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Time to get back into Chinese stocks?

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It looks like China is back in business. As the government drops its zero Covid policy, investors have started seriously looking to get back into Chinese stocks. Is there scope for some considerable upside in 2023? We think there might be.

After an extended period of lockdown, the rolling back of China’s zero-Covid policy is being seen as a catalyst for recovery in 2023 and investors expect to see an acceleration in activity as pent-up demand is released. China’s reopening from Covid controls is happening faster than most would have thought.

As we enter 2023, China’s macroeconomic, regulatory and pandemic policies are looking to be aligned with a pro-growth tone, for the first time in three years. Although economic data may remain volatile for the next quarter or two, China is likely to be one of the very few major economies where growth could accelerate in 2023, enjoying a reopening recovery like much of the rest of the world had in 2022. The policy focus on quality of growth instead of quantity of growth will provide exciting stock-picking opportunities in areas such as green transition, hard technology, consumption upgrade and industrial automation.

“This could be an excellent time to get into China as we believe the stars are aligned for a meaningful recovery in growth, driven by consumption,” says Elizabeth Kwik, co-manager of the abrdn China investment trust. “In our opinion, domestic consumers will be the key driver of China’s economic growth in 2023. They have accumulated a significant amount of excess savings. Once the reopening benefits fully materialise in the coming months, we expect to see a rundown of this excess saving. This should benefit a wide variety of sectors – from consumer to healthcare, property and finance. Given the largest theme of our portfolios is the growth of the Chinese consumer, this expected recovery in consumption bodes well for our holdings.”

Consumer confidence is returning

The abandonment of China’s zero-Covid policy has not been the only reason behind market strength. Support for the property sector and the pro-growth policy shift signalled at the annual Central Economic Work Conference in December also caught the market off guard. China can expect to see a post-pandemic recovery like that seen in the rest of the world, buoyed by returning consumer confidence, with China’s household savings ratio reassuringly at 4.7% of nominal GDP, its highest level in a decade.

Regulatory and policy headwinds in the China internet space over recent years have made it very difficult for tech giants to maintain market share and return to strong margins, which had been reflected in low valuations. However, with an improving earnings outlook and easing regulation, there is an increasingly attractive risk-reward pay-off among the likes of Tencent and Alibaba. Encouragingly, both stocks have started to reverse their declining trend and have risen over the past month.


“We maintain a high degree of conviction in the long-term structural growth opportunity of China’s underpenetrated insurance industry,” says Dale Nicholls, a portfolio manager on the Fidelity China Special Situations fund. “We have been holding insurance companies like China Life, China Pacific Insurance and have bought Ping An Insurance in the fourth quarter of 2022.”

Any further risks ahead for China investments?

There are several potential headwinds that investors should be wary of, and the first is a potential effort to try and flatten the infection curve. As infection cases continue to mount, the strain on the healthcare sector is becoming more visible. While the government is working to broaden access to Covid treatment and is pushing to vaccinate more of the population, it is likely that the authorities may consider targeted restrictions in specific cities or parts of cities to rein in the infection and bring it under control. That could potentially dent near-term sentiment in the market.

Beyond that, further escalation of US-China tensions, particularly over Taiwan, remains a lingering issue but it is currently unlikely we will see any sudden surprises considering the tone adopted by both countries following last November’s meeting between Presidents Xi Jinping and Joe Biden.

“While there are reasons to believe the domestic economy can enjoy a strong recovery, this is coinciding with a slowdown in global growth as developed market demand rolls over, which will impact China’s manufacturing sector and exports,” notes Fiona Yang, co-manager of Invesco Asia. “Much also depends on confidence returning to the residential property market, although this is not a bubble as some would have you believe. Our optimism is measured though, as once China’s economy reopens fully, it will likely revert to a slower growth glide path.”

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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