There's a lot of fervor across various investor segments looking to pounce on China's re-opening theme.
In hindsight, we took a contrarian approach i.e. we sided with the pessimists, the naysayers, or disbelievers of China's re-opening opportunity.
We then studied their assertions and tried to understand where they came from. Much of the skepticism from their end revolved around China’s geo-political tensions with the USA over Taiwan. The USA further came down with harsh export controls in October 2022 to ban semiconductors trade with China.
The Chinese government has a fair share of blame on their part on account of several retrograde decisions. Zero-COVID policy and crackdowns on technology behemoths were the bitter ones that hampered economic growth and dampened business and investors’ sentiments to a large extent.
Despite declining orders and employment, the firms are optimistic for the coming quarters due to the re-opening of the economy. The Caixin Purchasing Managers’ Index (PMI) rose to 48 in December from 46.7 in November.
So, does the reopening theme provide a good investment opportunity? What will be the impact of the reopening on the Chinese and global economy? And, will the tensions with the USA obscure the growth prospects?
From a geopolitical standpoint, the Chinese government seems to be well aware of the export earnings coming from the USA and the impact of the USA’s export controls on the semiconductor industry. The appointment of the new foreign affairs minister, Qin Gang, in December 2022 speaks volumes of the changing narrative from China’s end.
Lately, the minister has been full of praise for America and is looking to adopt a conciliatory stance toward US - China relations. Just read his January 4 column in the Washington Post.
China also seems to strengthen its foreign position with other countries, especially in Africa. So, the geo-political construct will likely improve for China and may provide a fillip to the business and investors’ sentiments.
On the demographic front, domestic demand will rebound after the reopening of China. The population is coming out after almost 3 years. There certainly will be a lot of pent-up demand in the economy as has been the case with other countries. It will boost sales across consumer-oriented businesses in retail, food, hospitality, etc., and other supporting industries.
There may be a temporary blip in the inflation with oil, metals, and commodity prices inching higher in the short term.
Everything may not be smooth, though. The Chinese New Year on 22 January may increase the risk of COVID spreading again due to greater mobility or migration of people in and out of the country. The country has already witnessed an estimated 37 million peak daily infections.
In addition, the issue of the humungous debt pile in the real estate sector is still not resolved yet.
With that being said, we still believe that the Chinese market may offer reasonable returns to investors amid the slowing global economy. A large pie from the emerging market funds is expected to divert to Chinese equities. The markets and the economy may recover sooner than expected.
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