2022 Ten Macroeconomic Trends

10 Macro
Economic
Trends
in 2022
Economic Insights
KPMG China
December 2021
kpmg.com/cn
Econom ic Insights 10 Macroeconom ic Trends in 2022 1
Executive summary
The global economy continued its recovery from the shock of the COVID-19
pandemic in 2021. Thanks to the country’s fast and effective measures to control
the spread of the pandemic, China was able to restart its economy more quickly
than many other jurisdictions. As the only major economy to achieve positive
growth in 2020, China continued this growth trend in 2021.
China’s economic rebound in 2021 has largely been driven by strong export growth,
while the recovery of domestic demand has been lagging. With rising demand from
advanced economies and production disruptions in some developing markets due
to new waves of pandemic, China’s exports have been a key driver of its economic
growth since the pandemic, supporting the rebound of industrial production and
manufacturing investment. By contrast, the rebound of consumption has been
relatively weak, due to the new waves of infections in some areas, slowing
property market, and the disruption of global supply chain.
Looking forward, as the pandemic is gradually put under control and the
government is tweaking fiscal and monetary policies to make them more flexible
and targeted, we expect China’s economic to continue to recover and the growth
driver to shift more from external to internal in 2022. We expect mainland China’s
GDP to grow 8.0% in 2021 and 5.2% in 2022.
In particular, we anticipate 10 trends for macro economy next year:
1 The COVID-19 pandemic and quarantine policies will continue to be key factors
determining the pace of China’s economic recovery
2 Inflation should remain under control, with the gap between CPI and PPI expected
to narrow
3 Consumption in China continues to pick up and domestic brands rise in popularity

Manufacturing investment, especially in innovative and green sectors, will see rapid
4 growth
5 Real estate regulation is expected to continue but the key policy objective is to
stabilize the market and expectations
6 Export growth will likely moderate and trade surplus will narrow
Foreign direct investment remains strong, while outbound investment is expected
7 to rebound
ESG is becoming a core focus for businesses, and decarbonization regulations are
8 expected to be implemented more systematically
9 Supply chain strategies focus more on resilience and ability to mitigate risks
Global economic recovery remains uneven, with widening divergence among
10 economies
© 2021KPMG Huazhen LLP, a People's Republic of China partnership and a m ember firm of the KPMG global organisation of independent member firms
affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
A review of 2021
The global economy continued its recovery from the shock of the COVID-19
pandemic in 2021. Thanks to the country’s fast and effective measures to control
the spread of the pandemic, China was able to restart its economy more quickly
than many other jurisdictions. As the only major economy to achieve positive
growth in 2020, China continued this growth trend in 2021. The momentum has
largely been driven by strong exports while domestic demand has continued to lag.
Exports have been the main driver of China’s economy since the second half of
2020. In the first three quarters of 2021, China’s exports rose by 32.3%, thanks to
strong demand for medical goods, home appliances, machinery and electronics;
and also due to the supply chain disruptions in other global manufacturing centres
caused by waves of new COVID-19 cases.
Growth of exports and imports were significantly faster than their pre-pandemic
levels, according to the average annualised growth rate of past two years (see
Table 1). The contribution of net exports of goods and services in the first three
quarters of the year was nearly 20% of China’s GDP, a historic high. Booming
external demand has accelerated the recovery of the country’s industrial production
and investment in the manufacturing sector.
Increasing domestic consumption is a critical part of China’s long-term economic

strategy and is a cornerstone of its “Dual Circulation” development model. In 2021,
the recovery of China’s consumption remained sluggish. Retail sales of consumer
goods in the first three quarters grew at 3.9% on a two-year average annualised
rate, lower than the country’s overall economic growth rate and its historical
average growth rate (9.0% in 2017-2019). Sporadic but lingering COVID-19 cases
and tightening prevention and control measures continued to undermine services
consumption; while a slowdown in property market has lowered domestic demand
for furniture, home appliances, and construction materials. Chip shortages have
also hindered consumption in the domestic auto market.
As China’s post-pandemic economic recovery continued in 2021, the country has

phased out some of the relief measures introduced in 2020, aiming to normalise its
macroeconomic policy. In the first three quarters of 2021, China’s two-year
average annualised growth rate of fiscal expenditure declined to 0.2%, lower than
the historical average. The government’s fiscal deficit also fell to RMB 1.5 trillion, a
significant decrease from the past two years and a reflection of the country’s
tightened fiscal policy. Meanwhile, the country’s M2 supply and total social
financing increased at a much slower pace compared to 2020. Tightened
regulations on the real estate sector, after-school tutoring businesses, internet
platforms, and energy-intensive enterprises have also slowed investment in
infrastructure and real estate, contributing to decelerated economic growth in the
second half of 2021.
Looking forward, as the pandemic is gradually put under control and the
government is tweaking fiscal and monetary policies to make them more flexible
and targeted, we expect China’s economic to continue to recover from the effects
of pandemic and the country’s main growth driver to continue to shift more from
external to internal in 2022. We expect mainland China’s GDP to grow 8.0% in
2021 and 5.2% in 2022. In this report, we analyse 10 prevalent trends that will
shape China’s macro economy in the coming year.
Major economic indicators, average annualised growth rate of

Table 1 past two years, %
Average
growth rate Q1 2021 Q2 2021 Q3 2021 Q1-Q3 2021
2017-2019
GDP 6.6% 5.0% 5.5% 4.9% 5.2%
Industrial production 6.2% 6.8% 6.6% 5.3% 6.4%
Retail sales 9.0% 4.1% 4.6% 2.3% 3.9%
Fixed asset investment 6.2% 2.7% 5.6% 3.2% 4.0%
Exports 6.1% 13.4% 14.2% 16.1% 14.6%
Imports 9.8% 11.9% 14.1% 14.3% 13.5%
Income per capita 6.5% 4.5% 5.9% 4.9% 5.1%

Fiscal revenue 5.8% 3.2% 5.2% 4.6% 4.3%
Fiscal expenditure 8.2% 0.1% -1.5% 2.3% 0.2%
Source: Wind; KPMG Analysis

Note: The growth rate in 2021 represents the average growth rate during the period from 2019 to 2021. The growth rates
of GDP, industrial production, and incom e per capita are in real term , and the others are in nom inal term .
10 Trends
The COVID-19 pandemic and quarantine policies

1 wil continue to be key factors determining the
pace of China’s economic recovery
The emergence of the more infectious “Delta” COVID-19 variant since the second
quarter of 2021 has led to a rebound of the pandemic. At the end of April 2021, the
number of daily confirmed new cases exceeded 800,000 globally, reaching a
historical high (see Figure 1). Nevertheless, the acceleration of global vaccine
campaigns has reduced the number of critical cases and the disease’s mortality
rate.
In response to the lingering effects of the pandemic, many countries have adjusted
their pandemic control policies. Some of them have steadily relaxed restrictions
since mid-2021, adopting a “living with COVID” strategy. These measures have to
some extent played a positive role in terms of short-term economic stimulus.
However, they have also resulted in waves of new cases in Europe, forcing the
Netherlands, Ireland, and some other European countries to consider another round
of control measures 1. These fluctuations in the pandemic have dealt additional
blows to some countries’ economies. In Asia, one example is Vietnam, which was
initially regarded as having effectively contained COVID-19. Its number of daily
confirmed new cases soared from less than 100 in May 2021 to over 13,000 by
early September 2021 due to relaxed control measures and low vaccination rates,
among other factors, dragging down its GDP by 6.2% in Q3, a record decline.
Fig 1 Daily confirmed new cases, 7-day moving average
140 900,000
120 800,000
700,000
100
600,000
80 500,000
60 400,000
300,000
40
200,000
20 100,000
0 0
2020-10 2021-01 2021-04 2021-07 2021-10
China Global (right axis)
Source: Wind; KPMG Analysis. Data as of 30 Novem ber 2021
1 European countries bring back Covid restrictions as cases rise, FT China, 18 Novem ber 2021,
http://www.ftchinese.com /interactive/53865/?exclusive
In contrast, China has adhered to stringent COVID-19 control measures, which

have largely been effective. Despite several outbreaks in January, August,
September, and early November 2021, China’s number of daily confirmed new
cases (7-day moving average) never exceeded 130, a tiny proportion of the global
daily totals, which routinely exceed 500,000. Moreover, each round of outbreaks in
China has had a lower peak than previous ones. Nonetheless, these minor
outbreaks have still caused disruption in some sectors such as retail (see Figure 2).
In 2022, China will host many international sports events, including the 2022 Beijing
Winter Olympics in February and the 2022 Asian Games in Hangzhou in
September. In addition, the country will also hold the “Two Sessions” in March and
the 20th National Congress of the Communist Party of China in the latter half of the
year. As these events will require a stable social environment; we expect the
government to maintain current anti-pandemic measures well into 2022. However,
as the country continues to pursue its “dynamic zero-COVID” goal, local
governments will need to ensure that their control measures strike a proper
balance between containing the spread of the virus and enabling economic and
social development.
In November 2021, a new variant of COVID-19, Omicron, was first discovered in

South Africa. Omicron, the fifth variant of concern identified by the WHO, has a
higher number of mutations which make it more easily transmissible. As of 3
December 2021, Omicron cases have been found in at least 38 jurisdictions. The
continuous mutation of the virus shows the importance of the global effort to fight
the pandemic and accelerate vaccination campaigns.
Fig 2 Confirmed new cases and growth rate of retail sales
6 4
5
3
6
0
7
-3 8
9
-6
10
-9
11
-12 12
2020-01 2020-05 2020-09 2021-01 2021-05 2021-09
Growth rate of retail sales (seasonally adjusted, month-on-month)
Logarithm of confirmed new cases (in reverse order, right axis)
10 Trends
Inflation should remain under control, with the

2 gap between CPI and PPI expected to narrow
With respect to inflation, China’s consumer price index (CPI) and producer price
index (PPI) displayed diverging trends in 2021. While CPI remained moderate, PPI
rose steadily throughout the year (see Figure 3), further supporting the trend that
production has rebounded much faster in China compared to consumption. This
widened gap between CPI and PPI has created profit pressure for some middle
and downstream companies.
CPI growth slowed due to a slump in food prices, particularly pork prices. In the
first 10 months of 2021, the CPI increased by only 0.7%, much lower than the
government’s target rate of roughly 3%. During the period, pork prices plunged
almost 30% year-on-year, dragging down overall CPI growth by nearly
1 percentage point. Core CPI, which excludes food and energy prices, also rose
slowly during the year.
Recently, China’s pig stocks have declined, and pork prices are expected to
stabilise and then increase in the coming year. Looking ahead, we expect China's
CPI to rise from 0.9% in 2021 to 2.3% in 2022 owing to this year's low base,
continued recovery of consumption, and the transfer of inflationary pressures on
the production side to consumers.
Meanwhile, PPI has increased dramatically over the past few months due to the
surging price of coal, oil, natural gas, and other commodities. In October, PPI grew
by 13.5% year-on-year, a record high. On one hand, demand for energy increased
after advanced economies eased COVID-19 containment measures; and expected
higher demand for heating during the imminent winter months has led to a short-
term energy shortage and rising commodity prices. On the other hand, production
Consumer price index (CPI) and producer price index

Fig 3 (PPI), yoy, %
15
10
-5
-10
2010 2012 2014 2016 2018 2020
CPI PPI
caps in some segments of the energy sector such as coal have resulted in supply
crunches, pushing up prices. As pandemic containment improves and raw material
supplies recover further, the gap between supply and demand is expected to
narrow. As such, we expect pressure on producer prices to stabilise in 2022.
Overall, we expect domestic inflation in 2022 to be controllable. However, we are

closely monitoring global inflation trends and the potential impacts of imported
inflation on the Chinese economy. 2021 has seen rapid inflation in Europe, the
United States, and other developed economies. The US’s CPI surged by 6.2%
year-on-year in October, the highest rate since 1990. In addition, the US core CPI is
at a 30-year peak. In the same period, the eurozone’s CPI grew by 4.1%, reaching
the highest rate since 1997 (see Figure 4). US Federal Reserve chairman Jerome
Powell removed the word “transitory” in describing the current inflationary trend in
his latest speech on 30 November 2021 .
We believe that the new characteristics the US labour market has taken on after
the pandemic may have to some extent affected inflationary trends. For example,
the US unemployment rate improved from 14.8% in April 2020 when the country
was heavily hit by COVID-19 to a moderate 4.6%. On the other hand, however, the
US labour participation rate has dropped significantly during the pandemic, and is
experiencing a slow recovery. Currently, the US labour force population (which
includes the employed and unemployed population) numbers nearly 3 million fewer
than in February 2020. In September alone, over 4.43 million people in the country
resigned their jobs, a historical record and a phenomenon described by the media
as “the Great Resignation”2. Wages have been driven up by this tightening in the
labour market. In October 2021, the average hourly earnings of nonfarm workers in
the US reached nearly USD 31, up 8.6% from last February, representing
remarkable growth compared with the historical average. In this context, we are
continuing to closely follow the development of global inflation trends and any
potential knock-on effects.
Fig 4 CPI in Euro area and the United States, yoy, %
7
6
5
4
3
2
1
0
-1
-2
-3
1997 2001 2005 2009 2013 2017 2021
US Euro area
2 “The ‘Great Resignation’ goes global,” Washington Post, 18 October 2021,

https://www.washingtonpost.com /world/2021/10/18/labor-great-resignation-global/
10 Trends
Consumption in China continues to pick up and

3 domestic brands rise in popularity
Due to the lingering pandemic and related pandemic control measures, recovery in
consumption has been lagging, with services that require physical contact the
hardest hit. In addition, residents are now less willing to consumption than the pre-
recession level. In the short run, this disruption may continue. However, China will
maintain a strong appetite for consumption, particularly with the continuous
improvement of the job market.
In the ten months through October 2021, China’s new urban employment
increased by 11.33 million jobs, with the 2021 target of 11 million new jobs
achieved ahead of schedule. A decline in the urban surveyed unemployment rate
(see Figure 5) and the steady rise in personal income are providing promising
prospects for consumption recovery in 2022. In the medium to long term, China's
continued efforts to drive urbanisation, implement common prosperity policies, and
expand the coverage of pension, health insurance, and other social welfare
programmes will continue to serve as pillars of consumption growth and turn
consumption into the main driver of the country’s economy.
Fig 5 China urban surveyed unemployment rate, %
6.5
6.0
5.5
5.0
4.5
2018 2019 2020 2021
Against this backdrop, the consumer market has demonstrated several new
characteristics, including the rise of so-called “emerging Chinese brands”. In
China, the quality and size of the consumer market is improving; the country’s
cultural confidence and lure are growing; Gen Z’s position in the consumer market
is growing rapidly; and technological innovations are giving birth to new
consumption scenarios. In this context, new Chinese consumer brands that feature
excellent quality, design, originality, and cost-effectiveness are quickly emerging,
further stimulating the growth of the consumer market. Chinese brands had a
breakout year in 2019 in particular, with many heralding it as the start of "the era of
trendy Chinese products.”3 . The development of Chinese brands across various
sectors is drawing increasing attention from domestic consumers.
The number of Chinese consumers interested in Chinese brands is three times the
number who are looking for foreign brands (see Figure 6). During this year’s
“Double 11” shopping festival, sales of Chinese brands exploded, especially in
areas such as clothing, cosmetics, and mother and baby care. In conclusion,
domestic-branded products are generating more and more excitement among
consumers, holding promise to further boost the country’s domestic consumption.
Fig 6 Attention on Chinese brands vs. Foreign brands
80% 75%
62%
60% 55%
45%
38%
40%
25%
20%
0%
2009 2016 2021
Foreign brands Chinese brands
Source: Big Data Report on Searches for Trendy Chinese Brands by Baidu and the Research
Institute of People.cn; KPMG Analysis
3 “New consum ption era sees Chinese brands stand out”, KPMG China, Novem ber 2021
https://hom e.kpm g/cn/zh/hom e/insights/2021/11/new-consum ption-era-leads-the-rise-of-dom estic-products.htm l
10 Trends
Manufacturing investment, especial y in

4 innovative and green sectors, wil see
rapid growth
In 2021, the profits of Chinese industrial enterprises accelerated, driving a parallel
increase in manufacturing investments. By the end of October 2021, industrial
profits grew by 42.2% year-on-year, significantly higher than pre-pandemic levels
(see Figure 7). Meanwhile, China’s industrial capacity utilisation reached a high
level, which encouraged enterprises to expand their production capacity.
Going forward, manufacturing will continue to serve as a core engine of China’s

economic transformation. At the same time, manufacturing value as a share of its
GDP declined from 32% in 2011 to 26% in 2020. The 14th Five-Year Plan has
called for maintaining manufacturing’s share of GDP while striving for greener,
more intelligent, and higher-end manufacturing, demonstrating the importance that
China has attached to upgrade this sector.
Fig 7 Industrial profits growth, yoy, %
50
42.2
40
30 25.4
21.0
20
12.2 10.3
8.5
10 5.3 3.3 4.1
0
-2.3 -3.3
-10
2011 2013 2015 2017 2019 Jan-Oct
2021
Meanwhile, financial institutions have been allocating a greater share of medium

and long-term loans to manufacturing enterprises, and providing more access to
credit to emerging strategic sectors, with the goal of facilitating equipment
upgrades and technological transformation of the traditional manufacturing industry.
In recent years, China’s investment in high-tech manufacturing has been growing
at over 10% annually, much faster than the manufacturing sector as a whole (see
Figure 8). In addition, the establishment of the Beijing Stock Exchange in 2021 aims
to provide better financing opportunities to small and medium-sized enterprises
that are professional, specialised, distinctive, and innovative. As a result of these
factors, we expect that investments focusing on technological innovation in
manufacturing will continue to grow rapidly in coming years.
Investments in green transformation represent another burgeoning area. In

November 2021, the People’s Bank of China (PBOC) launched new facilities to
support enterprises to reduce carbon emissions. Using these instruments, financial
institutions can make loans to enterprises to help them reduce carbon emissions
and pursue technological development in clean energy, energy conservation and
environmental protection, and carbon emissions reduction. The PBOC has also
appropriated RMB 200 billion for refinancing that will be used to promote the clean
and effective use of coal and facilitate green and low-carbon energy development.
In recent years, major power plants in China have concentrated their investments
on non-fossil fuel energy sources, including hydropower, nuclear power, and wind
power. These investments as a share of overall power project investments have
increased from 63% in 2010 to nearly 80%, significantly outpacing investment in
thermal power projects. Going forward, we expect enterprises to continue to invest
more resources in both technology innovation as well as sustainability.
Fig 8 Fixed asset investment growth, yoy, %
30%
20%
10%
0%
-10%
2015 2017 2019 Jan-Oct 2021
High-tech manufacturing Manufacturing Total
Source: Win d; KPMG An alysis
10 Trends
Real estate regulation is expected to continue

5 but the key policy objective is to stabilize the
market and expectations
Starting in the latter half of 2020, China implemented a series of tightened
regulations for the real estate market, including the “three red lines” policy for
asset/liability ratios, the real estate loan concentration management policy, and the
“two centralised” land supply policies. These policies represent a comprehensive
set of regulations for the property sector covering finance and land supply, among
other issues.
From 2013 to 2019, the average annual growth rate of real estate loans exceeded
that of total loans by as much as 7%. Since the second quarter of 2020, however,
loan issuance has trended in the opposite direction as banks have become
conservative in lending to the real estate sector (see Figure 9). At the same time,
defaults on real estate bonds have started increasing. From January through
October 2021, real estate companies suffered a total of 43 credit bond defaults, 2.5
times the tally in 2020 (17 bonds).
As a result of the increased regulation, real estate sector indicators such as floor
area of private housing for which construction has commenced and sales of private
housing dropped dramatically in the latter half of 2021. In October 2021, these two
indicators slumped by over 30% and 20% respectively. We expect to see these
metrics to continue to decline in 2022, with construction and completion stabilising,
as overall real estate investment continues to scale back.
Policy adjustments in some local governments in China have had a short-term

positive impact on the real estate sector. By the end of October 2021, real estate
loans granted by financial institutions during the month had increased by 8.2%
year-on-year, and over 90% of personal housing loans were used by borrowers to
purchase their first houses. During the same month, loans provided to the rental
housing market grew by 61.5% year-on-year.
Fig 9 Bank loan growth, yoy, %
30
25
20
15
10
0
2011 2013 2015 2017 2019 2021
Real estate loans Overall loans
Despite these figures, we believe real estate market controls will continue to
remain stringent in the near future, with only a slim possibility of policy easing. In
its recent third-quarter 2021 monetary policy implementation report, the PBOC
reiterated that it will “firmly adhere to the philosophy that ‘houses are for living in,
not for speculation’ and insist on not allowing real estate to be used as a short-term
economic stimulus” 4.
Overall, the objective of the country’s real estate policies is to establish a more
effective long-term mechanism for the real estate market to ensure that it remains
stable and sustainable. This includes stabilising land prices and housing prices as
well as investor expectations. Over the past several decades, China has made
great progress in helping to improve living conditions across the country,
constructing a tremendous amount of housing. Urban housing area per capita
increased from 6.7 m2 in 1978 to 39.8 m2 in 2019. In 2020, real estate investments
totalled RMB 14 trillion, accounting for 27% of total fixed asset investment, and
revenue from the land sales exceeded RMB 8 trillion. This revenue, combined with
real estate-related tax income, nearly RMB 2 trillion, accounted for over half of
China’s local government income in 2020 (see Figure 10).
In October 2021, the National People’s Congress (NPC) authorised the State
Council to start a 5-year pilot program on property tax in selected cities. We still
expect the State Council to announce the city list and the implementation
guidelines in the coming months.
Real estate related income in total local government

Fig 10 revenue (before central gov’t transfer), RMB billions
12,000 60%
55%
50%
10,000 47% 50%
43% 43% 44%
8,000 40%
38% 37% 39%
6,000 30%
4,000 20%
2,000 10%
0 0%
2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue from land sales Real estate-related tax income

Share of total local government income (right axis)
Source: Win d; KPMG An alysis
4 China Monetary Policy Im plem entation Report for Q3 2021, The PBOC, 19 Novem ber 2021
10 Trends
Export growth wil likely moderate and trade

6 surplus wil narrow
2021 marks the 20th anniversary of China’s accession to the World Trade Organizat
ion (WTO). From 2000 through 2020, the global trade of goods nearly doubled, whil
e China’s exports expanded by more than ninefold. As a result, China’s exports as a
share of the world's total exports of goods surged from 4% in 2000 to nearly 15%
by 2020.
In 2021, China’s export trade continued to expand rapidly. Exports in the first 10 mo
nths of 2021 already exceeded total exports in 2020, reaching a historical high of U
SD 2.7 trillion (see Figure 11). Exported goods mainly included electronics, electrica
l, and audio/visual equipment, as well as machinery, which contributed for 24.4% a
nd 13.6% of the total export growth respectively (see Figure 12).
Fig 11 Trade activities, USD billion
3,000 700
2,500 600
500
2,000
400
1,500
300
1,000
200
500 100
0 0
2010 2012 2014 2016 2018 Jan-Oct
2021
Trade surplus (right axis) Exports Imports
In 2021, China’s exports remained strong due to rising demand from advanced
economies and supply chain disruptions in some emerging markets due to new
waves of COVID-19 cases. In 2022, we estimate that continued global economic
recovery will encourage enterprises to increase their capital expenditures, which
will likely boost China’s exports of machinery, electrical equipment, electronic
products, vehicle parts, etc. However, logistical challenges resulting from a lack of
containers, port congestion, and resulting higher freight costs will put pressure on
China’s exports in the near term. As demand in advanced economies has continued
to shift from goods to services, and a higher base effect, we anticipate export
growth will moderate in 2022, albeit at a remain robust level.
In terms of imports, we expect China to import more coal and natural gas to
address greater energy demands during the autumn and winter months and to
mitigate the constraints posed by its “Dual Carbon” target.
The ongoing COVID-19 pandemic is creating challenges for the implementation of

the China-US Phase One Economic and Trade Agreement. Our calculations show
that by the end of October 2021, China reached 56% of its two-year commitment
to import American goods set forth in the agreement. Recently, the two countries
have engaged in more dialogue, including a virtual meeting of the two national
leaders on 16 November 2021, which may help to further ease economic and trade
tensions. As such, we expect imports to continue to ramp up in 2022, and trade
surplus will retreat.
Contributions to China’s goods exports, January to

Fig 12 October 2021
Electronic, electrical, and

audio/visual equipment 24.4%
Nuclear reactors, boilers, and machinery 13.6%
Vehicles and parts 5.8%
Plastics and plastic products 4.6%
Furniture 4.5%
Toys 4.4%
Steel 4.2%
Medicine 3.3%
Clothes 3.0%
Steel products 3.0%
0% 10% 20% 30%
Source: The General Adm inistration of Custom s; KPMG Analysis
10 Trends
Foreign direct investment remains strong, while

7 outbound investment is expected to rebound
The COVID-19 pandemic has significantly hindered cross-border investment. In
2020, global foreign direct investment (FDI) plummeted by 35%, falling to the
lowest amount on record since 2005. In contrast to the global trend, FDI in China
increased by 6% during the year, an indication of China’s strong appeal to foreign
investors (see Figure 13).
Fig 13 China’s FDI and ODI, USD billion
250
200
150
100
50
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
FDI ODI
Source: UNCTAD; KPMG Analysis
Global FDI has rebound as the global economy normalised, and China’s FDI growth
has remained robust in 2021. In the first 10 months of the year, non-financial FDI
totalled USD 142 billion, representing a year-on-year increase of 23.4%. In recent
years, China has opened up wider to the world by introducing favourable policies
such as lower market access barriers for investment (see Table 2).
The country’s strong economic fundamentals, vast domestic market and well-
established industrial sector, infrastructure, and business-friendly environment
continue to attract foreign investors, particularly in the wealth management, new
energy, and high technology sectors. As such, we expect that China’s FDI will
remain robust in 2022.
Table 2 China’s recent opening-up policies
Time Policy
China established a comprehensive strategic partnership with the Association of
November 2021
Southeast Asian Nations (ASEAN).
September 2021 China applied for CPTPP membership.
The CPC Central Committee and State Council issued the General Plan for Building a
Guangdong-Macao In-Depth Cooperation Zone in Hengqin and the Plan for
Comprehensively Deepening the Reform and Opening-up of the Qianhai Shenzhen-Hong
September 2021
Kong Modern Service Industry Cooperation Zone to establish and improve a more open
economic system, with the goal of promoting free trade in services with Hong Kong SAR
and Macao SAR and making the financial sector more accessible.
The Ministry of Commerce promulgated the Special Administrative Measures (Negative

August 2021 List) for Cross-border Trade in Services in Hainan Free Trade Port (2021 Edition), the
country’s first negative list for cross-border trade in services.
The State Council issued the Official Reply of the State Council regarding Approval for
April 2021 the Comprehensive Pilot Projects to Further Open Up the Service Sector in Tianjin,
Shanghai, Hainan, and Chongqing to provide guidelines for these pilot projects.
China completed the EU – China Comprehensive Agreement on Investment (CAI)
December 2020
negotiations according to schedule.
China officially signed the Regional Comprehensive Economic Partnership (RCEP). On 2

November 2021, six ASEAN member countries—Brunei, Cambodia, Laos, Singapore,
Thailand, and Vietnam—and four non-ASEAN member countries—China, Japan, New
November 2020
Zealand, and Australia—officially submitted the Instrument of Approval to the Secretary
General of ASEAN to form a quorum and put the agreement into force. RCEP will
become effective from 1 January 2022 for these 10 countries as stipulated therein.
China rescinded the Qualified Foreign Institutional Investor (QFII) and RMB Qualified
September 2020
Foreign Institutional Investor (RQFII) quotas.
The National Development and Reform Commission shortened the Special
June 2020 Administrative Measures (Negative List) for Foreign Investment Access (2020 Edition)
from 40 to 33 items.
The CPC Central Committee and State Council issued the Overall Plan for the
June 2020 Construction of Hainan Free Trade Port, which will be implemented from June 2021, to
put in place a deregulation and facilitation policy centred around a “duty-free” concept.
January 2020 The Foreign Investment Law became effective.
Source: KPMG Analysis
Meanwhile, China’s overseas direct investment (ODI) growth has slowed due to
strengthened regulation aimed at combating irrational investments. According to
statistics from the United Nations Conference on Trade and Development
(UNCTAD), China’s ODI has moderately declined since its 2016 peak. However, as
anti-pandemic efforts continue and the global economy gradually recover, China’s
ODI has started to trend upward again. Last year, China became the largest
provider of ODI for the first time, accounting for over 20% of the global total.
During the first nine months of the year, China’s non-financial ODI grew by 2.4%
year-on-year, and its investments in Belt and Road countries continued to increase.
The country has also optimised the structure of its ODI, resulting in investments in
the manufacturing sector and high-tech service sectors growing at a much faster
rate compared to the overall average.
China has also made progress on a number of economic and trade agreements
since 2020. Specifically, the country signed the Regional Comprehensive Economic
Partnership (RCEP), completed negotiations on the China-EU Comprehensive
Agreement on Investments (CAI), and applied to join the Comprehensive and
Progressive Agreement for Trans-Pacific Partnership (CPTPP). These efforts are
aimed at enabling China to more effectively participate in international trade and
investment and in the establishment of rules and systems, while also providing
mechanisms to facilitate overseas investment. Against this backdrop, we expect
China’s ODI to see some rebound in 2022.
10 Trends
ESG is becoming a core focus for businesses,

8 and decarbonization regulations are expected
to be implemented more systematically
In recent years, environmental, social and governance (ESG) issues have drawn
more attention across a number of sectors. As such, more and more enterprises
are restructuring their business models to make them more sustainable.
KPMG’s 2021 China CEO Outlook revealed that in the context of a growing focus
on ESG, there are increased demands from regulators and investors for more
extensive reporting on ESG issues5. ESG management can help enterprises reduce
compliance risks, gain recognition from employees, and improve their corporate
image, enabling enterprises to create long-term value.
China’s long-term planning provides for a shift towards green and low-carbon
development. The country’s carbon emission goals call for the country to reach
peak carbon emissions before 2030 and carbon neutrality by 2060. To achieve
these goals, it is estimated that China will need to invest over RMB100 trillion in
the coming decades, which will in turn present opportunities for businesses across
a wide range of sectors.
At the same time, China is still a developing country undergoing industrialisation

and urbanisation, and as such, its demand for energy will continue to increase.
Therefore, the country should continue to coordinate its national economic
development and energy security with decarbonisation objectives in mind. In
September 2021, a hike in coal prices due to a tight supply of coal in the domestic
market contributed to power outages in some parts of the country, impacting
production and people’s livelihoods6. At the National Energy Committee meeting
on 9 October, the government reiterated that the “Dual Carbon” target must be
realised in a scientific and systematic manner based on national plans, to avoid
unsustainable carbon reduction campaigns enacted by local governments.
5 2021 China CEO Outlook, KPMG China, October 2021

https://hom e.kpm g/cn/zh/hom e/insights/2021/10/2021-china-ceo-outlook.htm l
6 The state council executive m eeting, The State council, 9 October 2021,
http://www.gov.cn/prem ier/2021-10/08/content_5641406.htm
Share of non-fossil fuel in China’s total energy

Fig 14 consumption, %
90%
80%
80%
70%
60%
50%
40%
30% 25%
20%
20% 15% 15% 16%
11% 12% 13% 14%
8% 10% 10%
10%
0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2025 2030 2060
Source: Wind; Opinions on Full and Faithful Im plem entation of the New Developm ent
Philosophy for Carbon Dioxide Peaking and Carbon Neutrality; KPMG Analysis
Note: The proportions for 2025, 2030, and 2060 are estim ates.
Recently, the government issued the Opinions on Full and Faithful Implementation
of the New Development Philosophy for Carbon Dioxide Peaking and Carbon
Neutrality and the Action Plan for Carbon Dioxide Peaking Before 2030 respectively
to set up the “1+N” policy system to realise a carbon dioxide emissions peak by
2030 and carbon neutrality by 2060. The Opinions set specific phased objectives
for 2025, 2030, and 2060, and vowed to increase the proportion of non-fossil fuel
consumption to above 80% by 2060 (see Figure 14). The Action Plan illustrates
green transformation targets and roadmaps for many areas, including energy,
industry, transportation, and urban and rural construction (see Table 3).
The issuance of these two policies will enable local governments and authorities to
coordinate the planning and implementation of their work and develop more
effective action plans and policies. Moreover, they will also guide enterprises in
planning and building green, low-carbon, and sustainable business models. As a
result, in 2022, we believe that China will further its scientific and systematic
approach to carbon emissions reduction.
Table 3 Major actions in the Action Plan for Carbon Peaking Before 2030
Action Description
Promoting coal substitution as well as transformation and upgrading; vigorously

The action for green and developing new energy resources ; developing hydro power according to local
low-carbon energy conditions ; actively developing nuclear power through a safe and orderly
transition approach; rationally regulating oil and gas consumption; speeding up the
development of the new electric power system.
Raising capacity for managing energy conservation across the board ;
The action for energy
implementing key energy conservation and carbon reduction projects ; advancing
saving, carbon emission
better energy saving performance and higher efficiency of major energy
mitigation and efficiency
consuming equipment; strengthening energy conservation and carbon reduction
improvement
in new types of infrastructure .
Promoting green and low-carbon development in the industrial domain ; pushing
the steel industry to peak carbon dioxide emissions ; pushing the non-ferrous
The action for peaking
metals industry to peak carbon dioxide emissions ; pushing the building materials
carbon dioxide emissions in
industry to peak carbon dioxide emissions ; pushing the petrochemical industry
industry sector
to peak carbon dioxide emissions ; firmly curbing the irrational expansion of
energy-intensive and high-emission projects .
The action for peaking Promoting green and low-carbon transformation in urban and rural development;
carbon dioxide emissions in accelerating building energy efficiency improvement; accelerating the
urban-rural development optimization of building energy consumption structure; promoting a low-carbon
area transition in rural development and energy consumption.
The action for promoting Promoting low-carbon transformation of transportation vehicles and equipment;
green and low-carbon developing green, high efficiency transportation systems; accelerating
transportation construction of green transport infrastructure.
The action for promoting Pushing industrial parks to develop in a circular manner; strengthening the
circular economy in carbon comprehensive use of bulk solid waste; refining systems for resource recycling;
mitigation purpose vigorously promoting efforts to reduce and recycle household waste.
The action for advancing Improving innovation mechanisms and systems ;enhancing innovation capability
green and low-carbon and personnel training; boosting application-oriented basic research ; accelerating
technology innovation the R&D and wider application of advanced practical technologies.
Consolidating the carbon sequestration capacity of ecosystems; enhancing the
The action for consolidating carbon sink capacity of ecosystems; strengthening the foundation for ecological
and enhancing carbon sink system carbon sinks; promoting carbon emissions reduction and carbon
sequestration in agriculture and rural areas.
Strengthening publicity and education for ecological civilization; advocating
The action for green and
green and low-carbon living patterns; encouraging enterprises to fulfil their social
low-carbon society
responsibilities; increasing training for cadres .
The action for promoting all Setting sound, systematic targets; promoting green and low-carbon development
regions to peak carbon according to local conditions; formulating local peaking carbon dioxide emissions
dioxide emissions plans through coordination between central and local authorities; carrying out
hierarchically and orderly pilot projects.
Source: Action Plan for Carbon Peaking Before 2030
10 Trends
Supply chain strategies focus more on

9 resilience and ability to mitigate risks
With the advancement of globalisation, multinational companies have opted
towards leaner management of their supply chains to improve cost-effectiveness
and enable “just-in-time” (JIT) inventory systems. This may involve using a smaller
number of vendors and leverage economies of scale to cut procurement costs and
improve management efficiency; shifting production to countries with lower labour
costs; and reducing inventory through efficient logistics and transportation.
While this supply chain model can raise the efficiency and profitability of
enterprises, it also can subject them to supply disruption risks if key vendors
cannot deliver as scheduled due to natural disasters, pandemics, or other external
causes. The COVID-19 pandemic is a prime example: anti-pandemic measures
have not only prevented the free flow of people but also crippled logistics,
imposing great pressure on global industrial chains. The initial impact of the
pandemic was particularly significant for sectors that are deeply engaged in the
global industrial chain, such as the retail, manufacturing, and automotive sectors,
due to the extensive global division of work. For example, COVID-19 outbreaks in
Southeast Asia in mid-2021 led to the shortage of auto chips, which hamstrung
auto production. As a result, China’s auto sales suffered year-on-year declines
starting from May 2021 (see Figure 15).
Fig 15 China’s monthly auto sales, thousand units
3,000
2,500
2,000
1,500
1,000
500
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2020 2021
Following the onset of the pandemic, supply chain constraints, and complex
geopolitical environment, enterprises have reflected on the weaknesses in their
existing supply chain models. While still trying to keep costs and inventory low,
they are now focusing more on the security, stability, resilience, and risk resistance
of their supply chains, and emphasising “just-in-case” (JIC) planning to prepare for
emergencies before unknown risks arise.
The JIT and JIC models have their own distinct characteristics (see Figure 16), and
enterprises should choose which model suits them based on the characteristics of
the industries in which they operate. KPMG’s 2021 China CEO Outlook indicates
that China CEOs are planning to implement a range of measures that include
closer supply chain monitoring, diversifying their sourcing and engaging in hedging
or long-term contracts to stabilise costs to mitigate pressure on their supply
chains.
Fig 16 Comparison of supply chain management philosophies
JUST IN TIME JUST IN CASE
Objective: Objective:
To lower costs and increase To improve risk control
efficiency
Measures: Measure:
1. Reduce inventory 1. Increase inventory to
2. Reduce the number fend off emergencies
of vendors to expand 2. Diversify vendors
economies of scale 3 . Diversifying sources
3 . Shift production to of input
countries or regions
with lower labour costs
Features: Feature:
Lower costs, but less Higher costs, but more
resilient and poorer risk resilient and better risk
resistance resistance
Source: KPMG Analysis
For enterprises, supply chains are not only a focus for risk mitigation, but also a
critical area for implementing ESG management practices. In addition to improving
their own ESG management, enterprises are making efforts to strengthen the
governance of other enterprises across their supply chains, with the aim of
enhancing ESG compliance and accountability across entire chains.
In line with China’s plans to accelerate digital transformation, more and more
Chinese enterprises are piloting supply chain digitalisation projects, which combine
big data, AI algorithms and other technologies to interconnect information silos in
supply chains, draw up more effective production plans, and implement automated
management to enable better informed decision-making. They are also speeding up
innovation to reduce the impact of supply chain “choke points”.
10 Trends
Global economic recovery remains uneven, with

10 widening divergence among economies
The COVID-19 pandemic has greatly impacted the world economy unlike anything
that has been seen since the Great Depression of the 1930s. The pandemic is
fundamentally different from the global financial crisis in 2008 in terms of the
impact it has had among economies in different development stages. The 2008
crisis started when the real estate bubble burst in the US, the impact of which
then spread to other economic sectors through the financial system, and
subsequently to the rest of the world via interconnected global financial markets
and trade systems. However, the 2008 crisis had a more profound impact on
advanced economies than on emerging markets and developing countries.
According to our calculations, output losses of advanced economies in 2010
relative to pre-crisis trend was 5.1%, while emerging markets and developing
countries posted a 4.3% decline (see Figure 17).
Comparing the impacts of the two global crises on

Fig 17 different economies, %
0%
-1%
-2% Advanced economies
-3%
-2.8%
Emerging markets and
-4% developing countries
-4.3%
-5%
-5.1% -4.9%
-6%
20201111
1905-07 20211111
1905-07
Source: IMF; KPMG Analysis

Note: The short-term im pacts, which were estim ated by the IMF in October 2021, represent
the GDP in 2010 with the pre-crisis trend in April 2008, and the GDP in 2021 with
the pre-crisis trend in October 2019.
During the ongoing COVID-19 pandemic, however, emerging markets and

developing countries have been hit worse than advanced economies. According to
an estimate released by the IMF in October, the output of advanced economies in
2021 may end up being 2.8% lower than pre-pandemic levels, a much more
moderate drop than the 4.9% decline estimated for emerging markets and
developing countries.
The reason for this gap is obvious: higher vaccination coverage and sufficient
financial support in advanced economies. Due to these factors, advanced
economies have been able to return to normal faster (see Figure 18). On the other
hand, limited resources and poorer vaccination coverage in emerging markets and
developing countries caused production and business activities to be more severely
disrupted by new waves of COVID-19 cases and the spread of new COVID-19
variants.
As the pandemic is gradually put under control, we expect the global economy to
continue to recover, although recovery will be uneven. Large-scale fiscal stimulus
and rising demand will make US inflation to maintain higher than expected, possibly
remaining elevated until mid-2022. In response, the Federal Reserve has started
tapering asset purchases, and it is likely to start raising interest rates from the end
of next year; both policies will impact the global economy. Given that the global
economy will continue to be characterised by uncertainty in 2022, enterprises will
need to continue to carefully consider ongoing global macroeconomic
developments in their strategic decision-making.
Proportion of the population that has received two

Fig 18 doses of the vaccine, %
80
70
70
60
50 44
40
30
20 13
10
0
发达经济体
Advanced economies 新兴市场经济体
Emerging market 低收入国家
Low-income
economies countries
Source: Our World in Data; KPMG Analysis. Data as of 31 Novem ber
Contact us
Raymond Ng
Vice Chairman
KPMG China
+86 (10) 85087067
raymond.kk.ng@kpmg.com
Kevin Kang
Chief Economist
KPMG China
+86 (10) 85087198
k.kang@kpmg.com
Research: Yuan Zeng, CFA; Yanan Zheng; Lindsay He (Intern)

Design: Joe Ma
kpmg.com/cn/socialmedia
For a list of KPMG China offices, please scan the QR code or visit our website:
https://home.kpmg.com/cn/en/home/about/offices.html.
The inform ation contained herein is of a general nature and is not intended to address the circum stances of any
particular individual or entity. Although we endeavour to provide accurate and tim ely inform ation, there can be no
guarantee that such inform ation is accurate as of the date it is received or that it will continue to be accurate in the
future. No one should act on such inform ation without appropriate professional advice after a thorough exam ination
of the particular situation.
© 2021KPMG Huazhen LLP, a People's Republic of China partnership and a m em ber firm of the KPMG global
organisation of independent m em ber firm s affiliated with KPMG International Lim ited, a private English com pany
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Publication date: Decem ber 2021

2022 Ten Macroeconomic Trends

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10 Macro

In particular, we anticipate 10 trends for macro economy next year:

3 Consumption in China continues to pick up and domestic brands rise in popularity

Increasing domestic consumption is a critical part of China’s long-term economic

As China’s post-pandemic economic recovery continued in 2021, the country has

Major economic indicators, average annualised growth rate of

Imports 9.8% 11.9% 14.1% 14.3% 13.5%

Income per capita 6.5% 4.5% 5.9% 4.9% 5.1%

Source: Wind; KPMG Analysis

The COVID-19 pandemic and quarantine policies

Fig 1 Daily confirmed new cases, 7-day moving average

Source: Wind; KPMG Analysis. Data as of 30 Novem ber 2021

In contrast, China has adhered to stringent COVID-19 control measures, which

In November 2021, a new variant of COVID-19, Omicron, was first discovered in

Fig 2 Confirmed new cases and growth rate of retail sales

Source: Wind; KPMG Analysis

Inflation should remain under control, with the

Consumer price index (CPI) and producer price index

Overall, we expect domestic inflation in 2022 to be controllable. However, we are

Fig 4 CPI in Euro area and the United States, yoy, %

Source: Wind; KPMG Analysis

2 “The ‘Great Resignation’ goes global,” Washington Post, 18 October 2021,

Consumption in China continues to pick up and

Fig 5 China urban surveyed unemployment rate, %

Source: Wind; KPMG Analysis

Fig 6 Attention on Chinese brands vs. Foreign brands

Manufacturing investment, especial y in

Going forward, manufacturing will continue to serve as a core engine of China’s

Fig 7 Industrial profits growth, yoy, %

Source: Wind; KPMG Analysis

Meanwhile, financial institutions have been allocating a greater share of medium

Investments in green transformation represent another burgeoning area. In

Fig 8 Fixed asset investment growth, yoy, %

Source: Win d; KPMG An alysis

Real estate regulation is expected to continue

Policy adjustments in some local governments in China have had a short-term

Fig 9 Bank loan growth, yoy, %

Source: Wind; KPMG Analysis

Real estate related income in total local government

Revenue from land sales Real estate-related tax income

Source: Win d; KPMG An alysis

Export growth wil likely moderate and trade

Fig 11 Trade activities, USD billion

Source: Wind; KPMG Analysis

The ongoing COVID-19 pandemic is creating challenges for the implementation of

Contributions to China’s goods exports, January to

Electronic, electrical, and

Source: The General Adm inistration of Custom s; KPMG Analysis

Foreign direct investment remains strong, while

Fig 13 China’s FDI and ODI, USD billion

Source: UNCTAD; KPMG Analysis

Table 2 China’s recent opening-up policies

The Ministry of Commerce promulgated the Special Administrative Measures (Negative

China officially signed the Regional Comprehensive Economic Partnership (RCEP). On 2

January 2020 The Foreign Investment Law became effective.

Source: KPMG Analysis

ESG is becoming a core focus for businesses,

At the same time, China is still a developing country undergoing industrialisation