Mid-year review 2022 - China: ready to spring back

As its pro-growth policy takes effect and gradually kicks in, China’s economic activities, after taming Covid-19, will likely be back on track during the year's second half.

Bottom line

Despite mounting pressure from the Covid-19's resurgence along with external uncertainties, the long-term fundamentals of the Chinese economy remain solid, and the trends toward digitalization, sustainable power supply, and healthcare upgrades remain unfazed.

Looking ahead, the CCP congress will pave the way for China to continue strategically investing in innovation.    

Ready to spring back 

A bumpy start to the year, but looking to a better  2nd half

China's rebound still faces some uncertainties due to its dynamic zero-Covid policy, making a V-shaped recovery unlikely. Yet, the Chinese leadership vows to stabilize the economy with the effective coordination of epidemic prevention and economic and social developments. Considering the importance of the impending 20th National People’s Congress meeting (an event that should see the Communist party decide whether the current president can clinch a third-term or even lifelong presidency), we expect policymakers to steer economic activities back to normal in the second half of 2022.

Doubling down on R&D

In the outline of the 14th Five-Year Plan (2020-2025), China set the national plans to pursue innovation-driven development, focusing on three "strategic pillars" (next-generation technology, renewable energy, and healthcare). As China strives to transition from a low-end manufacturer to a high-end producer, the Chinese government sees technical innovation and industrial upgrades as critical to competing globally. China's R&D expenditure hit a record high of $441bn in 2021, with an annual growth of 14.2% YoY. Beyond the favorable base effect following a year 2020 plagued by Covid-19, the country plans to grow its investments by more than 7% per year until 2025 in a push for technological breakthroughs.

In 2022, China further increased its tax support for R&D investments, expanding its "super deduction policy" to the technology-based small and medium-sized companies (SMEs). This policy was previously only open to manufacturing firms. Those SMEs who meet the qualifications are eligible to obtain an extra 100% of R&D expenses on top of actual costs incurred – meaning that for every $100 spent on innovation, Chinese companies can deduct $200, or ten times more than their American competitors.

The first voluntary ESG report program with Chinese traits

As we mentioned, China's Environmental, Social, Governance (ESG) market has gained traction rapidly in recent years. Its ESG development is heavily driven by policy incentives as the country strives to meet its zero-carbon commitment and improve social equality. A new set of optional ESG reporting standards for Chinese corporations was implemented at the beginning of June. The guidelines include more than 100 measures that broadly align with the global benchmark issued by the International Sustainability Standards Board, although they are less complicated and include some "Chinese features" such as corporate charity. Overall, China still has a long way to go to integrate with the global standards fully, but it is swiftly taking steps to enhance transparency for investors.

At the heart of digitalization 

Big Data infrastructures are on the rise

As mentioned in our 2021 outlook mega data/cloud infrastructure is expanding rapidly in China. The country launched the "Eastern Data, Western Calculation" project – a plan to build eight national data center clusters, representing $63bn of yearly investment across data centers, telecommunications, renewable energy, software, and other projects. China's cloud infrastructure services market – covering both infrastructure-as-a-service and platform-as-a-service – is expected to grow to $85bn by 2026 (from $27bn today), with a 5Y CAGR of 25%. The leading Chinese players, Baidu, Alibaba, and Tencent, already representing 60% of the Chinese market share, will play a pivotal role.

Robotaxi rides are entering the fast lane

Backed by a supportive policy, China's autonomous vehicle industry is accelerating the commercialization of self-driving technology. Beijing has granted the first permits to two leading Chinese autonomous taxi operators, Baidu's Apollo and Pony.ai, allowing 14 robotaxis to operate in approved suburban areas with staff sitting inside but no longer in the driver's seat. China is expected to reach 17k Units by 2026, with a 74% 5Y CAGR. Baidu has pledged to build 1'000 driverless vehicles over the next three years.

From "demographic" dividend to "robot" dividend

The widespread outbreak of Covid-19 has brought all industries to realize the value of automation. Yet, the massive lockdowns and the resulting slump in economic activity in manufacturing, have reduced the demand for robotics in 1H22. However, China's automation is a growth driver tackling structural issues such as a shrinking workforce, rising labor costs, and supply chain upgrades. The sector is poised to resume its rapid growth. By 2050, China's industrial robotics density is expected to reach 370 units for every 10,000 people, nearly matching the current level of Germany.

Regulation starting to pay its dividends

The worst days have likely passed

The pandemic not only accelerated the adoption of Fintech (e.g., digital payment and online lending) but also sped up the implementation of regulations. The main regulatory frameworks have been well-set, covering a broad spectrum from cybersecurity to data security and personal data. Looking forward, the authorities are likely to take a more granular approach. Since May, the Chinese government has signaled a change from its previous tough stance on regulatory scrutiny. The authorities have encouraged internet companies to play an active role in the national economy, easing some pressure on China's internet sector.

Owning banking licenses is an ultimate game-changer

After the implementation of a series of fintech regulations (e.g., non-banking financial Chinese companies must be licensed to carry out financial business), the business environment has changed drastically. Additionally, the anti-monopoly policy has reduced the concentration of the financial industry, leading to healthier market practices. The fintech sector shows no sign of slowing down as the government continues to push digitalization. Licensed institutions that hold a "golden ticket" granted by the authorities will be the largest beneficiaries, and likely to thrive as the sector completes its cleansing.

Government-led blockchain market

China has rapidly adopted blockchain technology, especially in major areas such as finance, healthcare, energy, and supply chain. As of 2021, China was the largest owner of blockchain-related patents, accounting for 84% of the global total patents. The Chinese government is the largest blockchain network builder. It has prioritized blockchain technology (excluding cryptocurrency trading and mining) as part of the national innovation plan to create a one-stop system that integrates the databases between government agencies and private enterprises. With the continuous advancement of the national blockchain framework, the private sectors will have to catch up and develop their core technologies to integrate with the public systems. Such measures could encourage private R&D investments, driving the still nascent blockchain market in China.

Moving to new frontiers

Zero Trust Architecture is red-hot

With the rapid development of Chinese mobile and internet services, Zero Trust Security (ZTS), based on the principle of "continuous verification, never trust", is getting strong traction in online payment applications. The digital transformation of financial services accelerates the establishment of a trusted environment. ZTS can add an extra layer of security to identity verification, authorization, and risk management, assuring user data security. ZTS is likely to stand out as the future of network security in China, and its market is expected to reach $9bn by 2026 (from ~$4bn currently), at a CAGR of 19%.

Breaking records in space launches

To fulfill its space ambition of "national development, military empowerment, and great-power competition", China has already achieved many remarkable accomplishments, including human-crewed spaceflight, Mars rover, and deep-space observation. China sees space capabilities as indispensable to building the future of digital innovation that would rely on satellites for communication and transportation. Last year, China achieved a new global record after completing 55 successful launch missions (vs. 32 and 35 successful launches in 2019 and 2020, respectively). In 2022, the country intends to beat its record by completing 60 space launches (already 17 launches as of May).

First-ever kilometer-level reusable rocket test

China's commercial aerospace sector is still in its early stage but moving fast. In May, Deep Blue Aerospace (DBA), a Chinese commercial rocket start-up, completed the nation's first-ever kilometer-level reusable rocket test. The success makes DBA second only to SpaceX, which accomplished the same level of test results a few years ago. But it took DBA only 10 months and three launch tests to succeed, while SpaceX spent a year with eight tests. Moreover, its engine was the first in China to be manufactured using 3D printing, achieving a milestone in space history. It is expected that China can execute its first orbital launch and recovery mission by the end of 2024, formally launching commercial operations for the Chinese reusable carrier rocket.

Bright sunshine in renewables 

Solar/wind plus storage combos are booming

As renewable energy capacity continues its rapid YoY increase, ramping up energy storage is a no-brainer. The bundle-install development (solar/wind + energy storage) has become the key development model in China, further driving the growth potential of energy storage.

China has required that new-built solar/wind farms must be paired with the battery-storage equivalent of 10%+ of the power generation capacity in 20+ provinces. The nation aims to increase battery storage fivefold over the next five years. ~40 G.W. of new battery storage capacity will be added, translating into >$17bn in new investments.

"Solarizing" the rooftop of the nation's buildings

Thanks to favorable policies and economies of scale, small-scale solar PV (residential, commercial, industrial, and off-grid projects) is gaining traction. Rooftop solar is showing the highest potential. In 2021, China added a record amount of rooftop solar panels (29GW) to its solar capacity, representing more than half of the newly-added solar capacity nationwide. Rooftop solar PV installation may be entering an acceleration period as China targets to equip as many as 50% of the nation's buildings with rooftop solar panels by no later than 2026.

Rising shipping and material costs remain a key headwind.

Surges in raw material prices and skyrocketing freight costs due to pandemic-induced disruptions have imposed heavy margin pressure on Chinese makers of solar panels or wind turbines. The cost of shipping a container from Shanghai has risen almost sixfold since the pandemic's beginning. The pent-up demand for exports (port congestions) and the possibility of going back into lockdowns have worsened the persistence of freight rates, if not pushed them higher. In addition, the price of wind turbines in China has recorded a low in 2021 due to domestic competition. The cost impact of rising steel price (a key material to make wind turbines) would weigh heavily on the margins of the Chinese winder turbine makers. With no improvements in sight for shipping costs and raw materials prices in 2H22, we continue to favor solar over wind also in China.

Trade tensions do not deter Chinese champions 

No plain sailing into the U.S. anymore 

The FDA has shifted to a more conservative attitude towards innovative Chinese drugs. The agency raised concerns about China-only clinical data (single-country only) when approving new drugs in the U.S. (e.g., the anti-cancer drug co-developed by Eli Lilly and Innovent). 2022 was expected to be a remarkable year of global expansion for many Chinese innovative drug developers; however, as reality bites, a few years of delay seem now unavoidable.  

An awakening giant in cell therapy

Despite a slow start in the cell therapy area, Chinese biotechs outpace their Western peers by holding a rich pipeline. CAR-T drugs now account for more than 10% of the new drugs developed by the Chinese biopharma, compared to only 2% of the new drugs developed by U.S. companies. In addition, CAR-T cell therapy clinical trials in China have contributed to more than half of registered Cell and Genetic Therapy studies worldwide. Currently, there are more than 200 ongoing CAR-T trials in China across a broad range of targets and indications. As CAR-T therapies require personalized treatments, the Chinese authorities are likely to favor domestic players over foreign ones. Among the Chinese players, Legend Biotech (a spin-off of GenScript) is worthy of particular attention as the company received the green light from the FDA on its cancer therapy co-developed with J&J. The approval gives Legend biotech a golden pass to tap into this fast-growing market with huge unmet demands and little competition.

The five-year plan for the bioeconomy to go beyond medical R&D

China unveiled its first five-year "bioeconomy" plan, covering pharmaceutical, biomedical engineering, and more sectors. This is the first plan for the biotech sector to move beyond pure medical R&D. It will focus on commercializing cutting-edge technologies such as promoting intelligent wearable products for remote diagnosis and genetic tests used for disease prevention. The plan aims to create a ~$3.3tn economy by 2025, focusing on healthcare and nurturing an ecosystem capable of producing more companies with annual revenue of at least $1.5bn (10bn yuan).


  • Policy rate cuts. Opposite to most western counterparties, the Central bank of China is in an easing cycle. More expansionary monetary policy (such as cuts of 1-year or 5-year lending rates) is likely to provide ample liquidity and boost private investments, particularly for small businesses that are the main job creators.

  • Upcoming 20th CCP meeting. Maintaining a stable and healthy economic environment will be a paramount task for the authorities as the Communist Party is preparing President Xi to be appointed for his third-term (and possibly lifelong) presidency in the 20th party congress meeting, heralding the end of the regulatory tightening cycle and a brighter outlook.

  • Consumer demand rebound. A strong recovery in consumer spending will propel Chinese economic growth once the Covid-19 cases are under control across the mainland, with the potential to catch up to pre-pandemic levels.


  • Further lockdowns. Any massive shutdowns will worsen the supply chain in China, already under stress from pent-up orders from the previous Covid-19 disruption.

  • Geopolitical tensions. Since China emerged as a competitor to the U.S., political tensions (often shown through trade sanctions) between the two superpowers have been on the rise. The escalating tension between China and Taiwan has reached its highest level

  • Rising commodity prices. A continuous surge in commodities prices would weigh heavily on manufacturing costs, hurting China’s growth momentum and potentially pushing up inflation.

Companies mentioned in this article

Alibaba (9988); Apollo (Not listed); Baidu (BIDU); Deep Blue Aerospace (Not listed); GenScript (1548); J&J (JNJ); Legend Biotech (LEGN); Pony.ai (Not listed); Tencent (Not listed)


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