China's recent policy moves in pandemic management, property and geopolitics signal a greater commitment to restore economic activity, which could lift market performance after a 20-month bear market.
- Even though rising COVID cases have caused further decline in mobility and public discontent in November, we continue to see further re-opening by the spring. External cyclical risks are likely to weigh on exports, but the acute domestics demand weakness from consumption and property in 2022 could see meaningful relief in 2023 and offset the potential weakening in external demand..
- China’s equities, currency and bonds have all seen notable rebound since the start of November. But these only reversed a small portion of the prior selloff. Valuations remain in distressed territory, while earnings revisions are likely to turn positive along with recovery in 2023.
- Longer term, however, there are many doubts about China’s prospects. Despite the commitment to treating economic development as top priority, structural challenges, compounded with technology decoupling with the west, suggest that China’s potential GDP growth is set to slow.
- But we believe there are still opportunities. While it becomes more challenging for China to surpass the US in size, China still is an economy of over $18 trillion, with the second largest consumer and capital markets. It will have strong global influences under every scenario. As China strives to reach technological security, there could be productivity benefits, such as automation. Investors simply can’t ignore Chinese markets and Chinese assets.
- To capture potential new investment opportunities, investors may follow China’s tech policies and R&D spend and those sectors targeted for domestic substitution and tech breakthroughs, while continuing to pursue potential opportunities from the ongoing structural changes.