Market Views: What China's policy shifts signal to investors

China’s shift in both Covid-19 and economic policies, including direction laid out in the December Central Economic Work Conference, has set the stage for investors as the country reopens.

By Shusi He | Jan 13, 2023

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China is recovering at a pace that is surpassing investors’ expectations about the reopening since late last year.

The Communist Party of China’s new leadership group, elected at the 20th Party Congress, also in late December held its first Central Economic Work Conference (CEWC), setting the priority for the country’s economic agenda back to growth with friendly fiscal policies and support to private businesses.

Then in January, the Communist Party secretary at the People’s Bank of China Guo Shuqing said that China’s crackdown on fintech operations of 14 internet companies’ financial services business is “basically over”, indicating the crackdown on tech giants is coming to an end.

The world’s second-largest economy now has tailwinds from the dropping of crippling Covid-19 restrictions and supportive measures in the beleaguered property and internet sectors as well.

Investors have cheered: in the A-share market, the Shanghai Composite Index registered a strong year-to-date rally, up 2.8% as of Jan 11. The highest returns came from industrials (+3.6%) and real estate (+3.6%), according to data from Manulife Investment Management.

This week, AsianInvestor asked institutions the most distinguished direction they take note of from China’s latest policy movement.

The following contributions have been edited for clarity and brevity.

Ben Bennett, head of investment strategy and research
Legal & General Investment Management

Ben Bennett
Ben Bennett

Chinese policymakers have altered course on several policies in a growth and market-friendly manner in recent weeks. Alongside dropping Covid restrictions, more subtle changes towards tech regulation and the property market also suggest a shift back towards pre-pandemic policymaking. As a result, we have increased our growth forecasts and brought the timing of the recovery forward.

Though policy volatility, for better or worse, can temper longer-term investor enthusiasm, this turn of events has clearly been positive for equity and credit investors. Outside of Covid policy, there has not been a full reversal, however. Importantly, the focus on keeping property speculation and macro leverage under control remains.

Back to the 2023 outlook, China is now facing the same challenge of reopening an economy that caused US and European inflation to spike in 2022. We don’t think China will suffer the same fate given labour market slack, a lack of massive pandemic fiscal transfers and an unimpeded global manufacturing supply chain. But we also need to humbly admit that very few people expected accelerating inflation in the US and Europe in 2022.

It’s hard to be confident of anything in such unprecedented times. If consensus is right, and Chinese growth accelerates with little inflationary pressure, then the coming year could build on recent equity and credit market gains. But perhaps a hedge against rising inflation and bond yields might be sensible, for example, via an outright reduction in government bond exposure.

Kai Kong Chay, senior portfolio manager, Greater China equities
Manulife Investment Management

Kai Kong Chay
Kai Kong Chay

China set high-level guidelines for economic policy in 2023 and prioritised growth stabilisation, deepening the country’s reforms and opening-up and expanding domestic demand for consumption and investment.

China-Hong Kong’s border reopening drives further economic recovery this year. In light of this, we continue to see opportunities arise in selective investment themes – consumption, technology and advanced manufacturing – for 2023 and ahead.

As economy gradually reopens, we expect both domestic and international tourist traffic to further recover should Covid-19 subside in China, benefiting reopening-related sectors including airlines, catering services, tourism and Macau gaming.

For the property sector, China’s announcement on “three-arrows” not only encompasses an increase in lending to private and small and medium-sized enterprises but also support for debt financing and equity financing, which are positive for property developers and homeowners. In addition, China’s installed capacity of renewable energy has expanded by 8.3% year-on-year as of end of October. We expect more renewable projects to kick off in Q4 2022 and infrastructure investment could lead the cycle of recovery.

On the technology front, China encourages strengthening strategic planning of the video game industry by stressing both its development and need for oversight. Meanwhile, China announced it would expand road tests for autonomous driving vehicles to a nationwide scale. We believe these policies will continue to support the innovation investment themes.

We believe the fiscal and monetary stimulus announced set the stage for economic recovery going into 2023. We remain selective and continue to focus on our key structural investment themes.

William Chow, deputy group CEO
Raffles Family Office

William Chow
William Chow

China is in a stronger position than many major developed economies as it begins a gradual reopening, providing support to its economy.

Conditions are expected to remain fluid, thus we prioritise agility in preparing for potential turning points. Our year-ahead investment ideas therefore reflect themes of diversification, durability, and defensive positioning. In general, we focus on building recession-resistant portfolios, with an emphasis on quality stocks and partial inflation hedges for the second and third quarter.

Asian equities, particularly in China, offer a bright spot due to the country’s gradual reopening and low valuations. The asset class is poised for recovery, driven by receding inflationary pressures, a weaker dollar, and China’s reopening. We see upside potential in domestic consumption and travel-related industries such as airlines, food and beverage, and travel operators.

In terms of fixed income, the repricing of bond yields to the highest in over a decade presents opportunities to rebuild income streams. Our preferred sectors are Macau gaming and travel operators. We also positioned in China property investment grade as the main beneficiary of policy interventions to date. This segment mostly comprises state-owned enterprises and those with mixed ownership, both of which have better access to onshore funding and have seen smaller declines in sales year-on-year.

Alec Jin, investment director for Asian equities

Alec Jin
Alec Jin

The outcome of the recent Central Economic Work Conference (CEWC) and recent comments by key government officials suggest that fiscal policy is likely to remain supportive but with a pragmatic tone. The government has indicated that it would expand fiscal spending appropriately to support the economy, by optimising the use of fiscal tools such as the fiscal deficit, local-government special purpose bonds and interest subsidies. This would then support infrastructure investment, and in turn boost the overall economy.

That said, we would envision some caution in fiscal expansion too, because fiscal stress has been building up at the local government level. In the three years since the pandemic began, most local governments have suffered serious fiscal deficits, owing to a double whammy of spending increases to deal with Covid alongside lower revenues because of the zero-Covid policy. The property downcycle also added more stress through the land sales channel, as demand dried up.

Given the above, it was notable that the CEWC emphasised the need for fiscal sustainability for the first time in 10 years, reflecting the risk from burgeoning local government debt. The policy shift to a reopening helps the economic recovery, while also enabling the government to rebuild its fiscal capacity on the revenue side, via higher tax collections.

With these, we continue to favour high quality companies across five themes: aspiration, digitalisation, going green, health and wealth. These represent the finest structural growth opportunities in China, and some of the most attractive areas of growth available anywhere to investors.

Michele Barlow, head of investment strategy and research, Asia Pacific
State Street Global Advisors

Michele Barlow
Michele Barlow

In China’s CEWC last December, boosting consumption was prioritised along with support for the property market. Aside from the zero-Covid policy, the property market has been one of the major headwinds to China’s economic growth. The meeting statement pledged to “effectively prevent and resolve the risks of those high-quality and leading developers and improve the sector’s balance sheet” and more recently there has been talk that the “three red lines” property rules may be eased.

In China’s CEWC last December, boosting consumption was prioritised along with support for the property market. Aside from the zero-Covid policy, the property market has been one of the major headwinds to China’s economic growth. The meeting statement pledged to “effectively prevent and resolve the risks of those high-quality and leading developers and improve the sector’s balance sheet” and more recently there has been talk that the “three red lines” property rules may be eased.

We are expecting China’s economy to grow by 5% this year although near-term growth remains on the weak side. The main reason for this is due to disruptions from the removal of the zero covid policy measures, which has led to a surge in infections impacting production and consumption. While the street has turned positive on stocks, we may still be in for a bumpy ride until the infection waves subside. We tend to favour quality companies with sustainable growth and earnings potential.

Ricky Tang, co-head of client portfolio management
Value Partners

Ricky Tang
Ricky Tang

The CEWC stressed boosting market confidence and promoting the overall improvement of economic performance, reaffirming that growth remains a key priority for China in 2023.

Together with the increasingly supportive policies in the property sector, especially those that were released in late 2022, and the more friendly stance towards internet companies, China may lead GDP growth among major economies in 2023.

We are positive that the reopening measures present more opportunities than risks in the China equities market. Even with the recent market rebound, the equity risk premium of major Chinese equity indices remains at the 60-70 percentile in history, making the asset class still attractive. Chinese equities are also relatively more attractive than other markets, with the MSCI China Index trading at 10.43x on a forward P/E basis versus the MSCI ACWI’s forward P/E of 14.5x as of 30 December 2022.

We expect the road ahead to remain bumpy, especially on swift movements in some macro data points and economic events. With the relaxation of Covid measures, pandemic cases rose sharply, negatively affecting near-term economic activities, and hence, the softer near-term macro readings.

However, these are also expected to be followed by a robust rebound later. Longer-term, we remain confident that 2023 will be a year of recovery for China and believe there is an upside on the back of valuations and prospective earnings upgrades. We favour high-quality companies, including financial, consumer, and high-end manufacturing names, that benefit from the macro recovery and are well-positioned to ride the China market upcycle.

Marcella Chow, global market strategist
JP Morgan Asset Management

Marcella Chow
Marcella Chow

The annual CEWC emphasised stability as the priority objective in 2023 and announced a long list of pro-growth guidelines. Coupled with the earlier and faster-than-expected reopening, we see that the priority of Chinese policymaking has shifted back to economic growth.

Over the pandemic, uncertainty surrounding the economic outlook has led to a pickup in savings rate in China. This implies a substantial amount of pent-up demand and savings will be released, benefiting consumer-sensitive sectors, tourism and retail markets. Over the longer term, green economy sectors, such as, electric vehicles and advanced manufacturing sectors are likely to play a more important role in generating growth.

Also, the compelling valuations of Chinese equities present a relatively attractive entry point for longer term investors. The A shares market continues to remain less correlated with global indices which will provide a good hedge against a downturn in the US and Europe.

Despite the positive triggers, it is worth noting that the road to recovery will likely remain bumpy in the near future. Borrowing experience from other countries during their outbreak, this could bring temporary disruptions in economic activities, and consumer and business confidence may remain subdued till further stimulus measures take effect.

Yang Zijian, head of multi asset Asia Pacific
Allianz Global Investors

Yang Zijian
Yang Zijian

We have observed a remarkable shift in sentiment towards China, triggered by a swift and aggressive exit of zero-Covid policy in December 2022. It is worth noting that this turn of sentiment came against the backdrop of very depressed expectations for China from global investors last year, also due to concerns about escalating geopolitical tensions.

Going forward, we see a much more constructive outlook for China equity markets in 2023. Firstly, the economic recovery on the back of reopening is likely to be quick and strong, led by consumption, employment, and household income growth.

Secondly, stimulative policy in China will continue into 2023 and beyond. The latest CEWC confirmed a pro-growth and pro-market tone, focusing on a broad set of areas ranging from domestic demand, industrial upgrade, to support of private sector growth. In addition, a dovish monetary stance of the People’s Bank of China, as well as regulatory loosening in the property and internet sector, give China equity markets a tailwind in multiple directions for the first time in nearly five years.

Finally, global investors’ exposure to China has yet to recover from a relatively low level, which leaves ample room for positive fund flow going forward. This is potentially to be further strengthened as the US dollar weakens from last year’s high levels.

Still, investors ought to pay close attention to the progress of Covid infection waves in the country as well as developments in US-China relations.

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