China’s reopening spurs optimism, but brace for a choppy ride

CHINA’s gross domestic product (GDP) growth of 3 per cent for 2022 is the second-slowest pace since the 1970s, and well below the government’s target of 5.5 per cent. But already China is increasingly cited as the brightest spot in the region. Globally, it is burnishing expectations that the macro environment may prove less bleak in 2023 than initially forecast. To be sure, there are challenges in the short and longer term. The abrupt reversal of its zero-Covid stance has caused a surge in Covid infections and deaths, particularly among the elderly. Consumer confidence has fallen to its lowest level in more than 30 years and the property market remains weighed down by debt.

Longer term, there are other pressures. A major headwind is its ageing and declining demographic. At end-2022, China’s population fell for the first time in 60 years, as deaths outnumbered births. The demographic shift was widely anticipated, but it has occurred sooner than expected – undoubtedly hastened by the Covid health crisis. A government official has declared that the country would enter “an era of negative population growth”.

For now, its economic resilience is cause for optimism. Three per cent growth is, after all, still faster than the 2 per cent growth in advanced economies such as the US. Even as China struggles with the explosion of Covid cases, economists have upgraded their GDP forecasts to over 5 per cent for 2023. There are many positive underpinnings. A major one is that policymakers have emphatically signalled the prioritisation of economic growth, focusing on boosting consumption and investment.

The outlook for China tech has also brightened amid official indications that the regulatory clampdown may be ending. As for the real estate sector, restrictions on developer financing are being relaxed. On the consumer front, household savings in the system rose strongly through the lockdown to an estimated 15 trillion yuan (S$2.9 trillion) in new deposits last year, equivalent to 14 per cent of GDP. In a January note, Citi Global Wealth believes that even just a small amount of this channelled into retail sales could fuel a consumption boom.

But the path forward will be choppy. While manufacturing output is expected to rise, exports may be restrained should its largest trade partners suffer economic recession. China’s domestic consumption should take up the slack, but the uptick in consumer confidence and spending may take some time. In a recent commentary, Oxford Economics said it is less optimistic about a quick or meaningful rebound in Chinese consumer spending, as the consumer now must climb out of a deeper trough. It estimates that the zero-Covid policy of the past three years has cost the economy 4.7 per cent in foregone economic activity, and China would not close its output gap before 2030.

Still, equity markets are forward-looking. China’s reopening narrative has buoyed sentiment, and canny investors have pounced, drawn by attractive valuations. Year to date, the MSCI China index has risen by 11 per cent and the MSCI Asia Pacific index by more than 6 per cent, outperforming the S&P 500 and the MSCI World Index. Citi believes more upside is likely, as the strong rally in China shares has not yet caught up with upwards earnings revisions. Investors who have taken early positions are likely to be amply rewarded – but they will have to brace for a volatile ride.