Benefiting from the post-pandemic pivot
Early indications are that China’s domestic economy will rebound strongly post-Covid, with spillover benefits for Asia-Pacific economies
CHINA began dismantling its zero-Covid strategy in December 2022, removing almost all restrictions and reassuring its citizens that the Omicron variant was not as dangerous as anticipated. It also advised that practising medical self-care at home would be sufficient to manage the virus successfully.
According to data from the World Health Organization, Covid cases in China had reached almost 100 million by late-March 2023. However, the numbers may have peaked, which is an excellent outcome from both a human and an economic perspective.
Global economic clouds
Since China’s pivot from zero-Covid, consumers have started to unleash their pent-up demand for some of the services that were restricted during the pandemic, such as entertainment, dining and travel.
While that is good news for the domestic economy, China’s position as a net exporter means any global economic slowdown triggered by overly aggressive interest rate hikes could negatively impact its export sector.
Supportive monetary policy
China’s monetary policy is out of lockstep with many other developed economies. This is partly because the government is concerned about supporting the economy as it emerges from Covid. It is also determined to stabilise vulnerabilities in the property sector.
While many markets have raised interest rates to dampen inflation, China has sought to boost its economy by reducing borrowing costs and the reserve ratio requirements for banks to encourage lending. Presently, inflation doesn’t appear to be a challenge for the country. Consumer prices in February 2023 rose at a relatively low annual rate of 1.5 per cent.
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However, if at some point inflation takes hold, the government may have to reduce its level of economic support or raise interest rates. That doesn’t appear likely in the short to medium term.
Local-currency bonds may benefit
The Federal Reserve remains concerned about inflation and is committed to more interest rate hikes in 2023. Despite this, the bond market predicts the Fed will start cutting interest rates in the latter stages of the year when the economy has slowed enough, and price rises are under control.
If this occurs, we should see a lagged benefit flow through and boost China’s export sector. Regarding the broader Asian bond market, a decline in US interest rates should also cause the dollar to weaken. This could increase the relative attractiveness of local-currency denominated bonds compared to US dollar issuance.
China property boost?
The real estate sector in China was another Covid casualty as buyers and sellers were locked down and concerns grew about the viability of some leading property developers. The government has since moved decisively to support the property segment.
This, combined with relatively low interest rates and rising personal incomes, may ease concerns and boost investor confidence, which will help to underpin the value of bonds issued by property developers. Recent price data for residential developments shows modest year-on-year price declines in certain cities. In contrast, prices in Beijing and Shanghai have actually risen in the past 12 months.
Spillover benefits for regional markets
China has also relaxed travel restrictions for inbound and outbound visitors. In March, it announced that foreigners from all territories could apply for visas to enter China. Outbound travel has also soared, a positive development for the region’s tourism-dependent markets. Travel is growing strongly, even though it has yet to recover to pre-pandemic levels.
In addition to a boost from inbound visitors, several Asian territories will also benefit from China’s increased demand for mineral and agricultural commodities. Indonesia supplies nickel and other natural resources, while Thailand, the Philippines and Vietnam export agricultural goods, which will benefit as consumers dine out more.
China and Asia: Cautious optimism
Early indications are that China’s domestic economy will rebound strongly, with similar consumer demand patterns as other markets as they emerged from restrictions. This sequence favours the consumption of services rather than goods. Accordingly, tourism and entertainment will likely be the primary beneficiaries, while segments like home delivery, which boomed during Covid, may see demand drop.
China’s reopening should also lift economic growth in Asia. A recovery in the country’s demand for goods could boost the gross domestic product of many Asia-Pacific economies by about 0.4 per cent. In a relatively low-growth global economy, this uplift is more vital than it might appear. Asian bonds issued by companies in sectors positively exposed to China’s domestic demand growth should benefit as the outlook brightens.
At the same time, the global outlook remains volatile and uncertain, as the potential for higher interest rates in the US and Europe triggers a drop in consumer demand for the types of finished goods in which China’s export sector specialises.
Despite these headwinds, there remains room for cautious optimism in China and Asia as the impact of the pandemic recedes.
The writer is Asia Pacific head of fixed income and head of Singapore, State Street Global Advisors
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