable FX forwards (NDF) are usually identified on a
time horizon of up to three months, although HSBC reserves the right to extend this time horizon on a discretionary, trade-by-
trade basis.
HSBC believes an investor’s decision to buy or sell an instrument should depend on individual circumstances such as the
investor’s existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems
to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research
report. In addition, because research reports contain more complete information concerning the analysts’ views, investors should
carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations
should not be used or relied on in isolation as investment advice.
155
February 2022
Definitions for currency trades on DFs and NDFs

Buy: refers to buying the first currency in the named pair in exchange for the second currency in the named pair.
Sell: refers to selling the first currency in the named pair in exchange for the second currency in the named pair.
The tenor of the instrument will be denoted and will refer to a settlement date relative to the opening date of the trade idea e.g.
1m refers to a settlement date 1 month forward from the open date of the trade idea. NDF trades normally fix two working days
prior to the settlement date.
Distribution of currency trades

The nature of foreign exchange forward trade ideas is such that there will always be an equal number of buy and sell trades
(buying one currency in exchange for selling another), both outstanding and historically.
Equities: Stock ratings and basis for financial analysis

HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor’s decision to buy or sell a stock should
depend on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations and that
investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or
relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in
each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating
because research reports contain more complete information concerning the analysts’ views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between
5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20%
below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any ‘material change’ (initiation or resumption of coverage, change
in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The target price for a stock represented the value the analyst expected the
stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight,
the potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12
months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was
expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage
points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months
(unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which
we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month’s
average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however,
volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock’s status to change.
Rating distribution for long-term investment opportunities

As of 31 December 2021, the distribution of all independent ratings published by HSBC is as follows:
Buy 61% (33% of these provided with Investment Banking Services in the past 12 months)
Hold 33% (29% of these provided with Investment Banking Services in the past 12 months)
Sell 6% (29% of these provided with Investment Banking Services in the past 12 months)
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February 2022
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current
rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy
= Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial
analysis” above.
Fixed income: Basis for financial analysis

This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor’s
decision to make an investment should depend on individual circumstances such as the investor’s existing holdings and other
considerations.
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations. Given
these differences, HSBC has two principal aims in its fixed income research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies in corporate credit and based
on country-specific ideas or themes that may affect the performance of these bonds in the case of covered bonds, in both cases
on a six-month time horizon; 2) to identify trade ideas on a time horizon of up to four months, relating to specific instruments,
which are predominantly derived from relative value considerations or driven by events and which, in the case of credit research,
may differ from our long-term opinion on an issuer. Buy or Sell refer to a trade call to buy or sell that given instrument; HSBC has
assigned a fundamental recommendation structure, as described below, only for its longer-term investment opportunities.
HSBC believes an investor’s decision to buy or sell a bond should depend on individual circumstances such as the investor’s
existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe
their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In
addition, because research reports contain more complete information concerning the analysts’ views, investors should carefully
read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should
not be used or relied on in isolation as investment advice.
HSBC Global Research is not and does not hold itself out to be a Credit Rating Agency as defined under the Hong Kong Securities
and Futures Ordinance.
Definitions for fundamental credit and covered bond recommendations

Overweight: For corporate credit, the issuer’s fundamental credit profile is expected to improve within the next six months. For
covered bonds, the bonds issued in this country are expected to outperform those of the other countries in our coverage over the
next six months.
Neutral: For corporate credit, the issuer’s fundamental credit profile is expected to remain stable for up to six months. For covered
bonds, the bonds issued in this country are expected to perform in line with those of the other countries in our coverage over the
next six months.
Underweight: For corporate credit, the issuer’s fundamental credit profile is expected to deteriorate within the next six months.
For covered bonds, the bonds issued in this country are expected to underperform those of other countries in our coverage over
the next six months.
Definitions for trades (Rates & Credit)

Buy and Sell refer to a trade call to buy or sell a bond, option on an interest rate swap (“swaption”), interest rate cap or floor,
inflation cap or floor, or Total Return Swap (“TRS”). The buyer/seller of a TRS receives/pays the total return of the underlying
instrument or index at the end of the period and pays/receives the funding leg.
Buy protection and Sell protection refer to a credit default swap (CDS): the protection buyer/seller is effectively selling/buying
the reference entity’s credit risk.
Pay and receive refer to a trade call to pay or receive the fixed leg of an interest rate swap (IRS), a non-deliverable IRS, the first-
named leg of a basis swap, the realised inflation leg of an inflation swap, or a forward rate agreement (FRA). An investor that
executes a pay or receive trade is said to be “paid” or “received.”
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February 2022
Payer and receiver refer to inflation caps or floors and to swaptions: a payer is an option giving the right but not the obligation to
enter a paid position in an interest rate or inflation swap, and a receiver is an option giving the right but not the obligation to enter
a received position in an interest rate or inflation swap.
ASW (also asset-swap, Buy on asset swap, Buy on an asset-swapped basis): Buy a bond packaged with a swap that is tailored
to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving the credit
exposure to the bond issuer.
RASW (also reverse asset-swap, Sell on asset swap, Sell on an asset swapped basis): Sell a bond packaged with a swap that is
tailored to eliminate the bond’s interest rate risk, effectively transforming the bond to a floating rate instrument whilst preserving
the credit exposure to the bond issuer.
Distribution of fundamental credit and covered bond recommendations

As of 31 December 2021, the distribution of all independent fundamental credit recommendations published by HSBC
is as follows:
Overweight 23% (55% of these provided with Investment Banking Services in the past 12 months)
Neutral 52% (42% of these provided with Investment Banking Services in the past 12 months)
Underweight 26% (36% of these provided with Investment Banking Services in the past 12 months)
For the purposes of the distribution above the following mapping structure is used: Overweight = Buy, Neutral = Hold and
Underweight = Sell. For rating definitions under both models, please see “Definitions for fundamental credit and covered bond
recommendations” above.
Distribution of trades
As of 31 December 2021, the distribution of all trades published by HSBC is as follows:
Buy 74% (41% of these provided with Investment Banking Services in the past 12 months)
Sell 26% (51% of these provided with Investment Banking Services in the past 12 months)
For the purposes of the distribution above the following mapping structure is used: Buy/Sell protection/Receive/Buy Receiver/Sell
Payer = Buy; and Sell/Buy protection/Pay/Buy Payer/Sell Receiver = Sell. ASW is counted as a buy of the bond and a paid swap,
and RASW as a sell of the bond and a received swap. For rating definitions under both models, please see “Definitions for trades
(Rates and Credit)” above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at
http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
Recommendation changes for long-term investment opportunities

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158
February 2022
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Additional disclosures
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Main contributors
Dilip Shahani Qu Hongbin
Head of Global Research, Asia Pacific Co-Head Asian Economics Research,
The Hongkong and Shanghai Banking Chief China Economist
Corporation Limited The Hongkong and Shanghai Banking
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+852 2822 4520 hongbinqu@hsbc.com.hk
+852 2822 2025
Eliot Camplisson* Frederic Neumann

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The Hongkong and Shanghai Banking The Hongkong and Shanghai Banking
Corporation Limited Corporation Limited
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+852 2822 1622 +852 2822 4556
Steven Sun*, CFA (Reg no: S1700517110003) Andre de Silva, CFA

Head of Research, HSBC Qianhai Securities Head of Global EM Rates Research
Limited The Hongkong and Shanghai Banking
HSBC Qianhai Securities Limited Corporation Limited
stevensun@hsbcqh.com.cn andre.de.silva@hsbc.com.hk
+86 755 8898 3158 +852 2822 2217
Wai-Shin Chan, CFA Paul Mackel

Head, Climate Change Centre; Head, Global Head of FX Research
ESG Research The Hongkong and Shanghai Banking
The Hongkong and Shanghai Banking Corporation Limited
Corporation Limited paulmackel@hsbc.com.hk
wai.shin.chan@hsbc.com.hk +852 2996 6565
+852 2822 4870
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered / qualified pursuant to FINRA regulations
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2022虎年中国投资策略：繁荣、机遇和可持续性（英） HSBC 2022.2 163页

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Multi-Asset

…we explain why we are more

…provide a one-stop shop for our

Change of growth model  China’s great transition: from construction to capex

growth rate to halve to 3-4% Survival of the fittest. Page 75

Common prosperity  The road to common prosperity: reduce inequality

population  Richer households: China’s rising wealth. Page 51

 Tech: Internet – A new playbook. Page 41

Reducing risk/deleveraging  Decoupling: A closer look at technology imports.

25% of GDP growth? Page 63

Greater focus this year

Easing to support growth  China in 2022 – Five macro themes. Page 9

RMB200trn over 2022-2060  Stepping up target easing. Page 47

Higher-end manufacturing: 60% of

Tiger macro outlook  Credit: China Onshore Insights – 2022 outlook.

6.55 at end-Q4  Rates: Onshore China – Off to a roaring start.

Investment compass  Green: ESG Integrated – Utilities. Page 31

Sustainability, manufacturing, Page 39

 Consumption: Consumer – Silver dollars, the she-

economy, Gen-Z style. Page 37

brands. Page 127

Welcome Tiger, good riddance Ox

We expect Beijing to introduce more targeted easing measures –

On the macro front:

Key data and forecasts

We see China’s economy rebounding to 5.6% in 2022e …

… with the RMB staying relatively range-bound …

Steady rise in foreign holdings of China government bonds

Foreign purchase of CGBs Foreign ownership ratio (RHS)

Source: CEIC, HSBC

HSBC’s key investment themes

This page has intentionally been left blank

Economics: China in 2022 –

 Beijing will likely step up monetary and fiscal easing, fine-tune

Policy easing to shore up growth

Proactive fiscal policies to do the heavy lifting

Economics: China’s great

 China’s decades-long boom in real estate and infrastructure, a major

Economics: The road to

 We put Beijing’s regulatory clampdown into a global context

What to expect next?

The Zhejiang demonstration zone

Economics: Greater Bay

 New development plans for Hengqin and Qianhai focus on

Summary of Greater Bay Area statistics

**Percent of national share including Hong Kong and Macau

Source: CEIC, NBS, HSBC Research

Summary of Connect programmes

Credit: China Onshore

2021 and the year ahead

FX: RMB overstretching

 The RMB may stay strong in the near-term

We forecast USD-RMB to rise from 6.40 in Q1 2022 to 6.55 by end-2022.

Full page image to come: Insert:

Rates: Onshore China – Off to

André de Silva, CFA

Funding conditions to improve further as interbank rate corridor shifts lower

The growing monetary policy divergence between China and the US

Steady rise in foreign holdings of China government bonds