Research Note | China pivots to growth

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    China Reopening
    China Reopening
    19 December 2022

    • China‚Äôs relaxation of COVID restrictions can help address its growth slowdown
    • While markets have rallied, investors should not expect an immediate turnaround
    • A full reopening of the economy is unlikely till the end of 1Q 2023

    In a major policy shift, China has scaled back its rigid COVID-19 rules following widespread protests against the country’s zero-tolerance approach.

    The sweeping changes include home quarantine for mild cases, shorter and more targeted lockdowns, reduced mass testing frequency, and lifting of domestic travel restrictions. For instance, Beijing and Shanghai residents can now take public transport without negative COVID test results.

    These new measures, alongside President Xi Jinping’s acknowledgment that the Omicron variant is less deadly, suggest China’s zero-COVID policy may be coming to an end after three long years.


    Shift to growth

    China’s much-awaited policy pivot comes amid a challenging year for the Chinese economy.

    Weighed down by persistent COVID-19 curbs and a property market crisis, gross domestic product (GDP) expanded just 3.0 per cent in the first three quarters of 2022, well below the official target of 5.5 per cent1. Economists now estimate full-year growth to reach 3.3 per cent2, which would mark one of the weakest levels in decades.

    China’s economic woes are underscored by its worst monthly trade data in more than two years. Rising global interest rates sapped demand for Chinese goods, causing exports to shrink by 8.7 per cent in November from a year earlier.

    Over the same time period, November imports fell 10.6 per cent amid waning domestic demand and manufacturing disruptions. Repeated lockdowns have led to a stark reversal from the 0.7 per cent growth registered in October.

    Against this backdrop, the Chinese government is now prioritising the economy over its zero-COVID policy. At a recent meeting, the Politburo, the Communist Party’s top decision-making body, called for a turnaround in the economy next year and said it will seek to significantly boost market confidence.


    Chinese stocks rally

    China’s pro-growth stance has buoyed market sentiment and sent Chinese stocks rallying.

    Hong Kong’s Hang Seng Index surged 27 per cent in November while the CSI 300 Index of mainland Chinese shares jumped nearly 10 per cent.

    According to a Bloomberg News survey, about 60 percent of fund managers now recommend buying Chinese stocks on reopening hopes, moderating geopolitical tensions, and attractive valuations3. At 11 times forward earnings, the MSCI China Index is trading below its average level for the past five years, Bloomberg data shows.


    Risks remain

    However, China’s road to full reopening may be bumpy in the near term. As controls are lifted, there will inevitably be a surge in COVID cases.

    Such an outbreak could see about 60 per cent of people get infected, according to Feng Zijian, former deputy director of China’s Center for Disease Control and Prevention. This could have deadly implications, especially since the vaccination rates among China’s elderly are still relatively low4.

    Healthcare risks aside, a full-blown outbreak could also hinder China’s economic recovery. Chinese people, wary of catching the virus, may decide to stay home instead of shopping or dining out. More people falling sick could result in labor shortages and supply chain disruptions.


    A brighter outlook for 2023?

    Still, China’s economic outlook looks favorable in the year ahead. The economy could grow more than 5 per cent in 2023 should COVID cases stabilise, and the government implement more policies to bolster confidence and consumption, says Wang Yiming, an adviser to the People’s Bank of China (PBOC)5.

    On their end, the Politburo has indicated that more stimulus measures could be introduced next year, and that China will “push for overall improvement of the economy”.

    The guiding framework for this plan is likely to adhere to President Xi’s development objectives for the next decade – technological innovation, economic modernization, and continued opening up to the world (see UOBAM Investment Perspective, 3 November 2022).

    In particular, China is looking to enter a new phase of its technology development that will focus on "core technology" industries such as electric vehicles (EV) and artificial intelligence (AI). These industries could offer attractive opportunities as China steps up growth.


    A revival for Chinese stocks

    In our view, China’s ongoing shift in its COVID-management strategy and increased stimulus to stabilise its domestic property sector is unlikely to see an immediate impact due to constraints on the political and logistical fronts. Risks include China’s property slowdown and the impact on its economy, the uncertainty around its path out from zero-COVID, housing and external demand, and worsening geopolitical tensions with US and Taiwan.

    Our expectation is that a full reopening of the economy would only come in the first quarter of 2023, barring unknowns such as a significant surge in infections.

    Overall, we are optimistic about Chinese equities heading into 2023. We recommend positioning for China’s reopening as the country learns to live with COVID-19.

    With much of the world already opened up, the lifting of China’s zero-COVID policy will remove business uncertainties, boost consumer spending, and allow Chinese people to travel abroad again after 3 years of isolation. Tourism-related industry and consumer stocks will be given a further boost, not only in China, but the whole Asia region.

    Many investors have been pessimistic about Chinese stocks for the past two years, but it is time to consider China again as fund flows reverse.

    1Li Keqiang, “Report on the work of the government”, March 2022

    2OECD, “Economic outlook note”, November 2022

    3Bloomberg, “China stocks are a buy on reopening, top money managers say”, December 2022

    4Financial Times, “China’s elderly vaccine refuseniks pose obstacle for Xi Jinping”, December 2022

    5Hong Kong Institute for Monetary and Financial Research, “The Twelfth Annual International Conference on the Chinese Economy”, November 2022

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