2022 PREDICTIONS
It is with a certain relief that we are soon leaving the year of the Ox. Entering the year of the Tiger somehow already sounds and feel a little bit better. But what will the year of the Tiger offer us – more challenges or new opportunities? As we are entering the Chinese New Year, here are some of my predictions on how China will impact the world of business in 2022. Enjoy the read!
The year of the Tiger, By Peter Lisbygd
Predictions for 2022
The Year of the Tiger begins on February 1, 2022, just three days before the opening of the winter Olympics in Beijing. China needs to deliver a successful Beijing Olympics under difficult political conditions and a hardcore strategy of zero-tolerance to covid.
The hunger for international recognition is great, but even before the games has started a political boycott by several nations, led by the US, has set the tone for co-operation with China in 2022. It is likely that we are entering yet another year of changes and potential conflicts, but we are also looking at a more self-confident Middle Kingdom, reshaping and advancing to meet the future, despite lower growth in a transition period.
Covid-19 zero-tolerance policy will remain for 2022
China will remain on its hard zero-tolerance course throughout the year. Short term risk and control are keywords for The Communist Party, navigating the nation safely through the year until Xi is set to enter his third term in the fall.
This will affect international companies working with China due to tight restrictions on international travel. There is a hope that policies in China may change after the party congress in the fall, but only if the virus is under control in the rest of the world.
China has vaccinated more than 85 percent of its population, but its healthcare system in not well prepared for a massive wave of covid cases like we have seen in Europe and US. So, it may take more than the coming year for China to change course. The risk is simply too high.
Supply-chain bottlenecks
The supply-chain constrains that we have seen throughout 2021 is still there. In China, the power cuts in the second half of 2021 were remarkable. Companies had to cut production due to power shortage and for local governments and utility companies had to comply with emission targets from the central government. We are looking into a scenario where we will face similar issues in 2022.
Reshaping the energy mix in the power infrastructure is time consuming and costly. China is on the right green path now and will do what it takes, but in the short term the answer is boosting coal production while investing heavily in a greener energy supply and storage, long-term.
It is also likely that we will continue to see short-term closing of Chinese ports and cities related to the hard zero-tolerance pandemic control. This could once again impact the global supply chain with delays and higher cost. This week Volkswagen and Toyota suspended production in Tianjin due to the same reasons.
The global supply shortage of semiconductors will remain for an extended period into 2022. China is ramping up on its own semiconductor capabilities but is still dependent on other global partners. The determination of being self-supplied will not have significant positive impact in 2022.
Around the second half of 2022 I foresee a new frontline in the global supply chain that could hit hard for the already challenged car industry, suffering from the earlier mentioned semiconductors shortage.
Lithium - we are using this raw material to electrify the green mobility sector and to build power storage at a volume never seen before. Soon the market demand will exceed the supply from miners and processors and dominant global payers like Chinese CATL and BYD have already raised the lithium battery cost by 20% this fall, buy this is just the beginning.
We can easily end up in a situation where battery cost could go to the sky and hit the weakest player in this game. May I remind you that China holds around 80% or global processing of Lithium.
New Energy Vehicle: Consolidation & Global expansion
I follow the global NEV space very closely. There in not a week China without a launch of a new car brand. It does not make much sense to me. Yes, China is a big market, but in my view many of the newcomers will not have a chance in a market that is already extremely competitive.
And add to that, that the market for foreign car manufactures in China, as of 2022 has been liberalized, so that you can produce and sell your cars in China without any joint venture partner, which has been the case until now. And soon we will see serious attempts from Xiaomi, Apple and other super brands entering the NEV / autonomous driving market as well.
China is the world largest market for NEV and is already world leading in speed and innovation and as such in front of the curve compared to Europe and especially US. Competition in the Chinese market will only be harder towards the end of the year when subsidies will be phased out and the market will have to stand on its own feet. Therefore, I expect some consolidation in the Chinese market at the end of 2022.
At the same time, and probably because of intense competition in China, we will see more Chinese brands venturing into Europe in 2022. BYD and NIO already started in Norway last year and I expect to see a strong attempt in other European markets from X-peng, BYD, Aiways and NIO just to mention a few.
NIO just launched its new ET5 model at the NIO day in December. A new car that is set to compete with Tesla in 2022. It is likely that Germany will be a blast for NIO, making a strong appearance in the homeland of European car-culture competing with all the local brands in the luxury segment. It is going to be interesting to see who will come out as the winners.
Trade war
For yet another year we will monitor Chinese commerce through the filter of the so-called trade war between China and US. Decoupling between the world´s largest economies is a phrase often used in the past year, but to me it does not make sense, when you look at trade volumes. The Chinese export was up 21%.
To me the trade war is a symptom of the rise of China and a US falling behind in the tech race. So, in reality, it is more about Chinas tech advance than trade. Tensions are expected to continue while there may be a few trade tariffs that will disappear when we get to the fall when both Xi and Biden need to show power of action.
As a paradox of China – US trade tension, Tesla’s new giga-factory here in Shanghai accounted for half of China’s exports on new energy vehicles in 2021.
It will also be interesting to see, if the EU – China investment deal, which was never signed, will be taken out of the freezer once again. In the current climate I doubt it.
Common Prosperity & Demographic Time Bomb
The concept of “Common Prosperity” will remain a vital concept of Xi Jinping’s policy priorities. When you look at the Chinese society from inside it is clear that reforms are needed to close the gap between the elite and the many who still did not taste the economic miracle of China.
Implementation will include continuous campaigns against labor and market abuses by big-tech and inducements to ensure that the elite pay their tax and put money into social programs.
In the education system a cheaper, less competitive, and more egalitarian system is the goal to find a better balance in family’s daily life. It is crucial for the government to success as the financial pressure of extra tutoring and housing cost in the bigger cities is draining the appetite for getting more children. A problem that the government have been trying to address for many years without success.
The birthrate in China is declining rapidly. It is a demographic time bomb and for sure one of the single biggest problems that need to be dealt with in 2022. It is expected that the government will somehow intensify, prioritize, and financially stimulate families who are getting more children.
The concept of “Common Prosperity” is often misinterpreted to pure socialism but do not mistake that the prosperity element is all about making the cake bigger so that there is more to share.
The Big Tech Crackdown
As we have covered earlier last year the tech crackdown in China has changed the dynamics in the game. I am not going to write much about it here as we have covered before, but just mention it as a reminder that the regulation is ongoing and in some areas was needed after decades of a “free ride” for big-tech.
Protecting the consumers by creating even competition and making new laws on data and marketing algorithms rhymes with standard that we have seen in the EU. So eventually, some of the regulations might not be so bad, though the uncertainty and short-term impact is difficult to deal with if you invest in the tech sector.
PS: The beauty sector, particularly plastic surgery, could be next in line for a regulatory facelift.
The Chinese Stocks Market
Stock markets in mainland China and Hong Kong has seen large falls in the past year, much due to the earlier mentioned tech crackdown from Beijing and the overall uncertain regulatory future for Chinese companies listed overseas.
This means that China is selling at a discount right now – so for long term investors there are some good deals to make. But remember that the bumpy ride is not over yet, 2022 can hold new and unexpected surprises that may shake the markets again.
What can we expect?
More high-profile tech firms will be delisted from US exchanges and or undergo radical restructuring to seal off sensitive data divisions. In other cases, like Alibaba, international and domestic business will be separated in new legal entities. The overall impact may be broad and could include e-commerce giant Pinduoduo and Alibaba, video and steaming service Bilibili and Kuaishou and potentially even NEV companies like NIO, X-peng and Li Auto.
X-peng and Li have already secured a dual listing in Hong Kong and NIO will most probably follow. Beijing wants Chinese companies to go public on Chinese exchanges to boost the homegrown index and at the same time we are expecting regulators to liberalize the sector further in 2022, so that foreign investors get easier access to the market.
If we are looking at China venture funding in 2021, it hit a record high of 131$ billion, up 50% YOY despite the tech crackdown. The focus of venture funding is not surprisingly, in the hardcore end of the tech space, where China is still behind and dependent.
Biotech, semiconductors, robotics, and SaaS are the focus areas with weight of investments in the same order. This gives us a good indication of future opportunities.
After a year of uncertainty about a potential collapse of the real estate giant Evergrande, Chinese private investors need to regain trust in the real estate market before the stock market can take a hike once again. The Chinese simply have too much if their saving in real estate. Therefore, it is important to get a clear direction from Beijing about the real estate market going forward.
The Chinese stock market for 2022 is difficult to predict. I am bullish long term and China may even have many of the ingrediencies to outperform other markets in 2022, if the short-term political modeling of the economy will be in favor or the market and the companies.
Chinese economy in 2022
Over the years I have learned that GDP numbers and the feeling on the street in China does not always match. But these days it is clear that the gearshift in the economy with long term focus on quality instead of quantity has impacted daily life for many Chinese.
Thousands of workers in the Chinese textile and shoe factories lost the job in the past year as production has moving out of China to other low-cost countries is Southeast Asia. And about 50 million construction workers are expected to lose their job before 2025 and have to be insourced in the growing service economy. And the list goes on….
The challenges of taking Made in China to the next level is very real. The current energy crisis, covid-19 restrictions, the real estate dilemma, and China’s long term demographic challenge is not making it any easier for Beijing, not to mention China’s bad image in the West. We must all get use to a new narrative about what Made in China is.
However, China is demonstrating its ability to advance further and develop innovative technologies and solutions and to create international partnerships and alliances in the region.
There is consensus around a GDP growth just below 5% for 2022. It is far from the 10-15% we have seen over decades, providing growth and opportunities for the rest of the world.
I believe we have seen the worst in terms of regulating big tech and when we get in to spring, I am confident that we will see well needed stimulus that will benefit the ones that what have suffered the most for the last couple of years.
Why? Beijing is determent on it “Common Prosperity” path and at the same time focused of stability before the important Party congress in the fall. Green energy infrastructure, SME´s and families with more than one child is some of the areas where I believe, it is going to “rain”.
I wish you all a great year of the Tiger!
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