When China abandoned it's zero-COVID policy in late 2022, the economy finished the year up 3% in GDP terms. The subsequent first quarter since liberating the population from lockdown has unleashed some very optimistic GDP predictions from the investment manager community inside RFPnetworks. Meaningfully above the set target of 5% for 2023. Sentiment on Chinese markets, is not off the charts. Here's why.
If the behaviour of Europe or the U.S. is anything to go by, following the relaxation of travel restrictions the Chinese middle classes will be on planes. The most popular destinations being Bangkok, Singapore, Manila, Kuala Lumpur, Chiang Mai and Bali. And they are, as everyone expected. Year on year comparisons of leisure and tourism statistics point to huge spikes in movement. The Chinese consumer has accumulated high levels of deposits and loans have been falling. From a wealth perspective, they are willing and able to spend. The recovery is looking more likely to be consumer-led as opposed to fiscal-led.
The Governments role in reaching 5% GDP growth may be very limited. The real estate market is hobbling around it's lows, and the expectation is that much of the property held for investment purposes may soon come to market. Beyond policies aimed at widening home provision, it it is doubtful that fiscal stimulus will go here. If anything the focus will be on infrastructure spending, and urgent measures to position China's capabilities in semiconductors and renewable energy.
The summary above of the re-opening repercussions is not extensive. Institutional Investors can research these topics much deeper inside RFPnetworks. In general managers are excited about the A share market. And equally confident about their ability to generate substantial alpha by investing beyond the usual names.
In addition, many investment managers argue that China's reopening has given an impulse to the relative value of Emerging versus Developed markets (China accounts for ~30% of the MSCI Emerging Market Index), given the spillover affects of Chinese tourism into many Asian countries. Emerging Market Debt managers also see positive signs for the tourist driven local currencies such as the Thai Baht. And many High Yield Managers see Asian corporates outperforming Europe and the U.S.
The Chinese market was relatively cheap back in mid 2022. But it has already rallied significantly since re-opening. So there is a valuation risk. Corporate earnings will need to drive the next stage of this sharp rebound.
Secondly, the government many be sensitive to overshooting it's target. Policy can work both ways, and impact household incomes as necessary in different ways. 2023 may be a year of two halves in Chinese markets. The first half characterised by a v-shape recovery. The second half driven by a more interventionist Government aiming to deliver no more and no less than what was promised. 5%.
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