What A Ride!

Since its highs in February 2021, the Chinese market corrected 63% to its trough in October 2022. After its faster-than-anticipated reopening news late last year, the market has rallied hard, now up 38% since its bottom (as at 22 February 2023)¹  Investors’ sentiment as well as positioning have turned positive meaningfully, in contrast to the doom-and-gloom scenario painted just last year, when some market participants dubbed the market as “uninvestable”. To give some context, China’s push for “common prosperity” to bridge the wealth gap had led to a slew of multi-pronged regulatory and antitrust campaigns. Various sectors saw a plunge in share prices under the crackdown – for example, during March 2022, the Chinese technology firms lost almost 70% of their market value since their 2021 highs. In addition to an economic slowdown and growing tensions with the West, the Chinese market was thrown into a period of huge turbulence and uncertainty.

The narrative in 2023 today is remarkably different. Should one look at the trajectory of recovery in China, we believe it is now indeed “unavoidable” to stay invested In China. In this article, we highlight three key points why China has shifted from “uninvestable” to “unavoidable”, as this global superpower rises once again.

¹All data are sourced from Lion Global Investors and Bloomberg as at 22 February 2023 unless otherwise stated.

1.U-Turn in Zero Covid Policy

First, the reversal in China’s covid policy has been unquestionably swift once it was ignited in mid-November last year. After a long and strict pursuit of a zero-covid policy, in a span of mere seven weeks, the country has moved from zero-covid to zero-quarantine. Mobility indicators – such as subway ridership in China’s key cities, to flight volumes as well as box office sales – are showing that the economy are coming back to life. Similarly, high frequency data over the Chinese New Year holiday and January PMI indicates that China’s macro recovery looks to be on track. Indeed, relaxation of restrictions has brought a huge wave of relief to markets, as the second largest global economy surge “online” again.

Fig.1 Commuters Back to Work

Source: Reuters, “China’s on the move again, economic outlook brightens”, 13 January 2023

Fig.2 Taking to the Skies Again

Source: Reuters, “China’s on the move again, economic outlook brightens”, 13 January 2023

Fig.3 Back to the Movies

Source: Reuters, “China’s on the move again, economic outlook brightens”, 13 January 2023

2. Pro-Growth Policies Put in Place

Second, aside from moving away from the zero-covid policy, the government has also introduced a series of pro-growth policies to rejuvenate its economy. Regulatory risk is receding surely and quickly. There have been sweeping measures unveiled to stabilize and support the struggling property sector, including credit support for debt-ridden developers and assistance for certain categories of homebuyers. After a period of relentless scrutiny, regulatory crackdown on Big Tech names seems to be seeing the light at the end of the tunnel as well. While arguably the Big Tech names may no longer be secular growth stocks, the Chinese internet sector is still viewed as a proxy to the country’s macro recovery. As the economy regains its footing, names like Alibaba, JD.com, Tencent and the likes will ride alongside the wave.

3. Spillover Growth Effects to Rest of the World

Third, the knock-on effects of China’s reopening cannot be ignored. We expect a significant global demand lift that could push the risk of global recession to 2H2023 or early 2024. We also expect its growth to spillover and set off a growth wave in Asia. One good example to illustrate is our expectation of how revenge travel could be back with vengeance – we are positive on domestic tourism as well as outbound travel. One of the key beneficiaries will be Thailand whose economy is very dependent on tourism, with a significant portion of their visitors from China. Hospitality-related names are expected to see a surge in top-line, while the operating leverage effect will kick in. Zooming with a micro lens, we are also of the view that tech demand will grow, especially for smartphones. China smartphone demand has been depressed for a number of years now, partly due to the fact that smartphone penetration is already very high in China. Now that smartphone inventory levels have come off and replacement cycle is long overdue, we are expected to see a recovery in smartphone supply chain demand as China reopens up.

4. Wild Cards

That said, we are mindful of the key risks on the horizon: 1) growing geopolitical tensions; 2) resurgent inflation; 3) policy changes.

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