Lessons from China: Exploring the great reopening

Recovery led by local services

In China, zero-Covid restrictions really are over. Whether it is in small villages or big cities, life seems to be back to normal. Local consumption (services, hotels and restaurants) seems to have recovered with a strong pick-up in activity. There is evidence that consumption will be the main driver of recovery in 2023, with an expected rebound of more than 8% in 2023 after contracting last year.

Not a future growth engine

While it is too early to have a definite view on the housing recovery, there have been some improvements in data, notably, in home prices and sales picking up and government actions in providing funding, relaxing regulation, lowering mortgage rates. Secondary market transactions will likely post a decent rebound this year.

Despite these positive developments, the property market, in our view, isn’t a future growth engine for China. Factoring in the weaker primary market, property investments are likely to be down in 2023, even after a 10% contraction in 2022 .

Pragmatism prevails

We observed a rise in pragmatism from local governments when applying central government policies. This leads us to believe that local governments have learnt from past mistakes and will lead to more practical policies when managing local budgets and applying central government policies in their region.

Modernization boons

Despite three years of restrictions, it’s clear China did not slow down its urbanisation.

Uncertainty ahead

While its clear the US and China will remain great rivals, with Chinese citizens expecting no “warming” in the relationship, the US-China decoupling looks structural and negative for China. There doesn’t seem to be a good solution for China’s semiconductor development and our Chinese trip did not give us a lot of comfort in that space.

Tensions with Taiwan are also a concern for China and global equities. Given the elevated geopolitical strains, Chinese equity risk premium will remain high and we choose to avoid Chinese companies that have a high level of exposure to such challenges (such as semiconductors and chip makers).

Despite some clear challenges, alongside India, China will still be the fastest-growing global economy this year with more than 5% growth (reinforced by the latest GDP data) and above all, a higher quality growth.

Moreover, after two years of sell-off, Chinese companies have attractive valuations, are buying back their shares, increasing dividends and as illustrated by recent announcements (Alibaba and JD.com splitting their business into several listed entities), trying to move in a direction of transparency, which is better in terms of cash flow generation.

The companies best positioned are those with good supply and demand dynamics in the domestic market, as well as companies able to “go global", as more Chinese companies try to reach international consumers.

While the great reopening will continue to see some bumps along the way, our experience in China has reinforced our conviction that there are many reasons to be positive – but selectivity remains essential.