Cautious optimism for China’s steady recovery

FOLLOWING a 3 per cent growth in 2022, China’s gross domestic product (GDP) is expected to grow by 5.2 per cent in 2023, while also producing a quarter of the globe’s 2023 growth. The recently released IMF Article IV Consultation relayed that the Chinese authorities are optimistic about a steady recovery in 2023, see significant potential for higher growth in the medium and long term, and agree that real estate market risks had increased, while noting that they are manageable overall.

Singapore lists close to 100 stocks that report nearly half of their revenue from China, with the current earnings season characterised by cautious optimism across the various industries.

China’s economic outlook

Zhongmin Baihui Retail Group : 5SR 0% noted on Feb 15 that it expects China’s economy to begin the process of recovery. While remaining cautiously optimistic, the group believes its business ought to similarly improve with consumers coming back to the market.

On Feb 17, Sasseur Asset Management chairman Vito Xu noted that the re-opening of China’s economy and policymakers’ pledge to prioritise domestic consumption and raise personal incomes bode well for the country’s consumption outlook. Xu added that the managers of Sasseur Reit : CRPU 0% were seeing visible signs of recovery in the retail industry in January, fuelled by pent-up consumer demand.

Fidelity’s multi-asset portfolio manager Evelyn Huang has highlighted that the potential increase in consumer spending from pent-up demand is in the vicinity of 6 trillion yuan (S$1.2 trillion).

CapitaLand China Trust : AU8U 0% maintains that the expected rebound follows the reopening and supportive targeted fiscal and monetary policies, adding that the Reit is well-positioned to benefit from the reopening flows, increased consumer spending and more conducive business environment.

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China Yuanbang Property Holdings : BCD 0% also noted on Feb 10 that with China’s reopening, the company was cautiously optimistic that there are potential signs of recovery of the real estate market on the back of a slew of property support measures, including credit support for debt-laden housing developers, financial support to ensure completion and handover of projects to homeowners, and assistance for deferred payment loans for homebuyers.

Meanwhile on the seaport front, Hutchison Port Holdings Trust : P7VU 0% maintains that apart from expected gradual improvements in international trade during the year, the business trust will benefit from the elimination of the closed loop arrangements at Yantian, which had previously pressured operating costs, and an anticipated return of containers to Hong Kong as cross-border trucking recovers.

Market moves, new portfolio products and trading activity

Commodities have also been impacted. Iron ore has been the best performing commodity since the reopening momentum extended to markets after Oct 31.

The iEdge SGX Iron Ore Futures Index tracks the seaborne iron ore market and is based on the underlying SGX TSI Iron Ore CFR China (62 per cent Fe Fines) Index Futures contract.

Paralleling the recent brighter outlook for China-driven growth in 2023, the index has moved from near 5,800 on Oct 31, to near 8,970 on Dec 31, and then on to 9,713 on Feb 16. China is the main importer of iron ore, the primary raw material used in steel products such as rebar, steel plates and hot rolled coils, used in the property, construction, and manufacturing industries.

Since Oct 31, expectation-led gains have also seen the Lion Global-OCBC Hang Seng Tech ETF gain from 49.8 cents per unit on Oct 31, to 72.0 cents per unit on Feb 16. This ETF tracks the Hang Seng TECH Index which represents the 30 largest technology-themed companies listed on HKEX, with the index rebalanced quarterly and each index constituent capped at an 8 per cent weightage during rebalancing.

These companies are classified under industrials, consumer discretionary, healthcare, financials or information technology industries. They have high business exposure to tech themes like cloud, digital, e-commerce, fintech or Internet. They are considered innovative as they operate technology-enabled businesses, with strong research and development investment or exhibit high revenue growth.

The ETF maintains a 0.45 per cent annual management fee, close to S$340 million of AUM, and has ranked as Singapore’s most traded ETF by turnover since Oct 31 with 180-day historical volatility of 48 per cent.

As part of the SZSE-SGX ETF product link, SGX recently welcomed two China thematic ETFs that invest in companies listed on the ChiNext market of Shanghai Stock Exchange (SZSE) and STAR market of Shanghai Stock Exchange (SSE). The UOBAM Ping An ChiNext ETF tracks the performance of the ChiNext Index which represents the largest 100 companies listed on the ChiNext market of SZSE. The CSOP CSI STAR and ChiNext 50 Index ETF tracks the CSI STAR & CHINEXT 50 Index which selects 50 constituents involved in emerging industries from the SSE STAR market and SZSE ChiNext. Notable listings in the ChiNext and STAR board include Contemporary Amperex Technology Co, the global leader in lithium-ion battery development and manufacturing, as well as the mainland’s largest contract chipmaker, Semiconductor Manufacturing International Corporation. After the technical S$1.00 per unit starts on Nov 14, and Dec 30, units of the UOBAM Ping An ChiNext ETF and CSOP CSI STAR and ChiNext 50 Index ETF were trading on Feb 16 at S$1.048 and S$1.042, respectively.

Meanwhile, two key financial derivatives, the SGX FTSE China A50 Index Futures and SGX USD/CNH futures have continued to book growing volumes over the past seven weeks as investors look to manage portfolio risks.

Key downside risks

Cognisant of the 2023 headwinds, International Monetary Fund (IMF) mission chief for China, Sonali Jain-Chandra, maintains potential downside risks for the China economy in 2023 that include further weakening of its property market, which contributes one-fifth of its GDP, and weaker global demand impacting China exports.

These headwinds are in addition to the longer-term structural challenges that include the ageing population and slowing productivity growth that comes with diminishing returns from previous years of investment-led growth. The IMF Article IV Consultation published on Feb 3 also conveyed that China authorities saw macroeconomic policies remaining flexible, responding to the realisation of downside risks as needed. Moody’s Investors Service noted in a sector comment on Feb 13 that more government stimulus from the Two Sessions meetings in March are likely, with the government potentially focusing fiscal policies on consumption and public spending but less on infrastructure. The report added that China’s monetary policy will provide a broadly stable liquidity environment but will also seek to control inflation. Thus, like the inflation outlook for much of the advanced world, the growth outlook for China remains somewhat fluid.

Big global themes

Markets are also relatively sensitive to the outlook for global trade and global debt. Aside from being the main importer of seaborne iron ore, China is the world’s largest trading partner. The country is also the largest creditor to developing economies. These are two themes particularly relevant to China as maintained by the IMF research department’s Thomas Helbling, who sees global technology decoupling bringing economic costs, while China, as a large global creditor, and part of the G20 Common Framework, can potentially provide solutions in situations of debt distress if some form of global debt relief is needed.

Expeditious environment initiatives are also a key global theme relevant to China. SIIC Environment Holdings : BHK 0% is a leading water treatment and environmental protection company in China that saw its 9MFY22 (ended Sep 30) construction revenue increase 25 per cent from 9MFY21 on the back of the group’s key waste project, Shanghai Baoshan Renewable Energy Utilisation Center, entering its commissioning phase in September 2022.

Yangzijiang Shipbuilding : BS6 0%, one of the largest private shipbuilding companies in China, is committed to building greener vessels, as maintaining stricter environmental regulations in recent years has given rise to growing demand for such vessels.

ISDN Holdings : I07 0%, which provides Industry 4.0 solutions, has sponsored three hydropower plants that have begun to deliver clean energy to rural communities in Asia. It reported 70 per cent of its S$440 million FY21 (ended Dec 31) revenue to China. It subsequently reported H1FY22 revenue and Q3FY22 revenue declined 12 per cent and 10 per cent respectively year on year, while flagging in April that the Covid-19 measures in China were disrupting its supply chain and workforce. Its share price declined from S$0.725 at the end of 2021 to S$0.365 on Oct 31, 2022, with the recent, cautious optimism for China’s steady recovery supporting the share price back to S$0.59 on Feb 16.

Consumer-driven growth puts technology in the spotlight

Most economists recognise that China’s gradual rebalancing to a more consumer-led economy can help to mitigate some of the aforesaid headwinds and challenges. According to CEIC data, private consumption, which accounted for 38.2 per cent of China’s GDP in 2021, while up from 35.2 per cent in 2011, still lags much of the globe’s largest economies.

With the rapid adoption of technology, both e-commerce and small-to-medium sized enterprises have a key role in facilitating the channelling of high household savings to consumer-driven growth not just in China, but across Asia. Such scale requires vigilance.

International management consulting firm Oliver Wyman summarised in 2020 that the most pressing issues facing the global technology industry include safeguarding individuals and society from maltreatment; promoting responsible innovation and robust competition; and establishing understandable and consistent parameters for data privacy and monetisation.

In January, the Chongqing office of the China Banking and Insurance Regulatory Commission approved Alibaba financial arm Ant Group’s proposal to raise 10.5 billion yuan for its consumer finance unit. On the development, the China Daily cited the views of a senior analyst who maintained that the “authority has sent a clear signal to support the development of platform companies and Ant’s latest move is expected to inject vitality into the consumer finance industry”.

While cautious optimism surrounds the economic outlook, advances in technology continue to attract interest from consumers and investors alike, as seen over the past two weeks with the chatbots.

The writer is the market strategist at Singapore Exchange (SGX). To read SGX’s market research reports, visit sgx.com/research.