Monday 17 Jun 2024
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The year 2022 was a volatile one, marred by soaring inflation, Covid-19 curbs, the end of easy monetary policy and a damaging war between Russia and Ukraine that placed tremendous stress on global energy supplies. With no easy solution in sight, these problems will persist and investors are second-guessing whether a global soft landing should now be the base-case scenario. This is supported by data, with the global economy projected to expand at a torrid pace of -1.6% in 2023 and potential recessions in both Europe and the US loom large.

Despite this, we remain cautiously optimistic as there are opportunities for savvy investors to grab during volatile times. In particular, we are bullish on the prospects for the Chinese economy. Unlike most developed economies, real gross domestic product growth in China is projected at 5% in 2023, driven mainly by its emergence from the ultra-restrictive zero-Covid policy and boosted by its pro-growth shift on both the macro and micro fronts.

End of Covid measures

The key driver of optimism is China’s earlier-than-expected reopening. After three years of a strict “zero-Covid” policy, the country unexpectedly relaxed measures in December 2022, marking a complete shift from its previous approach to handling the virus.

Gone were the stringent mobility restrictions, mass lockdowns, widespread testing and quarantines. This move was welcomed by the markets, as it would reintegrate the second-largest economy with the rest of the world and ease fears of a potential recession. China remains the world’s largest growth driver after all.

The end of mobility restrictions would finally address major supply chain blockages and subsequent delays, which in turn would lower prices and help somewhat to ease the high inflation across the globe. Second, the influx of Chinese tourists and the resumption of travel to and from China would inject the global economy with the much-needed impetus. China was previously the world’s most important source of international travellers, as its 155 million tourists spent more than a quarter of a trillion US dollars in 2019. This would also stimulate cross-border business operations and investments. Finally, Chinese consumer confidence would improve as the government loosens restrictions. During the period of strict regulations, consumer confidence hit record lows. Following the announcement of an end to Covid measures, China’s Consumer Confidence Index score rose to 72.2 in December 2022 — the only country with a score above 70 and greatly surpassing the global index score of 45.9. As optimism continues to grow, so will spending, which in turn bodes well for 2023.

Pro-growth policy shift

Whereas most central banks across the globe hiked interest rates over 2022 to tame soaring inflation, China headed in the opposite direction, which augured well for its economic prospects. The country is well prepared to inject stimulus into its economy, given that it experienced neither high inflation nor rising interest rates last year.

In a statement issued after the annual Central Economic Work Conference, China said it would implement “proactive” fiscal policy and “prudent” monetary policy for 2023 to stabilise the economy and ensure that key targets are hit. On the fiscal side, the government will look to increase financing — especially for infrastructure — by encouraging private capital to participate in national projects.

Monetary policy is expected to remain steady and accommodative — the Chinese central bank last cut its benchmark lending rate by five basis points in December — unlike the US Federal Reserve’s tightening cycle. Given that China has taken measures to address the two identified drags on growth — zero-Covid policy and a severe property downturn — we believe 2023 will be the year that the Chinese economy stages a strong comeback.

Another sign that the government has shifted to a more “pro-growth” mindset was the announcement on the end of regulatory crackdowns on some of its largest companies. On Jan 9, 2023, during an interview with state media, the party secretary of the People’s Bank of China announced that the country’s heavy crackdown on its tech giants had ceased, officially concluding its two-year campaign to enforce stricter controls on private enterprises deemed to have become too powerful in the eyes of the government.

As China refocuses on growth in 2023, the government will need the support of the private sector, with internet firms playing a vital role. The most notable sign of a less-restrictive regulatory environment was Jack Ma’s Ant Group winning key approval for capital expansion of its consumer finance unit. The resumption of approval of games for Tencent and NetEase, two of the largest gaming companies, will alleviate the badly hit gaming sector, in which regulators had suspended approvals for new game releases since 2021 and capped the amount of time children under 18 can play. The central bank also pledged more support for private businesses and to expand their access to funding to support initial public offerings and bond issuances.

To alleviate the record slowdowns and a devastating liquidity crunch in the real estate sector, where the 100 largest developers saw sales plunging by more than 40%, the Chinese government introduced a financing policy pivot with a 16-point rescue plan in November 2022, which resumed equity financing, relaxed escrow account control and allowed more access to credit lines. To further stimulate consumer demand in 2023, the government will continue to ease mortgage rates, lower down-payment ratios and pledge “strong support” for first home purchases. It will also provide relief for embattled developers to ease liquidity stress, where companies deemed “systemically important” with reliable financial statements and no adverse records are eligible for support, either in the form of financing and loans or the creation of real estate investment trusts. These easing signals, as well as China’s exit from its zero-Covid policy, will likely lead to a recovery in consumer confidence.

Positive outlook

With all this positive momentum — and ample room for more supportive policy implementation to achieve growth — the Chinese economy is poised to stage a strong recovery in 2023. Despite the odds of a potential recession lowering, thanks to stronger-than-expected US employment figures, renewed business optimism and Europe avoiding a fuel crisis, the Chinese economy — with its shift on growth and consumption — is still expected to vastly outperform its global peers.

To take part in China’s recovery story, investors would do well to align themselves with a trusted investment manager. The RHB Big Cap China Enterprise fund, with its high exposure to onshore and offshore Chinese large-cap companies, as well as companies listed on the Hong Kong stock exchange, is well positioned to thrive in 2023.

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