Opportunities in China’s Return to the World
January 20, 2023
Jason Gibbons, Investment Director, Asia
A long-awaited U-turn in China’s zero Covid policy saw the Chinese re-enter global markets after a 3-year self-imposed hiatus. While aided by public unrest, China’s fall in annual GDP (3% for 2022) and rising unemployment are more likely the culprits. The re-opening is uneven – major cities have seen peak infections in late December and rippling through to rural areas in Q1. The re-opening, like other major economies before them, will be a driving positive force in growth in China/Asia. The opportunity set is different as global growth slows, benefiting China and the consumer sectors.
Lockstep in re-opening, Chinese regulators have made additional changes in support of economic growth. Those have been targeted at easing limits on borrowing in the flailing property sector, a large injection of liquidity in November 2022, and a Davos platform calling for foreign capital investments. Their move from reactive enforcement in tech, ed-tech, and ride, has moved toward proactive one as ‘golden share’ stakes and board seats are taken. While unlikely to derail a recovery in TMT sectors, we remain bearish on SOE financial institutions. These have been known, time and time again, as a mop in the latest sector fallout.
The growth opportunity set is limited, as pent-up consumer spending and travel are the likely primary beneficiaries. Supply chains have largely recovered back to pre-pandemic levels in 2022, while demand for Chinese goods by western countries has dropped 30% year on year. Regional travel and casino sectors, especially Macau, will be the primary beneficiaries of Chinese ‘revenge spending’.
While China’s equity market has rebounded back to June 2022, they remain 45% below June 2021. Daily investment flows going into Mainland China have increased by 50% YoY in 2023, reducing the premium between on and offshore markets. Valuations remain very attractive, with PE ratios for onshore and offshore China indexes, at 15 & 11.8 respectively. Long-term CAPEX and industrial production may be a longer-term headwind, but we remain positive on China through mobility and pent-up consumer demand.
Jack Farrar, Junior Associate
On the 8th of January, we saw China’s borders open for the first time in nearly three years. This comes after Beijing started to change its stance on the COVID-19 pandemic and initiate the removal of some Zero-COVID policies. However, while this eased the concerns of some of the domestic population, this caused more concern in neighboring countries.
After it was announced that Chinese tourists would be free to travel again, a few countries quickly imposed new rules and regulations. We saw visa suspensions and COVID-19 testing requirements targeting Chinese tourists emerge from countries that felt the spike in infections after the zero-COVID policy removals were a cause for concern. Beijing retaliated to actions taken by suspending short-term visas for South Korean and Japanese travelers. Meanwhile, Chinese foreign minister Qin Gang praised Malaysia and Thailand for welcoming Chinese travelers. After reopening it has been recorded by the National Immigration Administration that there was an average of 501,000 exits and entries per day. And while the reopening of Chinese borders is positive news for Chinese citizens, it was positive for more than just Chinese markets.
Over the weekend of the announcement, we saw markets across Asia rise, with the biggest jumps seen in the Hang Seng Index and the CSI 300, rising 2% and 1.5% respectively. But this increase was not just isolated to that weekend with Asian markets outperforming most other markets year-to-date (as of 18th Jan). And given Asia makes up over 70% of Emerging Markets, this means they are outperforming Developed Markets year-to-date as well. This outperformance will likely continue throughout the first half of the year as China finally joins the rest of the world once again.
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The Hang Seng Index is a free-float-adjusted market capitalization-weighted stock market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 50 constituent companies represent about 58% of the capitalization of the Hong Kong Stock Exchange.
The CSI 300 is a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. It has two sub-indexes: the CSI 100 Index and the CSI 200 Index. Over the years, it has been deemed the Chinese