2021 Annual Report of RC

Looking back at 2021, the world economy entered a bumpy road of post-pandemic recovery after being hit hard by the coronavirus. “Strong recovery, imbalance, weak supply and high inflation” has become the key logic governing global economic developments. Underpinned by prudent monetary policy and rigorous anti-pandemic policies, the Chinese economy still managed a recovery with its unique rhythm and quality. Looking ahead into 2022, the world economy is going to demonstrate the feature of “co-existing with the pandemic”, while high inflationary pressures will force central banks to restart the cycle of monetary policy normalization. Confronting short-, medium- and long-term pressures, China will likely find itself misplaced in the global economic cycle relative to the world’s other major economies, and facing post-recovery downward pressures ahead of its counterparts. At this point of time, we will look at economic developments both at home and abroad in an all-round and systemic manner based on the post-pandemic recovery of the world economy; comprehensively analyze future market trends and coping strategies from a global strategic perspective by starting with domestic and overseas economic situations and relevant policy dynamics; design and optimize customized financial services for domestic and overseas clients in terms of crisis prevention, strategy adjustment and optimization of asset allocation.

1.The unbalanced recovery of the world economy has raised higher requirements for the investing ability of enterprises and investors

After the outbreak of the covid-19 pandemic in 2020, governments all over the world adopted strong countermeasures, proactive and loose policies, allowing the world economy to recover in 2021. However, differences in vaccination and the intensity of policy support resulted in certain imbalances amid such recovery. This raised even higher requirements on enterprises and investors as to when to purchase assets and how to structurally adjust their asset allocations.

Figure 1:Three serious new coronavirus variants struck in 2021

Sources:RC Family Office

Figure 2:Unbalanced recovery of the world economy

Sources:RC Family Office

2.Mismatch between global commodity demand and supply led to surging inflation, and incurred losses to enterprises and investors that failed to hedge against risks

In 2021, due to the unbalanced recovery of the world economy, a mismatch between global commodity demand and supply helped rapidly push up inflation throughout the world.

Figure 3:A shortfall in global commodity demand and supply helped rapidly push up inflation

Sources: RC Family Office

Figure 4:Fast-rising global demand for shipping aggravated tensions in the shipping industry

Sources:RC Family Office

We consider that surging inflation worldwide can be attributed to the following four factors: (1) In 2021, the promotion of covid-19 vaccines paved the way for economic demand to recover. Developed countries universally adopted fiscal and monetary measures equivalent to more than 10% of their GDP to cope with the pandemic. As the major increment in global economic demand, developed economies, led by the United States, drove the rapid recovery of the world economy. (2) The pandemic dealt an obvious blow to the “supplier nations” represented by Southeast Asian countries. (3) A mismatch between commodity demand and supply in developed and emerging markets drove up shipping pressure all over the world. (4) Global energy transformation fuelled energy shortage at a faster pace. Soaring inflation worldwide caused heavy losses to enterprises and investors that failed to hedge against relevant risks.

3.China vigorously promoted economic transformation, with technological and innovation-oriented sectors maintaining high-speed growth

In November 2020, the fifth plenary session of the 19th CPC Central Committee considered and approved the Outline of the 14th Five-Year Plan (2021-2025) for National Economic and Social Development and the Long-Range Objectives Through the Year 2035, putting forward a new development pattern. Centered on common prosperity and supported by the two wings of the innovation-driven development strategy and the carbon peak and carbon neutrality strategy, the new pattern seeks to facilitate China’s economic restructuring and fulfill high-quality growth of the Chinese economy. Guided by such a new development pattern, manufacturing is put at the center of China’s economic transformation and upgrading drive. The “14th Five-Year” Plan stipulates that the share of the manufacturing industry shall remain basically stable, with efforts made to upgrade it in a green, intelligent and high-end manner. Boosted by policies, financial institutions are stepping up their support of the real economy, such as raising the share of medium- and long-term loans to the manufacturing sector, increasing credit grants to strategic and emerging industries, and supporting equipment upgrades and technological transformation of the traditional manufacturing industry.

In recent years, China has seen investments in high-tech manufacturing (centered on technological innovation) maintain a growth rate of over 10%, notably higher than that of the manufacturing sector as a whole. The Beijing Stock Exchange, newly established in November 2021, also expressed clearly that it would specifically provide greater financing support to innovation-based leading small and medium enterprises that specialize in niche sectors.

Figure 5: Investment in high-tech sectors grew faster than that in the general industries

Source: RC Family Office

Figure 6: Consensus has been formed on the overall principle of “establishing the new before abolishing the old” for the carbon peak and carbon neutrality policy

Source: RC Family Office

4.With the real estate industry cooling off, both upstream and downstream enterprises and investors suffered losses

Gradually breaking away from the traditional investment-driven growth model, China has entered a new development stage featuring high-quality growth. As one of the key drivers for investment, the real estate industry also witnessed changes as a result. On the one hand, the guideline that “houses are for living in, not for speculating with” has become a keynote medium- and long-term policy for the industry; on the other hand, influenced by such policy, real estate enterprises saw financing continuously restricted, market expectations weakened, and real estate investments growing a slower pace. With the all-round tightening of policies including the “three red lines”, centralized land supply and management of loan concentration, winter dawned on the real estate sector in the second half of 2021. This was reflected by negative growth of real estate sales, restricted financing, bond defaults, continued slump in housing starts, falling willingness and ability of developers to acquire land, dual dips in land transaction areas and land premium rates, and rising auction failures in the second round of centralized land supply, with the land auction failure rate exceeding 30% in quite some popular cities. This led enterprises that failed to put in place supply chain-related risk control measures and investors that failed to make early strategic adjustments to suffer losses; meanwhile, upstream and downstream enterprises without early supply chain financing arrangements also faced the plight of tight capital chains.

Figure 7:Real estate investments grew at a continuously slowing pace

Sources:RC Family Office

Figure 8:Commodity housing sales tumbled substantially in the second half of 2021

Sources:RC Family Office

Figure 9:The gross floor area of housing starts maintained negative growth

Sources:RC Family Office

Figure 10:Both land transaction area and land premium rate dropped in the second half of 2021

Sources:RC Family Office

despite repeated outbreaks of the pandemic in 2021, the world economy was already on the path to recovery, supported by anti-pandemic measures and loosening policies. China took the lead in realizing policy normalization, and proactively promoted economic restructuring to shape a new development pattern while gradually shifting from the traditional growth model of mainly relying on investments in real estate and infrastructure construction industries. However, high inflation, complex international situations and market changes that resulted from easing policies worldwide will raise higher requirements on the risk hedging and asset allocation capabilities of enterprises and investors. Moreover, China is expected to face downward pressures earlier than its peers following the economic recovery. How to address various negative impacts brought by the real estate market, seize the window of opportunities amid a new development landscape and comprehensively respond to changes in global economic situations has added more unknowns and variables to the year of 2022.

1.The world economy will show the feature of “co-existing with the pandemic” for a long time

After two turbulent years, covid-19 is evolving into a highly contagious virus with low fatality, similar to a “super flu” that can co-exist with human society for a long time. Given the differences between the Chinese and western pandemic response models, supposing that there were no major virus variations going forward, major countries would gradually shift from the recovery model of “demand preceding supply” to the one of “balance between demand and supply”.

Figure 11:Covid-19 vaccines could suppress the virus

Sources:《Science》

2.Loose monetary policies will return to normal worldwide, which calls for prudence in asset allocation to resource-rich countries and emerging markets

Loose monetary policies led most countries out of the pandemic crisis, but the repeatedly worse-than-expected inflation in the second half of 2021 has become a major concern of central banks that needs an urgent solution. Overseas central banks represented by the US Federal Reserve (the “Fed”) have restarted a new cycle of monetary policy normalization, heralding the arrival of a marginal inflection point for loose monetary policies. Overheated economic operation and high inflationary pressures prompted the Fed to continue scaling down its bond purchases at a faster pace, which accelerated monetary policy normalization. Furthermore, the Bank of England raised interest rates and the European Central Bank planned to halt its pandemic emergency purchase programme (PEPP) in March 2022; to suppress soaring inflation and prevent capital flights, the central banks of emerging economies including Russia, Brazil, Mexico and Chile scrambled to increase interest rates many times in 2021.

Figure 12:Monetary policies of the world’s major countries are currently in different positions of a cycle

Sources:Haver, IMF

Figure 13:Inflationary pressures on major economies have surfaced

Sources:RC Family Office

Figure 14:In December 2021, the FOMC anticipated the Fed to enter a rate hike cycle after the end of tapering

Sources:RC Family Office

Figure 15:Countries whose foreign exchange reserves are not enough to cover external debts and which have a relatively high government leverage ratio run the risk of defaults

Sources:Bloomberg, Haver, EPFR, Ourworldindata

We believe that： the arrival of an inflection point for global monetary policies will duly hold back the growth of the world economy, on the one hand, and increase future uncertainties about resource-rich countries and emerging markets, on the other hand. The liquidity factor that shores up global asset prices will likely fade away, which may generate a moderately negative impact on commodity prices, but gradually curb the current situation of resource-rich countries benefiting and emerging markets suffering. Against the backdrop of the Fed cutting back on QE and raising the interest rate, emerging markets run the risk of capital exodus; moreover, due to weakening global demand and tightening fiscal and monetary policies at home, they face greater growth pressures than developed economies. Therefore, it is necessary to guard against the outbreak of debt or exchange rate crises in emerging markets.

3.With the inflation rate anticipated to fall back, there are opportunities in the commodity market

According to the IMF’s latest forecast (October 2021), the YoY growth rate of the global CPI will decrease from 4.3% in 2021 to 3.8% in 2022, but still higher than 2019’s 3.5%; the inflation rate of developed economies will fall from 2.8% to 2.3%; for emerging and developing economies, the figure will drop from 5.5% to 4.9%. We estimate that the center of demand growth in America and major European countries will shift from products to services, meaning that the spillover effect of consumer demand in these countries will be greatly curtailed, and the increment of global demand for commodities substantially constrained. Furthermore, a return to normal of global monetary and fiscal policies will mitigate the inflationary pressure built up in 2021. For enterprises, how to address uncertainties about future inflation and boost their financial condition through the hedging strategy appears particularly important. Yet for investors, the mitigation of inflationary pressures indicates that commodity prices will enter a phase of turbulence at high levels. So prudent and rational asset allocation plans will turn out to be an optimal choice for them.

Figure 16:Global central bank liquidity has contracted ahead of the CRB index

Sources:RC Family Office

Figure 17:The fiscal stimuli of the world’s major economies will most probably ramp down

Sources:IMF

4.With the Chinese economy facing multiple pressures, more prudent strategies are needed to address market risks

Confronting short- and medium-term downward economic pressure, and long-term pressure on economic transformation and upgrading, China will likely find itself misplaced in the global economic cycle relative to the world’s other major economies, and adopt proactive policies to respond to potential market risks ahead of its counterparts.

Figure 18:China is expected to enter the pressure stage in the global economic cycle

Sources:RC Family Office

The Chinese economy is now facing triple short- and medium-term pressures (i.e. “shrinking demand, supply shock and weakening expectations”), the Central Economic Working Conference explicitly pointed out that policies for 2022 would center around “seeking progress while ensuring stability”.

Figure 19:Shrinking demand - weakening consumer demand and falling demand for commodity housing

Sources:RC Family Office

Figure 20:Supply shock - supply chain disruptions, and enterprises running short of multiple factors of production

Sources:RC Family Office

Figure 21:Weakening expectations - enterprises, residents and economists

Sources:RC Family Office

In the long run, China faces such issues as an aging population, a shrinking workforce and weakening economic growth drivers, which has intensified the urgency of industrial upgrades and technological innovations, and calls for the transformation and upgrade of its economic structure.

Figure 22:China is facing an increasingly aging population and a shrinking workforce

Sources:RC Family Office

Figure 23:The key growth drivers for the Chinese economy have been losing steam since 2008

Sources:Estimation of Total Factor Productivity by Industry and Analysis of Economic Growth Drivers for China

We anticipate the following changes to the Chinese economy in 2022:

On the one hand, it is required to both stabilize growth and promote economic restructuring, so it is necessary for enterprises and investors to consider the organic combination of fiscal, industry and monetary policies for industrial layout and strategy formulation respectively. On monetary policy, China will remain timely and appropriate in terms of gross volume, and maintain targeted support of green and high-tech industries, among other key areas. On fiscal policy, the tempo of fiscal expenditures will show the feature of “being ahead of time”; attention can be paid to market opportunities arising from local special bonds, key projects during the “14th FYP” period, and local affordable housing projects. On industry policy, overreactions during policy implementation at earlier stages will be corrected, and reasonable needs of the real estate and traditional manufacturing industries will be satisfied.

On the other hand, China will continue to vigorously develop new drivers. Given the “carbon peak and carbon neutrality” targets, low carbon and environmental protection is anticipated to turn from a development constraint into a growth driver, whereas energy system reconstruction may generate investment opportunities for equipment upgrades and technological renovations for upstream and downstream enterprises along the industrial chain. With China on track to becoming a “manufacturing superpower”, the problems that hinder its development remain grim; hence it is expected to step up policy support of outstanding SMEs specialized in niche sectors, high-tech manufacturing and strategic emerging sectors so as to bring investment opportunities to manufacturing. Corporate clients shall make full use of the supporting financial instruments for carbon emission reduction created by the People’s Bank of China, and the multi-tier capital market system centered around the Beijing Stock Exchange to promote their strategic development.

5.As the real estate sector enters a policy rectification period, affordable housing will likely become a highlight of growth

✦With the real estate entering the policy rectification period, industrial chain-specific enterprises and investors shall seize the window of risk strategy adjustment.

The real estate sector will enter a phase of “appropriate rectification” throughout 2022. Since November 2021, corrective measures targeting the sector have been launched continuously, such as appropriately relaxing the excessively tight mortgage loan policy, and duly loosening restrictions on housing loans. The Politburo meeting held in early December also explicitly expressed that it is essential to support the commodity housing market to better meet the reasonable housing needs of homebuyers, which can help ease the financing pressure of real estate enterprises and stabilize market expectations. These policy adjustments shall not be seen as “going easy on” the real estate industry, but instead as “appropriate rectification” against the backdrop of the “houses are for living in, not for speculating with” policy. In such a context, industrial chain-specific enterprises and investors shall seize the key window of risk strategy adjustment.

✦Affordable housing will likely become a highlight of growth for the industry.

At the 2021 central economic working conference, the wording about affordable housing construction was revised from “attach great importance” to “promote”, with a higher priority given to it, which means that the development of affordable housing has already been swiftly in progress.

Figure 24:The development of affordable housing is mainly promoted in medium and major cities with large population inflows

Sources:Websites of relevant municipal governments

We consider it necessary to remain vigilant about the effects generated by a slowdown in real estate investment during 2022：

Firstly, slower growth of real estate investment will affect the land-related fiscal revenue of local governments. Under the influence of the “houses are for living in, not for speculating with” policy, land purchase expenses are expected to be still affected in 2022. As income from land transfers serves as a key supplement to debt repayment by local governments, slower growth of such income will bring relatively great pressure on local government debts. Therefore, it is important to guard against the risk of defaults of municipal bonds in less developed regions.

Secondly, it is necessary to stay alert to cash flow and debt problems of some real estate enterprises. The overall improvement of the environment for housing finance is not equal to the financing environment turning relaxed. It should be seen as a “rectification” of previous policies. Except for central SOEs, and some competent private real estate enterprises, the financing situation for most small and medium private ones is yet to be improved. Moreover, the second and third quarters of 2022 will witness a peak of dollar-denominated bonds maturing which are issued by Chinese real estate enterprises worth US$29 billion in total. As these enterprises still face relatively huge debt repayment pressures, the possibility of more such enterprises going into material default cannot be ruled out.

In 2022, by consistently “catering to the differentiated needs of clients, we will provide non-replicable, customized financial services” and professional support, develop and optimize customized financial solutions to the following clients by thoroughly analyzing global economic situations, forming prudent strategies and seizing the key logic.

1. Ultra-high-net-worth (UHNW) families

As a critical incident in the history of human civilization, the covid-19 pandemic raging all over the world for more than two years has generated huge political, economic and ecological impacts, and caused a series of chain reactions. The Russia-Ukraine crisis, the steep fall of China concept stocks and other events that happened since the start of 2022 are epitomes of deglobalization and worsening geopolitical conflicts caused by the pandemic. Against such a historical background, China’s the development and its ties with the outside world will also enter a more complex and bumpier path, filled with all kinds of challenges and risks. Nevertheless, it is foreseeable that themes such as fulfilling “common prosperity”, decidedly promoting the carbon peak and carbon neutrality strategy, regulation of the real estate market and China-US competition will have significant influence on the development and asset allocation of family enterprises for a long time. How to prejudge potential risks, prevent crises and make customized adjustments will be a top priority to us this year when we serve UHNW families.

Given that the pandemic and latest geopolitical events may fundamentally change global economic and geopolitical orders, and further increase the risk of economic division, with relatively great impact on trade and investment in particular, therefore, we will: 1) on corporate strategy level, emphatically study and analyze new changes in global economic and political landscapes and the building of new systems, avoid economies featuring soaring uncertainties, pay more attention to the areas vigorously supported by government policies, effectively perform corporate social responsibility, prevent business involvement in grey zones that go against the promotion of social equity and justice, and put in place industry-specific risk control measures on a customized basis; 2) on family asset allocation, fully consider the spillover effect of geopolitical and policy risks, recreate and optimize customized investment models for family asset allocation; 3) on family inheritance, integrate common prosperity into building the family trust structure to fulfill family inheritance and the mutual promotion between practiced social and family values, as well as the combination between sustainable wealth of families and growth of social wealth; 4) on successor cultivation, continue to implement customized plans, strive to break down the background, performance of and response to “profound changes unseen in a hundred years” into actual cases and carry them out in the ideas and skills of successors.

2.Domestic and overseas financial institutions

We believe that China’s financial industry is currently in a new stage of all-round opening up. As part of China’s opening up, this round of the financial industry’s opening up far exceeds previous ones in terms of the width thereof for financial license, depth thereof for business qualification and international acceptance. Therefore, financial institutions shall highly value its profound impact on the development of the domestic financial industry, especially the vast business growth space and unprecedented opportunities for international transformation. All in all, as international investors rush in at a faster pace, and relevant domestic business models and industry landscapes are adjusted constantly, there exists a grave risk of information asymmetry and missing out on the “strategic window”.

Committed to jointly promote the development of China’s financial industry, we will fully capitalize on our international experiences and overseas resources to help facilitate the internationalization reform of and establishment of international business for domestic financial institutions, provide a series of consulting and tutoring services, and accurately connect them with our overseas resources based on the realities and international strategies of these institutions. Moreover, as an “integrated service provider” for overseas institutional investors investing in China, we will help overseas institutions that hope to enter or expand their investment in China to address information asymmetry, offer customized services such as sorting out investment channels, designing fund remittance and repatriation plans, optimizing investment operation and costs, accurately connect them with premium domestic partners, and reduce losses arising from policy or cultural differences.

3.Listed companies

Given the ever-changing global trade and economic situation, greater volatility in financial markets and faster promotion of the comprehensive registration system at home, great changes have taken place to the eco-environment faced by domestic listed companies. This not only poses many challenges to the operation of companies, but also raises higher requirements for market value management of listed firms. All this requires the use of specialized knowledge about finance, legal affairs, business, marketing and public relations (among others), rich experience in evaluating general trends, swiftly sensing changes in regulatory rules and policies, seizing the timing and understanding market styles, as well as good communication relationships with regulators, stock exchanges, industry associations, securities analysts, institutional and retail investors and the media, etc.

By leveraging our “local resources + international investment research team”, and rich upstream/downstream buyer and seller resources, we will provide one-stop services dedicated to listed companies in a more thorough manner in 2022, including but not limited to：1) special-account customization and exclusive investment plans with liquidity, safety and returns all taken into consideration; 2) customized foreign exchange risk management plans for enterprises based on their financial operation status through the employment of overseas and domestic financial instruments; 3) one-stop capital operation services for offshore listed companies; and 4) professional value-based public relations service built upon the valuation system of the industry and based on the long-term development strategy of enterprises.

------Prepared by: expert team of RC Family Office