#1BEA東亞銀行 Economic Overview for Mainland China & Hong Kong 料 wwwwwN wwwww www Economic Research Department February 2022 Prepared by The Bank of East Asia, Limited 由東亞銀行有限公司編寫#2Index 1 Mainland China economic outlook • Easing momentum in late 2021 Delicate challenge of propping up growth while deleveraging the property sector Stability - the main economic priority in 2022 2 Hong Kong economic outlook • Growth momentum continues Property prices are expected to stabilise this year#3China's economy has seen easing momentum since Q3 2021 and uneven economic development due to Covid-19 Growth momentum slowed by a number of headwinds China's Economic Growth 20% Exports is the growth driver, while consumption lags behind Growth rate 15% 10% 5% 0% -5% -10% -15% 2016 2017 2018 2019 2020 2021 Year-on-year growth Quarter-on-quarter growth Main Economic Indicators for China 200% year-on-year growth (%) 150% 100% 50% 0% -50% -100% 2019 2020 2021 Exports Retail Sales . Source: National Bureau of Statistics, PRC (data as of 17/1/2022) The economy has faced sporadic COVID outbreaks, energy crunches, heavy regulatory oversight, and floods. Property market downturn has led to a decline in the real estate sector as well as its related industries, such as construction and building materials (cement, steel, coking coal, etc.). BEA東亞銀行 • Source: National Bureau of Statistics, PRC (data as at 17/1/2022) The exports market is surprisingly resilient, defying supply chain bottlenecks and soaring input costs. Meanwhile, private consumption is dragged down by Covid- 19 and the recent property market downturn. 2#4Sporadic outbreaks of Covid-19 dampen consumer sentiment Covid-19 outbreaks becoming more frequent and impactful New Covid-19 Cases in China This is dampening consumer sentiment and willingness to spend Survey of urban residents' relative preference to invest, save, or consume 300 السليلية Apr-21 Oct-21 200 Rolling 7 day average 0 Apr-20 Source: Our World in Data (data as of 25/1/2022) Consume more Invest more 25% ☑24% הווי 52% Deposit more savings e Although China continues to adopt a zero tolerance approach to Covid-19, outbreaks are becoming more frequent and the number of new cases is accelerating. BEA東亞銀行 Source: People's Bank of China (data as of 31/12/2021) • With high uncertainty, residents prefer to save rather than invest or consume. 3#5Uneven economic development between upstream and downstream industries as well as between large and small firms Upstream industries performing much better than downstream ones Industrial Profits Year-on-year change in the whole year of 2021 212.7% Bigger companies performing better than smaller ones Manufacturing Purchasing Managers' Index 60 55 50 51.6 45 45 46.0 12.2% 40 40 8.3% 4.1% 1.9% 35 Coal producers Electrical General machinery & equipment Textile makers Car makers 30 equipment manufacturers 2020 2021 2022 Overall - large-size firms manufacturers medium-size firms Source: Bloomberg (data as of 30/1/2022) small-size firms Upstream industries Midstream Downstream industries industries Source: National Bureau of Statistics (data as of 27/1/2022) · Although the divergence has improved in recent months, the gap is still large, as soaring input prices are putting pressure on downstream industries. BEA東亞銀行 • While large and medium-sized manufacturers are seeing improvement, small and micro-sized firms are still struggling. 4#6Economy experiencing further pressure of tight regulations Property market downturn has dampened private consumption and investment China's Property Price Index and Real Estate Investment Newly built commercial residential building index (2015 = 100) 116 114 112 110 108 106 104 102 100 2019 2020 2021 Property Price (LHS) Real Estate Investment (RHS) Year-on-year change Regulations on private tuition & internet services impacting younger workers in particular China's Urban Surveyed Unemployment Rate 18 16 14 12 50% 40% 30% 20% 10% 10 0% -10% -20% 2 -30% 0 2018 Retail sales (RHS) 2019 2020 2021 -Nationwide Workers aged 16-24 14.3 5.1 Sources: National Bureau of Statistics; BEA Economic Research, data as of 17/1/2022 Property market sentiment has turned bleak, which is affecting investment and private consumption as well as other related sectors such as property services, including construction materials like cement, steel, and coking coal. • Source: National Bureau of Statistics, data as of 17/1/2022 Workers are being laid off from jobs in internet services, education, and the property sector, which is also dimming employment prospects for college graduates. Didi Global and Bytedance are said to have laid off thousands of employees last year. New Oriental has said that it will cut 40,000 staff by end-2021. BEA東亞銀行 5#7Property market has been the main driver of China's economic growth but now is also a potential source of systematic risk Property market has been a key engine for economic growth China's Economic Growth Year-on-year growth 40% 30% 20% 10% 0% -10% -20% 2007 2009 2011 2013 2015 2017 2019 2021 GDP Real estate investment Yet it also overleverages the financial system and needs rectification m 27% 20% As of Q3 2021, property- related loans accounted for 27% of banking assets, not including loans by trusts and other asset companies. The urban property market is over-developed, with a vacancy rate of over 20%*. *The Standard, “China faces tricky balancing act in push for stability", 20th December, 2021 • Source: National Bureau of Statistics, PRC (data as of 17/1/2022) Property sector has been one of the main drivers in investment and overall economic growth. BEA東亞銀行 1.3 China had a fertility rate of just 1.3 children per woman in 2020, on a par with Japan and Italy. Housing demand will decline as time goes on. 6#8Will China reverse its property market restrictions? Previous attempts to rein in the property market were unsuccessful Property prices and money supply ...but this time, the risk of inaction is very high China's Debt to GDP Ratio (%) Year-on-year change 30% 20% 10% 0% -10% 2007 2009 2011 2013 2015 2017 Property Price -M2 350% 42% 300% 54% 250% 36% 200% 17% 39% 150% 17% 100% 102% 146% 224% 50% 0% 2005 2015 2020 ■Corporate ■Household ■Government • • Sources: National Bureau of Statistics; BEA Economic Research, data as of 31/1/2018 In 2008 and 2014, when the property market underwent downturns, economic growth swiftly lost steam. ⚫ The government promptly reversed course and pumped in liquidity to save the economy. • Source: Bloomberg, data as of 11/1/2022 ⚫ The aftermath brought soaring debt levels. China's debt to GDP level continued to rise and reached 323% by end-2020. Therefore, general market expectation is that China will not reverse its policy direction. BEA東亞銀行 7#9China faces the delicate challenge of propping up growth while deleveraging the property sector $$ Deleveraging the property sector has a real impact on the economy 33% At least one third of local government revenues are derived from land sales, and another 10% to 15% from taxes on development. About 70% of household wealth in China is in real estate holdings. 70% Private consumption will be 20%-30% undermined by a property market downturn. Construction, real estate services, and construction materials such as steel and cement will be affected. Some estimate that the property sector accounts for 20%-30% of China's economy. Yet the government seems determined to press ahead, albeit cautiously 2021 Central Economic Work Conference & Recent Policy Highlights "Houses are for living in, not speculation” This principal has been reiterated since 2017 Policy implementation varies between cities Local governments may have greater flexibility in adjusting their restrictions in terms of homebuyer qualifications and financing Cut in banks' reserve requirement ratio and loan prime rates These piecemeal steps are a gesture to soothe market concern BEA東亞銀行 8#10Stability - the main economic priority in 2022 Highlights of the 2021 Central Economic Work Conference 1 Stability · “Prioritising stability” is given preeminence over "making progress while ensuring stability" in the official press release - Government departments at all levels should shoulder responsibility for ensuring economic stability 巾 2 Active fiscal policy - - Accelerate spending Front-load infrastructure investment Ministry of Finance has vowed bigger tax and fee cuts, and offered local governments early allocation of CNY1.46 trillion in special-purpose bonds for 2022 % olo 3 Targeted monetary policy 4 Traffic light system for Guide financial institutions to support small businesses, the innovation sector, and green industries capital investment Strengthen anti- trust rules Common prosperity: Control internet companies & corporate leverage B BEA東亞銀行 9#11This will translate into 3 key trends in 2022: common prosperity, self-sufficiency in technology, and decarbonisation • • Common prosperity Address wealth inequality by ensuring fairer market competition and reducing monopolies Push up birth rate by deflating housing bubble, lowering education and medical costs, and improving social welfare. These measures will benefit the mass-affluent class BEA東亞銀行 Self-sufficiency in technology . . Formulate plans to strengthen basic research Promote manufacturing upgrading and raise "little giants" in niche markets Nurture home-grown talent & recruit top professionals from around the world", particularly in Beijing, Shanghai, and the Greater Bay Area . Decarbonisation Renewable energy and other low-carbon technologies will see larger investment, aided by the People's Bank of China's low interest rate credit covering 60% of green loans granted by banks However, environmental information disclosure will add costs for companies, and there is no evidence green financing has a lower default rate 10#121 Mainland China economic outlook Index • Easing momentum in late 2021 Delicate challenge of propping up • • growth while deleveraging the property sector Stability - the main economic priority in 2022 2 Hong Kong economic outlook • Covid-19 is a central concern Property prices will stabilise#13Hong Kong economy: Covid-19 is a central concern Exports, the main growth driver, likely to slow in 2022 Covid-19 could stall the labour market and block improvement in private consumption Hong Kong Covid-19 Cases and Vaccination Rate Hong Kong Exports and Imports 30% 25% Year-on-year change 20% 15% 10% 5% 0% 600 26.3% 24.3% 500 400 300 200 100 0 03/20 07/20 11/20 New cases 03/21 07/21 11/21 - Vaccination rate (%) -5% -10% 2015 2016 2017 2018 2019 2020 2021 Exports Imports 80 70 60 50 40 10 R23220 Sources: Hong Kong Center for Health Protection; Our World in Data, data as of 9/2/2022 Remark: New cases are 7-day rolling average Source: Hong Kong Census and Statistics Department, data as of 28/1/2022 Downside risks are looming with the Omicron variant, supply bottlenecks, and moderating growth in Mainland China. With a high base of comparison, exports are expected to grow at a slower rate in 2022. BEA東亞銀行 Prior to the fifth Covid-19 outbreak, private consumption was recovering steadily, while Hong Kong's unemployment rate continued to trend lower. Covid-19 has delayed reopening of the border, and earlier-than- expected US interest rate hikes could cloud the outlook. 12#14Different sectors are seeing varying impacts, but in general small and medium-sized enterprises are struggling Employment has not yet returned to pre- pandemic levels in most industries Hong Kong employment change (end-2019 to end-2021) Number in thousands Real estate Construction Financing Most small & medium-sized enterprisare struggling to return to growth figures Diffusion Indices of Small & Medium-Sized Enterprises' Business Receipts Above 50 represents an expansion, below 50 a contraction Index 70 60 2623 5.8 2.4 1.3 50 40 Professional & business services -1.1 30 IT & communication -5.8 20 Public admin & social services -11.4 10 Manufacturing -12.1 0 Transportation 2018 2019 2020 -25.0 -Retail trade Retail & food services -30.6 -Restaurants 2021 External trades Business services External trade -61.3 Source: HK Census and Statistical Department, data as of 11/1/2022 BEA東亞銀行 Source: HK Census and Statistical Department, data as of 11/1/2022 13#15Hong Kong property prices have been edging down, but are expected to stabilise this year Property prices and rents have been trending downwards recently Hong Kong Housing Price and Rent Indices 150 140 8 130 Index (1/2016 = 100) 120 12218 2 110 100 80 2016 2017 2018 2019 2020 2021 -Price -Rent Property prices are expected to stabilise this year, with both upsides and downsides at play US and Hong Kong Interest Rates Forecast 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2008 2010 2012 2014 Fed Fund Rate 2016 2018 2020 2022 -Hong Kong Prime Rate 1.75% • • Source: Rating and Valuation Department, data as of 29/1/2022 Hong Kong's residential property prices edged downward in the 3 consecutive months to December 2021 amid a lacklustre stock market. As of end-December 2021, both property prices and rent indices were up 3.3% from end-2020. BEA東亞銀行 . • Sources: Bloomgerg; BEA Economic Research Department, data as of 28/1/2022 The US Fed is expected to kickstart interest rate hikes this year, but Hong Kong's prime rate will likely lag behind Fed actions and may remain unchanged in 2022. This and limited supply are countering the adverse impacts of Covid-19 and concern about mainland policies. 14#16Disclaimer This document is prepared by The Bank of East Asia, Limited ("BEA") for customer reference only. Other than disclosures relating to BEA, the content is based on information available to the public and reasonably believed to be reliable, but has not been independently verified. Any projections and opinions contained herein are as of the date hereof, are expressed solely as general market commentary, and do not constitute an offer of securities, nor a solicitation, suggestion, investment advice, or guaranteed return. The information, forecasts, and opinions contained herein are as of the date hereof and are subject to change without prior notification, and should not be regarded as any investment product or market recommendations. This document has not been reviewed by the Securities and Futures Commission of Hong Kong, Hong Kong Monetary Authority, or any regulatory authority in Hong Kong. BEA will update the published research as needed and as required by the law. In addition to certain reports published on a periodic basis, other reports may be published at irregular intervals as appropriate without prior notice. No representation or warranty, express or implied, is given by or on behalf of BEA, as to the accuracy or completeness of the information and stated returns contained in this document, and no liability is accepted for any loss arising, directly or indirectly, from any use of such information (whether due to infringements or contracts or other aspects). Investment involves risks. The price of investment products may go up or down. Past performance is not indicative of future performance. The investments mentioned in this document may not be suitable for all investors, and the specific investment objectives or experience, financial situation, or other needs of each recipient are not considered. Therefore, you should not make any investment decisions based solely on this document. You should make investment decisions based on your own investment objectives, investment experience, financial situation, and specific needs; if necessary, you should seek independent professional advice before making any investment. The views and opinions in this document do not constitute the official views of BEA. This document is the property of BEA and is protected by relevant intellectual property laws. Without the prior written consent of BEA, the information herein is not allowed to be copied, transferred, sold, distributed, published, broadcast, circulated, modified, or developed commercially, in either electronic or printed forms, nor through any media platforms that exist now or are developed later. For more information, please visit our webpage at https://www.hkbea.com/html/en/bea-about-bea-economic-research.html. For any enquiries, please contact the Economic Research Department (email: [email protected], tel: (852) 3609-1504, post: GPO Box 31, Hong Kong). ON © 2021 The Bank of East Asia, Limited#17BEA東亞銀行 Thank You For further information, please contact the Economic Research Department Celia Lam [email protected] 3609 1542 Annie Wong [email protected] 3609 1534 Francis Cheng [email protected] 3609 1543 Prepared by The Bank of East Asia, Limited 由東亞銀行有限公司編寫