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China’s equity markets may differentiate themselves from global equity markets in the coming years, as the world’s second largest economy eases fiscal and monetary policy and as its stock market could enter a recovery phase on the back of robust economic growth. But nothing is certain, as ongoing COVID lockdowns raise questions over the country’s economic growth in 2023.
Some Wall Street investment banks are turning bullish on China. As developed economies slow down markedly following interest rate rises, Chinese economic growth is starting to recover. Consumer spending is improving and over the longer term, the rise of China’s consumer and technology sectors, along with an official push to globalise its financial markets, are continuing to transform China’s economy.
Value in China
Since China began reforming its economy in 1978, GDP growth has averaged more than 9% a year while more than 800 million people have lifted themselves out of poverty, according to the World Bank. There have also been significant improvements in access to health, education and other services over the same period.1 For 2022, expected economic growth of 3.2% easily outweighs expected growth in the US economy of just 1.6%2 and 2.4% for advanced economies generally, according to IMF forecasts.
In more recent times, the Chinese government has responded to headwinds coming from the property sector slowdown by stepping up macroeconomic policy easing, boosting public infrastructure spending, offering tax rebates, and relaxing local purchase restrictions in the property sector. Interest rates, too, are being eased while western nations tighten monetary policy.
However, according to the World Bank, ongoing structural reforms are needed to reinvigorate the shift to more balanced high-quality growth.3 And in the IMF’s view, any regaining of momentum in China’s economic growth will depend on these reforms being successfully implemented.
Any easing in lockdowns could lift shares
While the Chinese economy has faced strict lockdowns to combat the spread of COVID this year, there are signs these lockdowns could ease next year. The Chinese government recently tweaked its ‘COVID-zero’ policy; under the new guidelines, officials must not ‘arbitrarily’ lock down cities.
However, Goldman Sachs have pointed to a number of conditions they believe will need be met before Chinese authorities are likely to relax COVID restrictions, “[including] a significantly higher vaccination rate for the elderly, broader accessibility to affordable and effective COVID pills, improvements in communication around COVID and the availability of sufficient medical resources to combat new waves of infection.” 4 They go on to predict that if those conditions are achieved, a reopening could begin in the second quarter of 2023.
Recent political events support this potential timeline for reopening. Positive signs came from China’s 20th National Party Congress last month, which pointed to an eventual reopening of China. The Pfizer-BioNTech COVID vaccination was also recently given approval for expats across the country, which favour the lifting of COVID lockdowns, according to Kinger Lau – Goldman Sachs’ chief China equity strategist in macro research. She predicts that if a full reopening of the country is achieved, this could drive a 20% increase in Chinese stocks as restrictions are lifted, potentially adding US$2.6 trillion in value to the nation’s equity market.
Other Wall Street banks have echoed these sentiments, with Morgan Stanley, Bank of America, and JPMorgan all declaring positive sentiments on Chinese stocks in recent weeks.5
However, nothing is certain. This month’s COVID outbreak, renewed lockdowns, public demonstrations, and some loss of confidence in the government’s COVID-zero policy could delay a China reopening – in which case, says Goldman Sachs Research, Chinese equities could actually fall by 15%.
As COVID cases in China spiral towards record highs, officials have again locked down large parts of the country. There were 27,307 new daily cases recorded on 21 November, which is just short of the April record of 28,973 new daily cases when Shanghai’s outbreak drove a surge in infections. According to Bloomberg, the southern manufacturing hub of Guangzhou remains the epicentre of the current wave, which raises questions on GDP growth over the coming months and – naturally – COVID-zero.6
On top of that, US-China tensions have weighed once again on investor sentiment this year. Foreign investors are asking what President Xi’s plans are for his third term in office. China’s increasing estrangement from the West, exacerbated by the nation’s support for Russia’s Vladimir Putin, underpin uncertainty about what’s ahead politically. China has so far refused to condemn the Russian invasion of Ukraine, and this year declared a ‘no limits’ friendship with Russia, which has added to tensions with the West.7
Retail support for economy
Looking to the longer term, however, China is developing other critical sectors with significant growth potential, including electric vehicles, clean technology, healthcare, and semiconductors. Opportunities in these areas are massive. Singles’ Day, which fell on 11 November, highlights the rising household wealth in the nation. Every year brings more spending on Single’s Day. What started as an ‘Anti-Valentine’s Day’ has transformed into the biggest e-commerce shopping day of the year in China, with sales exceeding US$139 billion (889.4 billion yuan) in 2021.
While this year’s total Singles’ Day sales appear to have only modestly beaten 2021’s results, there are other reasons to be optimistic about longer-term retail growth. Many leading online retailers expect an uptick in sales over the final two months of the year, given events such as Black Friday and Boxing Day Sales.
So, for now, China is worthy of investors’ close attention – but vigilance is needed, especially in the near term. As the world’s second largest economy, with a huge share market which has low correlations to other global markets,8 investors should have China on their radar for its diversification and growth benefits. Attractive valuations, loosening COVID regulations, and the easing cycle of China’s monetary policy area all positives. But caution is also needed on what lies ahead politically and economically.
References:
1. https://www.worldbank.org/en/country/china/overview
2. https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD/CHN
3. https://www.worldbank.org/en/country/china/overview
4. https://www.goldmansachs.com/insights/pages/chinas-reopening-could-drive-stocks-up-20-percent.html
5. https://www.bloomberg.com/news/articles/2022-11-20/wall-street-s-chorus-of-buy-china-calls-is-getting-louder
6. https://www.bloomberg.com/news/articles/2022-11-22/china-covid-cases-near-record-high-in-test-of-easier-approach
7. https://www.scmp.com/news/china/diplomacy/article/3199805/g20-china-endorses-russias-no-nuclear-pledge-ukraine
8. https://blogs.cfainstitute.org/investor/2021/11/02/chinese-and-world-stock-market-co-movements-two-findings/
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