China’s reopening is a major positive for 2023
China’s reopening after three years of Covid-19 lockdowns and isolation from the rest of the world will be one of the most important developments for investors this year.
Exhibit 1: Annual Growth, China and US
Source: Bloomberg, Bank of Singapore
The end of zero-Covid policies is set to cause China’s growth to rebound strongly in 2023. With the removal of mass testing, quarantines and travel restrictions, the world's second largest economy is likely to see a significantly faster expansion of consumption and investment compared to last year.
Exhibit 2: Inflation, China
Source: Bloomberg, Bank of Singapore
We have thus upgraded our GDP forecasts and now anticipate growth of 5.2% in 2023. We think China will be the only major economy this year to experience faster growth than last year’s; China’s GDP only expanded by 3% in 2022 as Exhibit 1 shows. Moreover, inflation remains tame after last year’s lockdowns as Exhibit 2 shows for both consumer price index (CPI) and producer price index (PPI) inflation. The People’s Bank of China is therefore likely to be the only major central bank that will not increase interest rates this year.
Investment Strategy: China Tailwinds
China’s policymakers have turned their focus firmly to economic growth after addressing leadership transition and regulatory issues in 2022.
By ripping off the band aid, the activity and mobility data in China has rebounded more sharply versus other economies like India and South Korea that have eased Covid-19 curbs last year.
In our view, improved levels of consumption could help propel the economy in the near-term. At this juncture, the level of savings in China is still relatively high, led in part by cautious spending during the pandemic, but also a function of slower momentum in property purchases. This then gives consumers the dry powder to act on the increase in near-term spending confidence.
Despite the scope for intermittent consolidation after a sharp rally, the combination of still undemanding valuations and positive fundamental undercurrents is a constructive set-up for China and Hong Kong equities in 2023. In particular, we favour sectors such as consumer, technology, renewables, green infrastructure and electric vehicles.
Commodities and Currencies: Riding China’s boost
Exhibit 3: Pickup in outbound travel from China should benefit Southeast Asian currencies like THB and MYR
Source: Bloomberg, Bank of Singapore
China’s reopening impact is likely to be most apparent in services – primarily tourism – and in commodities. Currencies in Asia are likely to be beneficiaries from their links to stronger Chinese growth. Moreover, the prospect of better-than-expected growth would not only benefit capital inflows into China but also into the region given its proximity to China.
As China’s reopening gains traction, Asian currencies like the KRW, THB and MYR and commodity currencies like the AUD and BRL stand to benefit more than the CNY. The likely pickup in outbound travel should benefit Southeast Asian countries like Thailand and Malaysia, which were major destinations for Chinese tourists pre-pandemic.
Particularly good news for commodity currencies like the AUD and BRL has been the property easing measures. Corporate loan growth has picked up after policymakers urged commercial banks to accelerate loan extensions (including developer financing). These measures will help stabilise the very weak residential property market, a sector which, by consuming 20% of Chinese-made steel, has helped lift iron ore prices. New home sales look set to recover further but long-term issues in the property sector will continue to limit the pace of recovery.
The CNY, too, has benefitted from the faster-than-expected reopening, but further CNY strength is likely to be moderate. From a currency perspective, stronger China growth will result in higher imports. This is set to narrow China’s trade surplus given the backdrop of soft global goods demand. Outbound travel is likely to recover swiftly – to the detriment of the CNY – given faster border reopening. A pickup in outward travel also reopens channels for unaccounted capital outflows which could widen the errors and omissions account.
Exhibit 4: Oil has scope to play catch-up in China growth re-pricing
Source: Bloomberg, Bank of Singapore.
Oil, which lagged industrial metals in pricing good news on China’s reopening, has scope to play catch-up. The oil market is set to gradually tighten on the back of a reopening-led demand recovery in China.
Equities and Fixed Income: Journeys from the East
In our view, retail (online and offline), tourism and hospitality plays will directly benefit from the pent-up demand arising from China’s sudden reopening. However, the economic momentum arising from reopening will have ripple effects globally. This is especially so across selected commodities proxies, European luxury brands and the Industrials complex given supply chain linkages.
In addition to the direct and indirect beneficiaries from increased consumption and mobility, we also see China’s reopening being a key anchor of market sentiment across the EM bond universe. We recommend select corporate bonds issued by Asian and Latin American companies which could benefit through increased commodity and tourism demand. We also like sovereign bonds of major commodity exporters in Africa, the Middle East and Latin America, as well as regional trading partners in Asia. However, a likely risk from the reopening to watch is that of resurgent commodity demand re-igniting inflation globally (or stagflation in developed markets), following Russia’s recent supply restrictions in the oil market.Disclaimer applicable to recommendation
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