JC Master Legal News Issue 1045

Key Takeaways for This Issue

Capital Markets: Ushering in a Year of Transformation
For asset allocation in 2022, it was a year of continually seeking hope only to see that hope repeatedly dashed, with broad-based declines in equity markets sharply increasing the pressure on portfolios to generate positive returns. Three key factors shaped asset‑class trends in 2022: the Federal Reserve’s interest-rate hikes, recurring domestic COVID‑19 outbreaks, and sluggish macroeconomic conditions. Looking ahead to 2023, all three of these factors are expected to evolve, making 2023 potentially a turning point for asset allocation.
Modern enterprises compete not on products, but on business models.
We can see that companies like ByteDance, Pinduoduo, and Meituan have risen to become industry giants in just a few years, thanks to their differentiated and distinctive business models.
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In practice, many enterprises, in order to conceal or defer revenue, record incoming funds under the “Unearned Revenue” or “Other Payables” accounts.
How should one choose between litigation and arbitration?
Both litigation and arbitration are formal, state‑imposed remedies for resolving disputes. So what are the key differences between them? And how should we stipulate the dispute‑resolution mechanism in a contract?
Finance & Capital Markets
Capital Markets: Ushering in a Year of Transformation
For asset allocation in 2022, it was a year of continually seeking hope only to see that hope repeatedly dashed, with broad-based declines in equity markets sharply increasing the pressure on portfolios to generate positive returns. Three key factors shaped asset‑class trends in 2022: the Federal Reserve’s interest-rate hikes, recurring domestic COVID‑19 outbreaks, and sluggish macroeconomic conditions. Looking ahead to 2023, all three of these factors are expected to evolve, making 2023 potentially a turning point for asset allocation.
The most significant shift stems from the optimization and adjustment of China’s domestic epidemic‑prevention policies, marking the largest turning point since the pandemic began and expected to boost market risk appetite. While it will still take a long and bumpy road for these policy changes to translate into macroeconomic recovery and improved corporate earnings, we believe the overarching trend toward progressively easing COVID controls is now officely in place—and that this shift is unfolding sooner than the market had anticipated. This will be the dominant driver of equity and bond‑market volatility throughout 2023, with rising risk appetite encouraging investors to take on more risk, thereby benefiting equity assets.
Building on the successful conclusion of the 20th National Congress, there is reason to hold a relatively optimistic outlook for China’s macroeconomic policies and economic recovery in 2023. China’s economy has long been strongly influenced by domestic political cycles; with the onset of a new cycle, ensuring steady growth and fostering development will set the tone for economic policy in 2023. On the one hand, the report of the 20th National Congress has outlined the key areas where Chinese industries are expected to focus their efforts over the coming years, suggesting robust growth potential in these sectors. On the other hand, resolving the real estate sector’s predicament has become an urgent priority—stabilizing the property market is essential to underpinning overall economic stability, and this policy direction is likely to remain a central pillar of government action. Coupled with the confidence boost from adjustments to COVID‑19 control measures, both aggregate and structural pressures in the capital markets are expected to ease to some extent.
The Federal Reserve is expected to conclude its current rate-hiking cycle in 2023, marking the most significant inflection point for global assets. The pressure on overseas equity markets and non‑U.S. currencies from monetary tightening will ease, and the external policy pressures facing China will also be alleviated, thereby creating a more favorable environment for pursuing domestically‑driven policies and for stabilizing the renminbi exchange rate and foreign capital flows.
Given the potentially significant shifts outlined above, it is no exaggeration to call 2023 a year of inflection. Across major asset classes, the most notable development in 2023 may well be a marked rebound in expected returns for Chinese equity markets. We recommend that investors increase the allocation to equities—both A‑shares and Hong Kong‑listed stocks—in their portfolios. Meanwhile, domestic fixed‑income assets will offer limited defensive appeal in 2023, whereas overseas fixed income, particularly U.S. Treasuries and Chinese‑denominated USD bonds, is likely to deliver robust coupon yields, presenting attractive investment opportunities. At the same time, the U.S. dollar’s strength is expected to ease, easing downward pressure on non‑U.S. currencies, and gold’s return prospects should improve markedly compared with 2022. We hope that, by this time in 2023, the strategies outlined in this report will help investors achieve relatively favorable investment outcomes.
(1) 2022 Market Review: A Double Whammy for Overseas Stocks and Bonds, with Domestic Stocks in a Bear Market and Bonds Trading Flat
Looking back at 2022, domestic and international markets delivered mixed performance: equities across both regions declined, while onshore bonds outperformed their offshore counterparts. Major equity markets posted broad-based losses, with significant declines in U.S., A-share, and Hong Kong stocks; U.S. Treasury yields surged, whereas Chinese government bond yields remained stable. Meanwhile, the U.S. dollar strengthened, while non-U.S. currencies and precious metals generally fell.
In overseas markets, conditions were marked by a “double sell-off” in both equities and bonds, with gold weakening and the U.S. dollar strengthening. Throughout 2022, market dynamics were dominated by persistently rising U.S. inflation, the Federal Reserve’s increasingly aggressive monetary tightening—often exceeding expectations—and escalating geopolitical tensions, such as the Russia-Ukraine war. The decline in U.S. stocks, the sharp rise in Treasury yields, and the appreciation of the dollar collectively underscored the impact of the Fed’s substantial policy tightening. Against this backdrop, gold’s losses were relatively modest, highlighting its role as an inflation hedge and safe-haven asset.
In the domestic market, equity markets remained weak while bond yields stayed broadly stable, and the renminbi depreciated somewhat. In 2022, trading dynamics were shaped by a confluence of factors: economic slowdown compounded by pandemic-related shocks, policy shifts, and overseas risks—including Federal Reserve tightening and geopolitical tensions. For A‑shares, underlying economic fundamentals were subdued, recurring COVID outbreaks delivered additional headwinds, and tighter global liquidity weighed on sentiment, leading to an overall downward trend. Following the peak of pandemic‑related disruptions in May–July, the market staged a modest rebound. Against the backdrop of sharp interest‑rate hikes across major economies, China’s 10‑year government bond yield remained largely unchanged, reflecting a relatively weak domestic economy and a comparatively independent monetary stance. Meanwhile, the renminbi depreciated to some extent, driven by divergences in monetary policy between China and the United States and by a stronger U.S. dollar.
(II) Key Market Outlook: Bullish on A-shares, remain cautious on fixed income, and maintain a non‑pessimistic stance on exchange rates.
1. U.S. Treasuries: With inflation easing and the tightening cycle coming to an end, interest rates may have peaked and are poised to decline.
The 10-year U.S. Treasury yield is expected to trend sideways initially before trending lower throughout 2023, with a projected range of 2.8%–4.5%. The pace of movement is likely to follow a pattern of high‑level consolidation followed by a gradual downward swing.
First, amid the impact of aggressive rate hikes, U.S. domestic economic momentum has already slowed, and the labor market has eased from its previously overheated tightness. As a result, 2023 is highly likely to see a mild, shallow recession, a development that will push long-term Treasury yields lower. Second, the downward trend in U.S. inflation is now officely established. With the lagged effects of declining service consumption and mounting downward pressure on the housing market gradually intensifying throughout 2023, inflation is expected to fall further, signaling the end of the Fed’s tightening cycle. The Fed is likely to halt rate hikes in the first half of the year, with interest rates peaking before settling into a period of volatile decline. However, since monetary policy will not pivot immediately, rates are expected to remain elevated for some time before stabilizing at moderate levels. Should inflation drop below 3% or the unemployment rate rise more sharply than anticipated, expectations of rate cuts could gain traction in the fourth quarter, leading to a more pronounced decline in interest rates.
2. Foreign Exchange: The U.S. dollar’s strength has temporarily paused, and the renminbi and G7 non‑U.S. currencies are expected to bottom out and rebound.
The U.S. dollar’s strength is set to ease, and the renminbi is likely to stabilize in response. However, amid a complex interplay of bullish and bearish factors, the renminbi exchange rate will continue to face significant uncertainty as it recovers. We expect the renminbi–dollar central parity to hover around 6.9, with a fluctuation range of 6.5–7.5.
On the U.S. dollar front, from the perspective of economic growth differentials, amid a global economic downturn, the U.S. economy is also set to enter a deceleration phase. Meanwhile, Europe’s fundamentals, under the dual pressures of geopolitical tensions and commodity‑supply disruptions, exhibit weaker resilience than those of the United States, providing support for the dollar index. From a monetary policy standpoint, Europe’s inflation cycle lags slightly behind that of the U.S., with peak inflation expected later; however, sovereign risks in highly indebted European countries could constrain the ECB’s tightening stance. Accordingly, the divergence in U.S.–European monetary policies is likely to narrow first before stabilizing, potentially paving the way for both regions to enter easing cycles in turn.
Differences in economic growth and monetary policy suggest that the U.S. dollar’s momentum in 2023 will be weaker than in 2022, though no fundamental negative catalysts have yet emerged. It remains premature to conclude that the dollar has shifted from a bull to a bear market; instead, its strength is likely to pause for now, with a higher probability of trading in a range‑bound, somewhat softer pattern. Should geopolitical tensions escalate or a debt crisis erupt in 2023—triggering “black swan” events—the dollar would stand to benefit significantly as a safe‑haven currency.
On the renminbi front, the depreciation pressures faced in 2022 are expected to gradually ease as both domestic and external conditions improve, with the currency poised to stabilize and rebound in 2023. Looking ahead, key influencing factors—including U.S. dollar dynamics, domestic economic growth, and monetary policy—suggest the following:
First, the U.S. dollar’s strength is expected to ease in 2023, reducing downward pressure on the renminbi, narrowing its negative impact, and gradually shifting to a neutral stance.
Second, in 2023, the U.S.–China economic cycles may shift from a pattern of “U.S. stability, China’s stagnation” to one of “U.S. slowdown, China’s steady improvement.” Consequently, the two countries’ monetary policy cycles are likely to move from divergent, staggered phases toward greater synchronization, and the inversion of the U.S.–China yield spread could narrow—potentially even reversing to positive under an optimistic scenario—thereby providing support for the renminbi exchange rate. However, the path to domestic economic recovery remains subject to certain uncertainties, which could introduce volatility into the renminbi’s exchange-rate dynamics.
Among G7 currencies, the euro, yen, and pound are expected to stabilize in 2023 as the U.S. dollar’s strength moderates, with some upside potential amid volatility. Given the generally subdued economic conditions in the eurozone and the United Kingdom, coupled with ongoing uncertainties surrounding the Russia-Ukraine conflict and the energy crisis, both the euro and the pound are likely to experience choppy rallies, warranting a cautiously optimistic stance overall; by contrast, the yen is expected to perform relatively more favorably. For 2023, the euro–dollar exchange rate is forecast to hover around 1.05, with a trading range of 0.98–1.12; the pound–dollar rate is projected at a midpoint of 1.16, within a band of 1.08–1.24; and the dollar–yen rate is seen averaging 138, with a range of 129–146.
Although the Federal Reserve’s shift in monetary policy will bolster non‑U.S. currencies, the eurozone and the United Kingdom remain highly dependent on energy imports. The surge in energy prices triggered by the Russia–Ukraine conflict has exerted significant pressure on price levels, the balance of payments, and industrial production costs, leaving their underlying fundamentals still fragile.
The eurozone’s economic outlook is heavily influenced by the duration of the Russia–Ukraine conflict and the feasibility of substituting energy supplies. In 2022, aided by milder-than-usual weather and coordinated efforts across EU member states, natural gas consumption fell sharply, while supply-side adjustments—leveraging LNG and increased Norwegian gas deliveries—helped push gas storage levels to over 95%. As a result, the market’s deeply pessimistic pricing has begun to reverse, and investor confidence has shown signs of recovery. However, in 2023, securing alternative energy sources remains a major challenge, and stagflationary pressures could prompt the European Central Bank, with its single‑mandate focus on price stability, to maintain a tightening stance. This, in turn, may heighten sovereign debt risks in some member states and push the eurozone into recession.
The UK economy is currently sliding into recession, with shortages of production factors—exacerbated by Brexit and the Russia-Ukraine conflict—deepening its stagflationary predicament. Meanwhile, the Northern Ireland issue and the risk of secession remain latent threats. Following the sharp financial-market turbulence triggered by the tax-cut controversy, the British government has adopted a more cautious stance on fiscal policy, while the Bank of England faces a difficult trade-off. As a result, emerging from recession in 2023 will be extremely challenging. Accordingly, we maintain a cautiously optimistic outlook for both the euro and the pound sterling.
By contrast, Japan has experienced prolonged deflation and sluggish consumption, so the impact of rising energy prices on downstream prices has been relatively muted. The Bank of Japan has consistently maintained a relatively accommodative monetary policy to support the economy. The primary pressure on the yen’s depreciation stems from the widening U.S.–Japan yield spread caused by the divergence in monetary policies between the two countries. As the Federal Reserve slows its tightening cycle and pivots toward rate cuts, the narrowing of the U.S.–Japan yield spread will provide a clear boost to the yen.
3. Gold: Expected to trend higher amid volatility
In 2023, gold prices are expected to stabilize gradually before trending higher, presenting an attractive allocation opportunity, with a projected trading range of $1,600–$2,000 per ounce. In terms of upside potential, this round of gains could approach historical peaks and, under favorable conditions, even reach new all-time highs.
Under the baseline scenario, 2023 will see a macroeconomic mix of a mild U.S. recession and easing liquidity. As the U.S. economic downturn materializes, real interest rates are likely to ease from their elevated levels, providing upward momentum for gold prices. We expect the yield curve inversion between short- and long-term U.S. Treasuries to deepen, with both real and nominal interest rates trending lower, which should support a volatile but generally higher‑priced gold market. In addition, the strong U.S. dollar may begin to lose steam, further bolstering gold.
However, it is worth noting that, on the one hand, during the 2022 cycle of rising real interest rates, gold prices did not fall sharply. This means that gold is currently far from “cheap” (according to our gold valuation model, its valuation remains at the 75th percentile of historical levels). On the other hand, in the first half of the year, the Federal Reserve’s monetary policy merely shifted from accelerating tightening to a slower pace of tightening, with expectations adjusting accordingly; yet the actual rate hikes are likely to continue. As a result, gold’s price appreciation is unlikely to be smooth, which will also weigh on its full-year performance.
4. Domestic Fixed Income: The interest rate center will rise slightly; maintain a cautious stance.
(1) Outlook for Interest-Rate Bonds: The central level is expected to rise slightly, with the upper bound of the range likely remaining modest.
Based on the traditional interest-rate analysis framework, economic growth, inflation levels, monetary and fiscal policies, and financial regulation are the primary factors influencing the bond market. Looking ahead to 2023, real GDP growth is expected to rebound, inflation to remain moderate, and nominal GDP growth to pick up; monetary policy will be neutral to slightly accommodative; fiscal policy will return to a normalized, proactive stance; and financial regulation will stay in place, with the “growth stabilization” priority remaining unchanged and the “risk prevention” priority modestly elevated. These medium- to long-term factors are likely to push the risk-free rate’s central tendency slightly higher.
The overarching policy approach is likely to be “small, frequent, and sustained measures to ensure steady growth.” The “small, frequent, and sustained” nature of this strategy reflects the fact that real estate investment growth hit bottom in 2022, and in 2023, policy will help lift it from that low point. Given that the principle of “housing is for living, not for speculation” remains unchanged, large‑scale, one‑off policy stimulus is unlikely; instead, a series of modest, repeated measures is more probable. For sectors with a high base in 2022—namely infrastructure and manufacturing—policy support will persist, though a marked pullback from elevated growth rates is fairly certain. Monetary policy is expected to continue providing accommodative support to the real economy, but the pace may shift: once the recovery trend is officely established, the degree of monetary easing will gradually ease, and the overall stance will pivot toward neutrality. Under this framework, we anticipate interest rates trending upward in a choppy pattern, with a relatively gradual pace of increase and no need to set overly high expectations for the peak. Meanwhile, each time rates decline in response to corrective moves, they are likely to find support at key levels before rebounding, resulting in a gradual upward shift in the floor of the range.
Rate outlook: In the first quarter, monetary policy will remain accommodative, supporting the ongoing economic recovery; interest rates are likely to trade in a range‑bound pattern, with levels staying near the lower end of the year’s corridor. In the second and third quarters, as economic recovery gains momentum, absolute interest rates may continue to rise, moving into the upper half of the year’s range. By the fourth quarter, with the recovery stabilizing, rates could revert to a more volatile, range‑bound trajectory, with levels remaining near the upper end of the year’s band.
Interest-rate bond strategy: Under a neutral scenario, the 10-year government bond yield is expected to hover around 2.95%, above the 2022 average of 2.76%, with a trading range of 2.7%–3.2%. In an optimistic scenario, if economic recovery exceeds expectations, the yield center could rise to approximately 3.0%, with a range of 2.8%–3.3%. Conversely, in a pessimistic scenario, should economic recovery fall short of forecasts, the yield center might remain at the 2022 level, around 2.75%, within a range of 2.6%–3.0%.
Bond yield curve: As the economy recovers, the curve may initially steepen with a rise in the long end, but as recovery stabilizes, the short end could shift upward, leading to a flatter curve.
Under neutral market conditions, we offer a broad assessment of the interest-rate trajectory and corresponding strategies: during the early phase of volatile rate hikes, it’s advisable to manage position sizing and duration, prioritizing short-term bond coupon income. Once rates have climbed to elevated levels, then proceed with allocation. For trading desks, adopt a range‑bound approach: reduce holdings when rates dip near 2.7%–2.8%, and increase positions above 3.0%; capitalize on short‑term opportunities by entering and exiting quickly.
(2) Credit Bond Outlook: Fundamentals are expected to improve, which should help bring risk premiums down.
Credit spreads are shaped over the long term by changes in fundamentals and, in the medium to short term, by financial regulatory policies. Credit spreads reflect both corporate default risk and bond liquidity risk; for a long time, China’s credit spreads were primarily driven by liquidity risk. However, in recent years, the influence of risk premiums has grown, leading to increasingly pronounced divergence across sectors and between high- and low‑rating bonds. Looking ahead, we expect this trend to persist. Consequently, investors in corporate bonds should place greater emphasis on sector‑specific fundamentals, favoring issuers that benefit from policy support and operate in industries whose cycles are currently on the upswing.
We expect the trajectory of credit spreads in 2023 to unfold as follows: In the first quarter, credit spreads are likely to remain volatile, driven by fluctuating liquidity premiums and, at the early stage of economic recovery, a similarly volatile default‑risk premium, with little differentiation between high‑ and low‑rating segments. In the second and third quarters, credit spreads are expected to trend upward, as the increase in the liquidity premium may outpace the decline in the default‑risk premium. During this phase, rising risk‑free rates will push up the liquidity premium, while accelerating improvements in economic fundamentals will ease the default‑risk premium, thereby supporting a narrowing of credit spreads—though the extent of this compression is unlikely to match the magnitude of the liquidity premium’s rise. At the same time, divergence between high‑ and low‑rating credit spreads will intensify: high‑rated spreads will be more sensitive to the uptick in the liquidity premium, whereas mid‑ and low‑rated spreads will respond more strongly to the decline in the default‑risk premium; consequently, the increase in mid‑ and low‑rated spreads may lag behind that of high‑rated spreads. In the fourth quarter, credit spreads are likely to revert to a pattern of volatility, as risk‑free rates stabilize and economic fundamentals either level off or settle into a more stable range, leading the default‑risk premium to enter a period of oscillation.
Credit bond allocation strategy: As economic fundamentals improve, the likelihood of monetary policy adjustments increases, driving the liquidity premium embedded in credit spreads higher. At this juncture, a decline in default risk premiums is needed to offset these pressures. Consequently, we are more bullish on sectors that stand to benefit from economic recovery and the rebound in downstream consumption, such as leisure services, food and beverage, and building materials. We also favor industries poised to gain from policy support, including high-end manufacturing and the dual-carbon initiatives. Meanwhile, we remain attentive to certain local government financing vehicle (LGFV) bonds facing mounting debt-servicing pressures. With 2022 fiscal spending on pandemic control measures and the carryforward VAT refund program tightening local general public budget revenues—coupled with limited growth in tax revenues—the fiscal deficit has widened. For LGFVs operating in regions with weak fiscal capacity and limited operational strength, debt-servicing pressures are expected to rise.
Local government financing vehicle (LGFV) bonds: In 2022, economic performance was relatively weak, and monetary conditions remained accommodative. As a safe‑haven asset, LGFV bonds attracted strong investor demand, driving credit spreads to exceptionally tight levels and leading to overcrowded trading. However, as money‑market rates surged toward year‑end, the crowded positioning exposed vulnerabilities, causing LGFV credit spreads to widen rapidly. Looking ahead to 2023, with monetary easing expected to moderate, the center of LGFV credit spreads is likely to rise. With the broader economy on a recovery path, LGFV earnings should also improve. That said, given the increased fiscal pressure and widening budget deficits in 2022, regions with weaker fiscal capacity may face more severe challenges, potentially impacting the revenue streams and refinancing capabilities of lower‑quality LGFVs. Strategically, investors should heighten their focus on LGFV risks, favoring high‑quality issuers with strong debt‑servicing capacity, while remaining vigilant about tail risks.
Strong‑cycle bonds: The coal sector is expected to remain in a robust upturn, while the steel industry’s outlook is poised for improvement. In 2023, the coal sector will likely maintain its high‑level, flattening momentum, with both supply and industrial electricity demand remaining relatively stable; however, significant uncertainty persists regarding whether residential electricity consumption could once again surge due to extreme weather. Meanwhile, driven by strong demand expectations, the steel industry’s profitability should improve compared with 2022 and is expected to stay within a moderately office range. Over the past two years, leverage ratios among companies in strong‑cycle sectors have continued to decline, leading to steadily improving debt‑servicing capacity and broadly manageable fundamental risks. That said, since 2022, credit spreads on strong‑cycle bonds have narrowed sharply, reaching historically low levels; should fundamentals be disrupted by unforeseen factors, liquidity‑premium risk could rise.
Property bonds: The sector is expected to bottom out and stabilize, but investment opportunities remain to be conofficeed. In 2023, supportive policies for the real estate industry are likely to continue, and as market expectations fluctuate, the sector may present phased opportunities. Meanwhile, structural differentiation within the industry will persist, with credit spreads between private developers and state‑owned enterprises widening further; the latter’s spreads remain relatively low. Companies that have already encountered distress should still be approached with caution. Sustainable investment opportunities will require clearer, more positive fundamentals—such as a turning point in sales or a marked improvement in demand expectations—to be validated.
5. Equity: A-shares are warming up, with technology taking the lead.
(1) A-Share Market Outlook: In 2023, the market is expected to gradually transition from a bottom‑level consolidation phase to a slow bull run.
The three key factors that determine market trends are corporate earnings, liquidity, and valuation levels. Market outlooks are generally framed around the various combinations of these three factors. Looking ahead to 2023, all three key factors point to a bullish bias.
First, corporate earnings bottomed out in 2023 and have since resumed an upward trajectory; however, the pace of this recovery is constrained by weakening external demand. Given the critical importance of corporate profitability, we conduct cross‑validation analyses from multiple perspectives.
From the perspective of underlying economic drivers, nominal GDP growth in 2023 is expected to rebound after bottoming out. As outlined in our earlier forecasts for the economy and inflation, the composite indicator of corporate earnings—GDP plus the average of PPI and CPI—will continue to hover at a low point from the fourth quarter of 2022 through the first quarter of 2023, with the first quarter marking the year’s trough. A marked improvement is anticipated in the second quarter, followed by a moderate pullback in the third and fourth quarters.
From the perspective of the economic cycle, A‑share earnings growth in 2023 is highly likely to be on an upward trajectory. A typical short‑term economic cycle lasts about 3.5 years and is known as the Kitchin cycle, closely aligned with the business‑profit cycle. Since 1948, the year‑over‑year growth rate of the CRB Industrial Index has exhibited a roughly 3.5‑year cyclical pattern, with A‑share earnings growth showing strong synchronization. This correlation stems from the cost‑plus pricing mechanism for industrial goods. At present, the CRB Industrial Index’s year‑over‑year growth rate has fallen to near historic lows, and the cycle is approaching its tail end. Based on this spatiotemporal pattern, 2023 is likely to usher in the upswing phase of the Kitchin cycle.
From a earnings‑forecast perspective, institutional consensus expects A‑share profit growth to improve in 2023. Brokerage analysts cover the vast majority of A‑shares and provide earnings estimates; the market capitalization of their coverage accounts for 91% of the total A‑share market cap. By aggregating these analyst forecasts, we can broadly gauge the overall performance outlook for the A‑share market. According to Wind’s consensus estimates, aggregate A‑share profit growth is projected to rise from 1% in the third quarter of 2022 to 20% in 2023, while the Shanghai Composite Index’s profit growth is expected to climb from 3% in the third quarter of 2022 to 13% in 2023.
Based on the cross‑validation analysis of the three aforementioned dimensions, listed companies’ earnings growth is expected to show a modest improvement after bottoming out in 2023.
Second, macro liquidity is expected to remain relatively accommodative in 2023.
Macroeconomic liquidity often serves as a leading indicator of corporate earnings and is also a key source of liquidity in the stock market. The market’s bull–bear cycles are largely driven by macroeconomic liquidity; historically, the growth rate of M1 money supply has been highly correlated with equity valuation trends. At present, the focus of monetary policy remains on stabilizing the economy, and, in response to the need to sustain growth, the accommodative stance is expected to persist. Moreover, given the leading nature of interbank liquidity, it can be inferred that M1 growth will continue to pick up in 2023.
Third, valuation levels are at historic lows, signaling entry into a medium- to long-term allocation range.
Following the decline in A-shares in 2022, valuation metrics—including the price-to-earnings ratio, price-to-book ratio, and equity risk premium—have all fallen to historic lows. Taking the Shanghai Composite Index as an example, its P/E ratio stood at 11.4 times at the end of October, near the lowest level seen over the past five years. If valuations were to drop to the 11.0‑times level observed at the bottom of the 2018 bear market, the index would be trading around 2,800 points. Recently, with the optimization and adjustment of COVID‑19 control policies, the continued rollout of real estate measures, and easing expectations for further Federal Reserve rate hikes, we believe the likelihood of the Shanghai Composite’s valuation hitting new lows is quite low. Moreover, the spread between the inverse of the Shanghai Composite’s P/E ratio and the yield on 10‑year government bonds now exceeds that of roughly 80% of historical periods, indicating that equities offer significantly better medium‑to‑long‑term value relative to bonds.
At current valuation levels, risk compensation is sufficiently high; rational investors should actively assume risk to capture potential returns rather than exit the market.
Overall, the three key factors driving market trends—corporate earnings, liquidity, and valuations—are all leaning bullish. In 2023, A‑shares are expected to gradually move from a bottom‑range consolidation toward a slow bull market, with the Shanghai Composite Index trading in a range of 2,900–3,700. However, given the drag on domestic corporate earnings from overseas recessions, the market is unlikely to enjoy an unimpeded rally. In terms of timing, we anticipate an N‑shaped pattern from November 2022 through mid‑2023, with a potential high‑level correction in the second half. As for valuation, the Shanghai Composite’s P/E ratio below 2,900 points is at an extremely low level, signaling a near‑bottom zone; yet, since corporate earnings are unlikely to return to 2021 levels, the index is also unlikely to break above 3,700. Looking ahead over the longer term, based on the mean-reversion dynamics of valuation and the cyclical rhythm of stock markets—typically around three to four years per cycle—A‑shares are likely to experience a gradual bull market in 2023–2024.
(2) A-Share Market Outlook: Technology stocks may lead the market out of its bottom, with small-cap stocks holding a relative advantage.
As the A-share market in 2023 has moved from a bottom‑level consolidation toward a gradual bull run, driven by supportive industrial policies, the rapid growth of emerging sectors, and ample macro liquidity, structural differentiation is expected to be pronounced. One key to capturing investment opportunities in A‑shares lies in identifying and selecting the leading sectoral groups.
Industry Structure: The industrial policies emphasized in the October report of the 20th National Congress provide crucial guidance for sector selection in the A-share market. Historically, major central conferences and significant industrial policies issued by the State Council have served as important benchmarks for investment in related sectors. We have analyzed the post‑policy stock price performance of relevant industries. Our findings indicate that when a policy supports a particular sector, its stocks tend to deliver positive returns; conversely, when a policy opposes a given sector, those stocks typically underperform. Moreover, the magnitude and duration of price movements are positively correlated with the strength and persistence of the policy. This clearly underscores the critical role of industrial policy in equity investing.
The industrial policies emphasized in the report of the 20th National Congress are concentrated in the technology and manufacturing sectors. The report underscores “keeping the focus of economic development on the real economy, advancing a new type of industrialization, and accelerating the building of a manufacturing powerhouse, a quality‑driven nation, a spacefaring nation, a transportation powerhouse, a cyberpower, and a digital China.” The corresponding stock market sectors include computers, electronics, telecommunications, defense industries, transportation, power equipment, and new energy, among others. Meanwhile, the report twice highlights the importance of ensuring the security of industrial and supply chains, underscoring that the directions of domestic substitution and independent, controllable development deserve close attention. Following the conclusion of the 20th National Congress, a series of industry‑specific policies are expected to be rolled out for these key sectors; on October 28, the State Council issued the “Guidance on Building a Nationally Integrated Governmental Big Data System,” which bodes well for the domestic substitution segment of the computer industry.
The technology sector, benefiting from the industrial policy support outlined at the 20th National Congress, is poised to lead the market out of its bottom and remains the top choice for sector allocation. Beyond policy backing, analysts’ earnings forecasts for the next two years place tech stocks ahead of manufacturing, consumer goods, finance, and cyclical sectors. Moreover, after two years of declines, the current five-year price-to-book ratio percentile stands below the 30th percentile, indicating undervaluation. Consequently, technology stocks—particularly those in the domestic substitution space, led by the computer sector—combine strong policy support, improving fundamentals, and attractive valuations, positioning them to outperform the broader market and deliver excess returns. Within the tech sector, the electronics industry, with a significant export component, may face headwinds in the first half of 2023 due to overseas economic slowdowns and a downturn in the global semiconductor cycle, suggesting that its upside potential could materialize somewhat later than that of the computer sector.
The high-end manufacturing sector also benefits from the industrial policy support outlined at the 20th National Congress, though its valuation‑to‑performance ratio is slightly lower than that of the technology sector, warranting moderate allocation. Sectors such as defense and new energy, which have enjoyed sustained strong growth for several years, currently trade at price-to-book ratios that remain above the 70th percentile over the past five years. Judging by the diminishing marginal impact of policy measures and the crowdedness of investor positioning, their relative value proposition is weaker than that of the technology sector. Nevertheless, from a long-term perspective, once current levels of crowding and valuations have been adequately adjusted, these sectors remain worthy of continued attention.
On the basis of its undervaluation and amid expectations that pandemic‑control policies will continue to be refined and adjusted, the consumer sector warrants moderate allocation. The primary headwind for the sector has been recurring COVID‑19 outbreaks. Despite being one of the most favored themes among domestic and international investors, consumer stocks experienced an accelerated sell‑off in October, pushing both the five-year P/E and P/B percentiles for the food & beverage and pharmaceutical industries down to low levels of 20–30%. The overarching direction of pandemic policy is likely to involve gradual, incremental adjustments, which should pave the way for earnings recovery across sectors such as food & beverage, pharmaceuticals, and catering and tourism. However, the precise timing of further policy tweaks remains uncertain, so investors should exercise ample patience regarding the pace of valuation normalization. Beyond the pandemic, the consumer sector’s performance is closely tied to overall economic conditions, and its responsiveness also hinges on the strength of the broader economic recovery. Given the relatively muted pace of economic rebound, it is prudent to set reasonable expectations for upside potential in consumer‑related equities.
Cyclical sectors such as finance and real estate have seen improved near-term prospects thanks to easing financing policies for the property sector, which should help restore valuations. However, in the long term, under the overarching policy stance of “housing is for living, not for speculation,” their investment appeal remains limited. The key drag on this sector stems from the prolonged downward trend in real‑estate industry sentiment. Since property sales peaked in early 2021, share prices across the upstream and downstream value chain have continued to decline, with valuations now broadly at historically low levels. The upside potential for cyclical sectors like finance and real estate hinges on strong policy stimulus and a substantial improvement in economic expectations. Overall, China’s economic recovery has been relatively muted; improvements in household income expectations will take time, and there is little room for major shifts in the top‑level policy direction of “housing is for living, not for speculation.” The process of de‑financialization in the real‑estate sector is likely to persist. While cyclical stocks in finance and real estate may experience temporary rallies amid phased policy support, their overall sustainability remains weak.
Taking into account the 20th National Congress’s industrial policies, sectoral cyclical conditions, and valuation levels, the technology sector—led by the computer industry—is expected to lead the market out of its bottom, warranting a top-tier allocation. In the consumer sector, given expectations of continued optimization and adjustments to pandemic‑control policies, it is advisable to allocate selectively to certain sub‑sectors with lower valuations and relatively stable demand, placing this segment in the second tier of sector allocation. As for the high‑end manufacturing sector—represented by defense and new energy—its relative value proposition appears weaker than that of the technology sector, judging from the marginal impact of policy measures and crowded positioning; thus, it should be positioned in the third tier of sector allocation.
In terms of market-cap style, the preference may lean toward cyclical small‑cap stocks. The core rationale behind the divergence between large‑ and small‑cap stocks lies in shifts in earnings‑expectation differentials. Looking back at history, three key factors have historically shaped these expectation gaps:
Is macro liquidity ample? When macro liquidity is loose, small-cap stocks typically outperform, primarily because lower financing costs and easier access to capital create greater room for earnings improvement among smaller offices that face tighter funding constraints. We have constructed two strategies: The first is a large‑cap–small‑cap rotation strategy—when macro liquidity is accommodative, i.e., M2 growth exceeds nominal GDP, we overweight the CSI Small Cap Index (the longest available small‑cap index); otherwise, we overweight the CSI Large Cap Index. From the end of 1996 through the third quarter of 2022, this strategy delivered a cumulative net asset value of 32.3. The second strategy is an equal‑weight allocation between large and small caps, with a cumulative NAV of 8.8. It is clear that the first strategy is more effective: during periods of loose macro liquidity, small‑cap stocks tend to exhibit relative strength.
Whether emerging industries are growing rapidly. When emerging industries take off, small-cap stocks typically outperform as well. The underlying rationale is that these sectors are dominated by smaller offices; in an environment where the overall market size continues to expand, competition remains relatively free, and industry structures have yet to solidify, smaller companies enjoy greater potential to deliver explosive earnings growth and overtake their larger peers through new business initiatives. By contrast, for mature‑stage large corporations, achieving significant structural shifts is considerably more challenging.
Are M&A and restructuring policies supportive? When such policies are favorable, small-cap stocks typically outperform, primarily because M&A and restructuring directly drive the external growth of listed companies, which accounts for a significant share of smaller offices’ earnings.
Taking the above factors into account, we expect macro liquidity to remain accommodative in 2023, with emerging sectors such as technology and high-end manufacturing continuing to grow rapidly, and M&A and restructuring policies remaining unchanged. As a result, small-cap stocks are likely to maintain their favorable momentum, and during the broader market’s gradual transition from bottom‑level consolidation to a slow bull run, small caps could deliver excess returns.
(3) A-Share Strategy Recommendations
In terms of positioning, the Shanghai Composite Index below 3,000 points represents a bottoming zone. The broader A-share market is expected to move from a choppy consolidation at the bottom toward a gradual bull run; should prices dip further, this would present an excellent opportunity to build positions. We recommend adopting a proactive stance and gradually increasing holdings.
From a structural perspective, we recommend focusing on the domestic substitution theme, particularly the technology sector led by the computer industry, as well as small-cap stocks that are benefiting from favorable market conditions. In addition, it is advisable to allocate selectively to high-end manufacturing sectors such as defense and new energy, along with essential consumer sectors like food & beverage and pharmaceuticals.
In terms of equity products, we recommend placing greater emphasis on growth‑oriented funds and small‑cap equity funds. In addition, it may be prudent to give due consideration to value‑focused fund managers with a strong track record over the long term, as well as the products they manage.
In the hedge‑fund space, hedging costs remain low, market sentiment leans toward small- and mid-cap growth stocks, and generating alpha from equity portfolios is relatively straightforward. Overall, the hedging environment remains favorable; we recommend that investors with a low risk appetite continue to hold hedge products.
(4) Hong Kong stock strategy recommendation: In a year of recovery, allocation is advisable.
With both of the major macro headwinds weighing on Hong Kong stocks set to ease, the market is poised for a broad recovery in 2023. Hong Kong‑listed companies are predominantly mainland‑based, with earnings closely tied to domestic conditions and liquidity largely influenced by U.S. policy; investor participation remains skewed toward overseas investors. In 2023, China’s macroeconomic outlook is expected to show modest improvement, while the Federal Reserve is likely to conclude its current rate‑hike cycle. At current low valuation levels, the combined boost from stronger earnings and improved liquidity should help drive a rebound in Hong Kong equities.
We expect the Hang Seng Tech Index, a key sector in Hong Kong stocks, to post gains in 2023 as well, though its investment appeal is somewhat weaker than that of A‑share tech stocks. Over the past two years, the index has fallen by roughly 75%, bringing valuations to historically low levels. With antitrust risks in the internet sector gradually unwound, cross‑border regulatory issues for Chinese concept stocks resolved, and China’s economic outlook improving alongside a contraction in industry capital spending, the Hang Seng Tech Index’s earnings growth is likely to pick up in 2023. However, as the internet sector’s traffic‑driven growth dividend peaks and a second growth trajectory remains elusive, it will be difficult for Hang Seng Tech earnings to return to their previous high‑growth phase. In terms of sector characteristics, it currently resembles consumer‑related stocks, with a slightly lower price‑performance ratio compared to A‑share tech equities.
(5) U.S. stock strategy recommendation: A turning point is at hand.
Looking ahead to 2023, with the interest-rate hike cycle coming to a close and the environment for U.S. equities improving marginally, U.S. stocks are poised for a turnaround, with modest gains expected over the course of the year.
The Federal Reserve’s monetary policy is set to shift from tightening to easing. Since 2022, monetary tightening has weighed on U.S. equity valuations and the economic outlook, dragging down U.S. stocks—particularly growth-oriented shares, which are more sensitive to liquidity and have experienced sharper declines. As noted earlier, in the first quarter of 2023 the Fed continued raising rates, albeit at a slower pace; by the second quarter, it will have “closed the gap” with the inflation trajectory, and in the second half of the year, monetary policy will pivot to an easing stance. Monetary tightening will no longer be the primary risk for U.S. equities in 2023, and this policy shift will provide upward momentum for the market.
The U.S. economic recession and a decline in corporate earnings represent the primary risks to U.S. equities in 2023. Historically, during bear markets not accompanied by a recession, the S&P 500 has averaged a 25.4% drop from peak to trough, with earnings per share declining by an average of 3.9%. By contrast, in recessionary bear markets, the S&P 500 has fallen by an average of 37.7% from peak to trough, while earnings per share have declined by 18.1%. This suggests that when a recession occurs, falling corporate profits exert a substantial negative impact on stock prices. In the current downturn, the maximum drawdown has been around 27.6%, closer to the level seen in non-recessionary scenarios. We judge that the U.S. economy’s endogenous growth momentum has slowed markedly and could enter a “mild recession” in the first half of 2023, lasting roughly one year. Given its mild nature, the overall impact is expected to be relatively moderate. From a timing perspective, equity markets typically anticipate future economic conditions; accordingly, the U.S. recession in the first half of 2023 will continue to weigh on equity valuations, though its influence should diminish in the second half.
Although U.S. equity valuations have been pushed to low levels by monetary tightening, relative valuations—measured as the risk premium—remain elevated, failing to price in the risk of slowing corporate earnings growth. The S&P 500’s trailing‑12‑month P/E ratio stands at 21x, placing it at the 40th percentile over the past decade—a relatively low level. However, with U.S. Treasury yields rising sharply, the S&P 500’s risk premium (1/P/E minus the yield on the 10-year U.S. Treasury) has fallen to 1.05%, now at the 2.5th percentile over the last ten years, indicating that equities are valued far more expensively than bonds. The risk premium primarily reflects expectations for economic and corporate earnings prospects: when economic outlooks improve, the risk premium declines; when they deteriorate, it rises. Historically, the ISM Manufacturing PMI, a key gauge of economic conditions, has typically moved in the opposite direction of year‑over‑year changes in the risk premium. Yet since 2022, despite a weakening economic backdrop, the U.S. equity risk premium has not increased but has instead remained at exceptionally low levels, suggesting that valuations have yet to incorporate the risk of slower growth. Given that the decline in U.S. equity valuations does not reflect an easing economic environment, it is entirely driven by rising interest rates and inflation. From the perspective of the risk premium, a future downturn in the U.S. economy will likely weigh on U.S. equity valuations.
Drawing on the experience of the past few decades, pauses in Fed tightening have typically signaled a bullish outlook for equities—but this cycle may be different. Throughout the “Great Moderation” period—spanning from the mid-1980s onward, when the U.S. economy enjoyed high employment and low inflation—the Fed was able to halt monetary tightening well before a recession began, paving the way for sustained equity market gains. In such environments, when monetary policy ceased tightening, economic growth remained robust; and as recessions loomed, policymakers could promptly ease policy. However, this cycle unfolds differently. With U.S. inflation hitting a 40-year high, inflationary pressures are constraining monetary policy, and the timing of the end of rate hikes in 2023 is drawing close to the onset of a recession. A pause in rate hikes does not necessarily bode well for equities, as the risk of recession remains. That said, once monetary policy shifts to an easing stance and a recession has already taken hold, the impact of policy turns positive, while the adverse effects of the downturn have largely been priced in—creating a potential inflection point for the stock market.
Overall, in the first half of 2023, the rate-hike cycle is expected to conclude, but U.S. interest rates will remain elevated, offering limited upside support for U.S. equities. At the same time, with recession risks still looming, U.S. stocks are likely to experience volatility. In the second half, as monetary policy shifts toward easing and recession risks materialize, U.S. equities should resume their bull run. Strategically, we recommend gradually increasing positions during the first half of the year.
(3) Asset Allocation Strategy: Increase allocation to equities and place emphasis on structural opportunities.
Regarding the 2023 asset allocation framework, we expect equity assets—including A-shares, Hong Kong stocks, and U.S. equities—to deliver improved returns, though investors should avoid excessive optimism. Compared with mid-2022, it is appropriate to tilt the overall portfolio toward a more aggressive stance and increase exposure to equities. We recommend that investors adopt a stock‑biased allocation between equities and fixed income, while placing particular emphasis on structural opportunities within the equity space.
For the next six months, our asset allocation strategy is primarily guided by two key metrics—each asset’s probability of outperformance and its risk-reward ratio. The underlying rationale is as follows:
1. Win Rate: The win rate in the A-share market is relatively high.
Based on the preceding analysis of each asset class, the summary of their respective win rates is as follows: A-shares have a relatively high win rate, while Hong Kong‑listed tech stocks, gold, domestic fixed income, U.S. equities, and U.S. Treasuries exhibit moderate win rates.
2. Risk–Reward Ratio: The domestic equity–bond value proposition exhibits a stock‑over‑bond bias.
(1) Across asset classes, the domestic equity–bond value ratio is currently at a high level, with equities relatively inexpensive. In contrast, the overseas equity–bond value ratio is low, and U.S. equities are relatively more expensive than U.S. Treasuries.
(2) From an internal asset comparison perspective:
Equities: A‑shares are valued at relatively high levels in the global market. By comparison, A‑shares rank near the top of the valuation distribution across global equity markets, making them comparatively expensive relative to other major stock markets worldwide.
Fixed Income: U.S. Treasuries > Chinese Government Bonds. Chinese government bond yields are currently around 2.8%, with a relatively neutral risk-reward profile. U.S. Treasury yields stand near 3.8%, offering a more favorable risk-reward balance.
Gold: The risk-reward ratio is moderate. According to our valuation model for gold’s relative price, London gold is currently valued at a level close to the 50th percentile over the past decade, with a moderate risk-reward profile.
3. Conclusion: Relatively optimistic about the investment value of A-shares, Hong Kong‑listed tech stocks, gold, and U.S. Treasury bonds.
Based on market assessment and analysis, we offer the following asset allocation recommendations for the next six months: Overweight: Growth‑style equities in China (A‑shares). Medium‑to‑high overweight: Technology stocks in China (A‑shares) and Hong Kong; consumer‑style equities in China; gold; and U.S. Treasuries. Equal weighting: Chinese government bonds, corporate bonds, U.S. equities, the U.S. dollar, the renminbi, the euro, the Japanese yen, and the British pound. Medium‑to‑low overweight: Cyclical‑style equities in China (A‑shares).
Specifically, the growth style in A‑shares has been upgraded from “standard allocation” to “overweight”; technology stocks in both A‑shares and Hong Kong stocks, as well as the consumer sector in A‑shares, along with gold and U.S. Treasuries, have been raised from “standard allocation” to “medium‑to‑high overweight”; the renminbi, euro, Japanese yen, and British pound have been moved up from “low‑to‑medium overweight” to “standard allocation”; the cyclical style in A‑shares has been upgraded from “underweight” to “standard allocation”; and the U.S. dollar has been downgraded from “medium‑to‑high overweight” to “standard allocation.”

Commercial & Corporate
Modern enterprises compete not on products, but on business models.
We can see that companies like ByteDance, Pinduoduo, and Meituan have risen to become industry giants in just a few years, thanks to their differentiated and distinctive business models.
Renowned economist Lang Xianping says: A business model is a matter of life and death, determining an enterprise’s rise or fall, success or failure. To achieve success, a company must begin by crafting a winning business model—this holds true for established offices, emerging enterprises, and especially those in the growth phase. The business model is the key to competitive advantage and lies at the very heart of commerce.
So, what exactly is a business model?
The three core components of a business model—creating value, delivering value, and capturing value—form an interconnected virtuous cycle; none can be omitted. If any one is missing, the business model cannot function as a whole.
Creating value means delivering solutions that are grounded in customer needs.
Delivering value involves allocating resources and orchestrating activities to ensure value is realized.
Value capture involves consistently generating profits through a well-defined monetization model.
Behind every mature business model lie certain essential components; anyone undertaking the process must align with these elements to maximize the likelihood of entrepreneurial success and, in turn, establish a sustainable operating mechanism.
These business elements are not only issues that every stakeholder must understand, but also critical factors in determining whether a business model is viable—and even in winning over investors.
Next, we will examine the key components of a business model and how it establishes its operating mechanism.
The Six Elements of a Business Model
Positioning: For a company to succeed in the marketplace, it must first clearly define its positioning. Positioning determines what the company should do and dictates the types of products and services it should offer to deliver value to customers. It is the outcome of the company’s strategic choices and serves as the starting point for all other integral components of its business model.
Business system: refers to the business processes required for an enterprise to achieve its strategic positioning, the roles played by each partner, and the methods and content of collaboration and transactions among stakeholders. The business system is at the heart of the business model.
Key resource capabilities: These are the critical resources and competencies required to keep business systems running.
Profit model: Refers to how a office generates revenue, allocates costs, and earns profits. It represents the distribution of value among the office’s stakeholders within a given business system, assuming that the ownership of each value chain and the overall value-chain structure have already been established.
Free cash flow structure refers to the cash generated from a company’s operations after deducting cash investments; its discounted value reflects the investment attractiveness of a office operating under that business model. Distinct cash flow structures highlight differences in a company’s positioning, business systems, core resource capabilities, and profit‑generation models, thereby underscoring the unique characteristics of its business model. These factors influence the pace of corporate growth, determine the level of investment value, shape the rate at which that value appreciates, and affect the degree to which the company is favored by capital markets.
Enterprise value—also known as a company’s investment value—is the discounted present value of its expected future free cash flows. It serves as the benchmark for assessing the quality of a company’s business model.
These six elements of the business model interact with and mutually determine one another: the same corporate positioning can be achieved through different operating systems; likewise, the same operating system may feature distinct core resource capabilities, varying revenue models, and differing cash‑flow structures.
For example, among home appliance companies operating in the same business segment, some may excel in manufacturing, others in R&D, and still others in channel development; similarly, with portal websites, some are subscription‑based while others do not charge users directly, and so on.
In the components of a business model, even a single differing element signifies a distinct business model.
A business model that delivers value to all of a company’s stakeholders emerges only through entrepreneurs’ rigorous refinement, experimentation, adjustment, and execution across six key dimensions. By fine-tuning these six elements at the right juncture, offices can reconfigure their business models and reignite vitality—particularly when they reach a developmental bottleneck.
The Significance of Establishing a Business Model
A business model is the underlying logic and foundational framework that enables an enterprise to operate. If you embark on running a business without first clarifying its business model, you are essentially building on sand—without a solid foundation or sustainable source of support. A well‑crafted business model allows a company to operate in a more systematic, rational, and targeted manner.
It is the cornerstone of a company—the very essence of its intrinsic value. If a business fails to define its own business model and continues to rely on external capital infusions to stay afloat, it is essentially still dependent on others and has yet to develop the self-sustaining capabilities needed for long-term survival. In today’s fiercely competitive marketplace, such a model leaves no room for growth, let alone sustained profitability.
Therefore, the business model is the fundamental prerequisite for a company’s healthy development and its highest‑level competitive strategy. It is indispensable for any enterprise seeking long‑term growth.
Who needs a business model, and who are its target customers?
Every individual and every startup needs a business model. Whether it’s how an individual can leverage their unique value to earn rewards, or how a company can deliver value to customers and sustain profitability, all of this hinges on a clear, well‑structured business model as its foundation. Only then can resource allocation, talent management, and profit redistribution be aligned with strategic objectives and executed effectively.
The market is constantly evolving, yet our thinking is limited. Therefore, we will highlight just three scenarios—common occurrences in both our daily lives and professional work—that all require the development of a distinct business model.
1. Small and medium-sized entrepreneurs—just starting out, they don’t even have an awareness of what a business model is.
The day-to-day operations of a startup differ from those of a mature company. A startup’s primary focus should be exploration, not execution. When uncertainty still reigns, relentless emphasis on execution can lead to increasingly misguided progress—burning through capital and, after using execution to validate flawed assumptions, bringing the brief entrepreneurial journey to an abrupt end.
Especially in the early stages, when companies lack capital, talent, and resources, those with a distinctive business model are more likely to attract investment and secure access to resources.
Therefore, in the early stages, what startups should devote most of their time to exploring is none other than their business model. Only by clearly defining their business model—understanding precisely what they aim to do, why they’re doing it, and how they’ll execute—can they minimize the risk of reckless cash burn and reduce trial-and-error costs.
2. Mature enterprises—fail to clearly define their existing business model
Mature enterprises, regardless of their size or stage of development, have already established well‑established business operations and stable revenue streams.
In other words, the business model already exists in practice, but the company has not yet recognized it. Such enterprises need to apply professional business‑model frameworks to systematically articulate their own model, transitioning from previously vague, trial‑and‑error operations to more scientific, rational, purposeful, structured, and well‑planned business practices.
2. Transforming Enterprises — Their previous business models are no longer suited to the current stage of development.
In the digital age, traditional enterprises—under pressure from internet‑based companies and amid rapid market shifts, technological advances, evolving consumer habits, and the emergence of cross‑industry competitors—are seeing their long‑standing business models threatened with disruption and obsolescence. They urgently need to rethink their approaches and explore new business models. Yet many entrepreneurs today either fail to recognize this crisis or do not accord it sufficient attention, as competition in the modern era has evolved from product‑ and brand‑level rivalry to a battle over business models.
In short, today’s successful business models enjoy numerous favorable conditions; they radiate an aura of promise and vitality, naturally attracting capital, top talent, and enthusiastic customer support.
Moreover, a business model is neither static nor a one‑time, set‑in‑stone solution; every business model is inherently phased. In many cases, it is not conceived all at once but rather refined, evolved, iterated, fine‑tuned, and gradually matured throughout the process.
Otherwise, no matter how sound a business model may be, if it remains unchanged over the long term, it will inevitably lose its competitive edge. Once a company reaches a certain scale, the factors that constrain its growth extend beyond talent, technology, management, and capital; most critically, it is the choice of business model itself.
Among all forms of innovation, business model innovation stands as the most fundamental type for enterprises. Without a robust business model, other innovations—whether in management or technology—will lack the foundation for sustainable growth and profitability.
Taxation
Be mindful of the six major tax risks lurking in intercompany balances; failure to reconcile them promptly could make you a prime target for tax audits.
Tax Risks of Concealing Income
In practice, many enterprises, in order to conceal or defer revenue, record incoming funds under the “Unearned Revenue” or “Other Payables” accounts.
Case: Company L is a trading company and an affiliated entity of Company C. On November 20, 2021, Company L entered into a credit sales contract with Company C, stipulating that goods valued at RMB 1 million (excluding tax) would be shipped on December 1, 2021, with 10% of the purchase price payable upon signing the contract and the remaining balance due by December 31, 2021. Due to Company C’s late payment of the final installment, Company L neither issued an invoice nor reported this revenue in the relevant accounting period. On January 31, 2022, Company L received RMB 1.03 million from Company C, subsequently issued a special VAT invoice, and reported this income in the current period.
Analysis: Recognizing revenue and recording taxes for “unearned revenue” requires assessing the specific circumstances of the underlying economic transaction and the relevant timing.
1. General Industry Overview:
When an enterprise receives advance payments, it is not required to pay value-added tax or income tax; however, it must still carefully determine the timing of recognizing such amounts as revenue. For example, manufacturing and sales enterprises typically recognize revenue upon shipment, while service providers should recognize revenue when the service is rendered.
According to Article 19, Paragraph 1 of the Provisional Regulations of the People’s Republic of China on Value-Added Tax: “The time when the tax liability arises for the sale of goods or taxable services shall be the day on which the sales proceeds are received or the evidence for collecting such proceeds is obtained; if an invoice is issued first, the tax liability arises on the date the invoice is issued. In cases where goods are sold on credit or through installment payments, the tax liability arises on the date specified in the written contract for payment.” Accordingly, for Company L, the tax liability for this 10% advance receipt does not arise on November 31, 2021; rather, the tax liability should be recognized as of December 31, 2021, and the total revenue of RMB 1 million must be reported in January 2022 in accordance with the relevant regulations.
2. Special Industry Conditions:
(1) Construction and leasing enterprises that receive advance payments must recognize their tax liability and remit value-added tax in the month the payments are received. Only construction enterprises are required to make provisional VAT payments on advance receipts received from locations outside their principal place of business.
(2) When real estate enterprises sell unfinished development projects on a pre-sale basis, no tax liability arises upon receipt of advance payments; however, value-added tax must be withheld at a preliminary rate of 3%, and corporate income tax is calculated and paid based on the estimated gross profit margin.
Based on practical experience, other payables are also a common account used to conceal income, primarily manifested in:
1. There are irregularities in the sub‑accounts under “Other Payables,” such as sub‑accounts that still pertain to customer accounting or are labeled with special designations like “Temporary Loans.” These practices only serve to obscure the true nature of the accounts and increase audit risks.
2. There are irregularities in the primary supporting documents: for instance, private loans should be substantiated by a loan agreement, accounting vouchers, and interest receipts. During the production process in the workshop, a portion of scrap and offcuts is sold each month; however, when such income is concealed, these records are often inadequately prepared and cannot withstand an IRS audit.
Tax Risks Associated with Deemed Dividends to Shareholders
Private‑sector shareholders are predominantly individuals. If dividends were subject to individual income tax, many companies would seek to avoid such taxation by employing various workarounds to siphon off funds, which in accounting typically appear under the “Prepayments” and “Other Receivables” accounts.
In practice, the accounts‑payable‑in‑advance account is often manipulated by fabricating a fictitious purchase‑sale agreement with an affiliated company, channeling substantial advance payments through the corporate account. When no subsequent transactions occur over an extended period, these advances are siphoned directly to personal accounts via the affiliated entity, effectively enabling cash to be diverted from the company. Such arrangements are readily detectable upon closer scrutiny or targeted inquiries.
Case: In January 2020, Wu Xiaoming, a natural-person shareholder of Company L, borrowed RMB 2 million from the company. The accounting records classified this amount as “other receivables.” To date, the shareholder has not repaid the loan, and the funds have not been used for the company’s day-to-day operations or production activities.
Analysis: According to the “Notice of the Ministry of Finance and the State Administration of Taxation on Standardizing the Collection and Administration of Individual Income Tax for Individual Investors” (Cai Shui [2003] No. 158), during a tax year, if an individual investor borrows funds from his or her invested enterprise (excluding sole proprietorships and partnerships) and, upon the conclusion of that tax year, neither repays the loan nor uses it for the enterprise’s production or business operations, the outstanding loan shall be treated as a dividend distribution by the enterprise to the individual investor and subject to individual income tax under the “Interest, Dividends, and Bonus Income” category. Once one year has elapsed from the date of the loan, and shareholder Wu Xiaoming still has not repaid the loan, the unpaid amount will be deemed a dividend distribution, triggering a supplementary individual income tax payment at a rate of 20%. It is recommended that enterprises, when conducting year-end reconciliation of intercompany balances, promptly identify any shareholder loans and remind shareholders to repay such amounts by year-end. Should shareholders require additional funding in the future, they should obtain new loans only after settling existing liabilities, thereby mitigating tax risks.
Tax Risks Associated with Loan Interest
In practice, interest on loans between enterprises and between enterprises and individuals is typically not accrued. Even when interest is charged, it can be difficult to obtain an interest‑bearing invoice from the borrower. Accordingly, enterprises should pay particular attention to internal and external borrowings recorded under “Other Payables” and “Other Receivables.”
Tax Risks Associated with the Overstatement of Costs and Expenses
Accounting for costs and expenses should be supported by invoices and bank remittance advices reflecting the agreed‑upon payments. In practice, some enterprises resort to purchasing falsely issued VAT invoices; since the funds cannot be repatriated, they remain recorded as intercompany balances. After a certain period, these intercompany amounts are either written off in cash or converted into payments made on behalf of shareholders, with the corresponding sub‑accounts reclassified under shareholders’ personal accounts.
Although these practices have become more covert, with the rollout of the State’s Fourth Phase of the Golden Tax System, enforcement against the fraudulent issuance of invoices is steadily intensifying. Tax authorities will closely scrutinize the proportional relationships among inventory, intercompany transactions, and revenue; any discrepancies—such as inconsistencies between the three flows of invoices—will immediately expose fraudulent invoicing, making such entities prime targets for tax audits.
Tax Risks of Forced Revenue Recognition
Case: Company L has an accounts payable balance of RMB 3 million that has been outstanding for more than three years. This amount represents a debt owed by Company L to Company C in 2018. In January 2021, Company C was placed into bankruptcy liquidation due to financial difficulties, yet Company L has not taken any action to address this liability as of today.
Analysis: In accordance with Article 6 of the Enterprise Income Tax Law of the People’s Republic of China and Article 25 of the Implementing Regulations of the Enterprise Income Tax Law of the People’s Republic of China, any income derived by an enterprise from the transfer of property—including various types of assets, equity interests, and receivables—along with income from debt restructuring, donated income, and income arising from accounts payable that cannot be settled, shall, regardless of whether such income is received in monetary or non‑monetary form, be recognized and taxed as enterprise income tax in the year in which it is realized, unless otherwise provided. This constitutes a specific category of “other income” as defined under tax law.
Accordingly, Company L should regularly reconcile its accounts payable and other payables, recognize the relevant revenue in 2021, and file its corporate income tax for that year, thereby avoiding the need to retroactively recognize revenue during an audit and incur additional penalties and late‑payment interest.
Arbitrarily offsetting inbound and outbound tax risks
Case: At Company L, the accounts receivable turnover period ranges from 90 to 120 days, while the accounts payable turnover period is relatively short, resulting in insufficient funds in the company’s bank account. Moreover, procurement transactions are predominantly settled in cash. Prior to 2020, the finance director advanced funds to pay suppliers; after 2020, shareholders assumed responsibility for settling supplier payments. However, due to a verbal agreement between the finance director and the shareholder—under which the shareholder would reimburse the finance director for advances made before 2020—the accounting records did not include contracts or other original supporting documents, leading to an unrecorded offset of intercompany balances.
Analysis: Due to the diverse and complex reasons underlying intercompany balances, many such accounts often remain outstanding for extended periods. Without obtaining the original supporting documentation, it is inappropriate to arbitrarily adjust or reclassify these balances across different entities. Failure to handle such matters properly may cause underlying issues to surface rapidly, triggering significant tax risks. Therefore, Company L should refrain from making any account adjustments without first obtaining the requisite original vouchers.
Conclusion
It is advisable to make sound judgments at the outset of accounting, prepare supporting documentation (such as invoices, contracts, and bank statements), standardize accounting practices, and anticipate future absorption and resolution. At the end of each fiscal year, a thorough analysis and verification of intercompany balances should be conducted to ensure that tax‑related risks associated with these accounts are minimized.
Accounts receivable and payable entail a wide range of tax‑related risks; even minor errors can result in unnecessary losses for the enterprise. Companies should establish a robust internal control system, conduct regular reconciliations and audits of their accounts receivable and payable, promptly address long‑outstanding balances as well as improperly recorded invoices and supporting documents, and make timely tax adjustments to ensure that account balances do not accumulate abnormally and that risks do not pile up.
Litigation & Arbitration
How should one choose between litigation and arbitration?
The method for resolving disputes is one of the standard and essential provisions in a contract. I am sure you are familiar with the following statement:
1. In the event of any dispute arising out of the performance of this Contract, the parties shall first endeavor to resolve it through amicable consultation; if no agreement is reached, either party may bring suit before the People’s Court of XX.
2. In the event of any dispute arising out of the performance of this Contract, the parties shall first endeavor to resolve it through amicable consultation; if no agreement is reached, either party may submit the dispute to the XX Arbitration Commission for arbitration.
Among them, both litigation and arbitration are public‑law remedies available after a dispute arises. So what are the differences between the two? And how should we stipulate the dispute‑resolution mechanism in a contract? This issue provides a preliminary overview of these topics.
A Basic Comparison Between Litigation and Arbitration
Comparison Item Litigation Arbitration
Adjudicating Body People’s Court Arbitration Commission
Scope of Acceptance: Civil Cases
Administrative case
Criminal Cases; Contract and Other Property Rights Disputes Between Citizens, Legal Persons, and Other Organizations
Adjudicating Officer Court-Designated
The handling judge The parties may
Designated arbitrator
Applicable Principles: Whether or not there is a written agreement,
Both are applicable Must have
Written arbitration agreement
Principles of Adjudication: Two-instance final adjudication; one-instance finality.
In addition to the comparison items listed in the table above, we should also take note of the following:
1. In principle, regardless of whether the parties have agreed that disputes shall be subject to the jurisdiction of the courts, either party may bring an action before the people’s courts with respect to the relevant dispute.
2. A valid arbitration agreement or arbitration clause is a prerequisite for the Arbitration Commission to accept a dispute for adjudication. If the parties have not entered into an arbitration agreement or arbitration clause, the Arbitration Commission shall refuse to accept any application for arbitration filed by one party.
3. Where the parties have entered into a valid written arbitration agreement, any party that brings an action before a people’s court shall not be accepted by such court (unless the arbitration agreement is invalid). Accordingly, a valid arbitration agreement or clause may preclude the jurisdiction of the people’s courts.
Litigation
1. In contract disputes, if the parties have not agreed on the competent court, jurisdiction shall lie with the people’s court at the defendant’s domicile or at the place of performance of the contract.
2. The parties to the contract may agree in the contract to resolve disputes through litigation and may designate a specific court with jurisdiction. In principle, when a dispute arises, the agreement of the parties shall prevail; however, this does not apply where the agreed-upon provisions contravene exclusive jurisdiction or hierarchical jurisdiction.
Common agreed‑upon venues include: the domicile of one party to the contract (the location of Party A or Party B), the place where the contract was executed, the place of performance of the contract, the location of the subject matter, the plaintiff’s domicile, the defendant’s domicile, and other locations that have a genuine connection to the dispute.
If the parties have agreed that the court at the place of contract signing shall have jurisdiction, the place of signing must be clearly specified in the contract.
3. If a party is dissatisfied with the first-instance judgment of the people’s court, they have the right to file an appeal with the next higher people’s court within fifteen days from the date of service of the judgment.
Arbitration
1. Where the parties to a contract agree to resolve disputes by arbitration, they shall enter into a valid written arbitration agreement or arbitration clause, clearly stating their intention to submit to arbitration, the subject matter of the arbitration, and the designated arbitral institution.
2. In principle, the arbitral award rendered by the arbitration commission is final and binding. That is, once the arbitral tribunal has adjudicated the dispute submitted to it, its award shall immediately take legal effect. Following the issuance of the award, if either party subsequently submits the same dispute to arbitration again or brings an action before a people’s court, the arbitration commission or the people’s court shall refuse to accept the case.
3. A party may apply to the intermediate people’s court at the seat of the arbitration commission for the annulment of the arbitral award only if it can furnish evidence demonstrating the existence of a statutory ground.
Precautions:
1. In the event of any dispute arising out of the performance of this contract, the parties shall first endeavor to resolve it through amicable consultation.
If the parties reach a consensus, they shall execute a corresponding written document to formalize the agreed-upon terms. For example: a repayment agreement, a guarantee agreement, an amendment agreement, or a modification agreement, among others.
2. With respect to the choice of court with jurisdiction over disputes, it is advisable to designate the court at our place of business whenever possible. If the other party does not agree, the parties may instead agree to submit to the court at the plaintiff’s place of business. Furthermore, as a general rule, we do not recommend opting for arbitration in a different jurisdiction.
Although the law stipulates that the selection of an arbitration commission is not restricted by geographic location, and the parties to a contract may agree to conduct arbitration in a different jurisdiction, considering disparities in regional economic development, differences in the judicial environment, the convenience and efficiency of personnel deployment, the timeliness and effectiveness of communication with the arbitral tribunal, as well as various costs associated with dispute resolution, it is generally not advisable to opt for out-of‑jurisdiction arbitration.
Article 6 of the Arbitration Law:
The arbitration panel shall be selected by agreement of the parties.
Arbitration does not apply hierarchical or territorial jurisdiction.
3. It is impermissible to adopt a one-size-fits-all approach by simply copying and pasting the jurisdiction clause from one contract into another for the sake of convenience and speed. In past contract reviews, there have even been instances where a company headquartered in Zhengzhou and another headquartered in Beijing agreed that any disputes would be subject to the jurisdiction of the People’s Court in Shanghai. When using contract templates downloaded from the internet or adapting others’ contracts, in addition to carefully scrutinizing the core rights and obligations of all parties, it is equally important to ensure that the dispute‑resolution provisions are lawful and reasonable.
4. One should not harbor any侥幸 (hope of getting away with it); in order to retain the flexibility to choose any dispute-resolution method at a later date, it is inappropriate to stipulate in the same contract that “either arbitration or litigation” may be selected.
In the same contract, if it provides for “either arbitration or litigation,” meaning that any dispute arising from the performance of this contract may be brought before a people’s court or submitted to an arbitration commission for resolution, such a provision shall be deemed invalid unless there are special circumstances.
Article 7 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Arbitration Law:
If the parties have agreed that disputes may be submitted to an arbitration institution or brought before a people’s court, the arbitration agreement shall be deemed invalid.
However, this shall not apply where one party has submitted an application for arbitration to the arbitral institution and the other party has failed to raise an objection within the prescribed time limit.

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