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.

【 A Review of 2021】

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.

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.

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.

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.

【 Outlook for 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”.

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.

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.

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.

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”.

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.

In 2022, as the world gradually enters the post-pandemic era, the exit of unconventional economic stimulus policies will further increase uncertainties about and risks related to economic development and financial markets. Sharp geopolitical and social conflicts may overtake the pandemic and become a global theme, which gives priority to the issues of business operation and investment safety. Nevertheless, previous business ideas and investment plans formed amid globalized development and under stable economic and political circumstances are to be reconstructed. On this basis, we recommend that corporate clients value strategic deployments, make early risk assessment and adjustment to customized strategies in respect of trade-related foreign exchange risk management, risk controls over upstream and downstream supply chains, remittance & repatriation of international funds and cross-market operation; that institutional clients establish a more complete global risk hedging mechanism and boost asset robustness; that families and individual investors customize asset allocation and inheritance plans based on risk hedging, and according to their respective needs and the latest situations.