Insight

What can we expect as China’s reopening gathers speed?

What can we expect as China’s reopening gathers speed?

China began to shift away from its long-standing COVID-19 restrictions in December 2022 by lifting mandatory quarantine and mass testing and dismantling regional travel curbs. In late December 2022, the government announced that the reopening of the country’s international borders would occur on January 8, 2023.

While many anticipate a surge in economic activity upon China’s reopening, disruption and turbulence is likely to occur in the short run as it has with many other major economies upon the easing of pandemic control measures.

We can expect China’s growth to contract in the first quarter of 2023 as COVID infections, hospitalizations and deaths are expected to rise further and the healthcare system comes under greater strain. The market may not yet have priced in this additional risk premium.1

As volatility subsides, we can expect factory productivity to rise as the labor force regains strength. We also anticipate a surge in household spending, particularly in consumer discretionary, due to pent-up demand. At the same time, some service sectors such as hospitality, travel and tourism are likely to rebound strongly after the peak out of the COVID infections in China.

At the Central Economic Work Conference in December 2022, officials cited the importance of expanding consumption in 2023 to spur economic growth. They spoke of providing support to households for expenses related to housing improvements, new energy vehicles, and elderly care services.2

In a year where US and European economies are expected to slow down and consensus sell side forecasts for the S&P500 are flat for 2023, the Chinese equity market is poised to benefit from the reopening growth boost.

With regards to monetary policy, we expect easing to continue in 2023 as well as loosening measures for China’s property sector to ensure the market remains stable. The divergence between US monetary policy/rate hikes and China monetary policy is also likely to impact asset prices in China.

Within fixed income, we are positive on Asia high yield at around 12-13% yield to maturity3 as an asset allocation choice linked to China’s reopening and policy easing steps.

J.P. Morgan Asia Credit Index – Asia HY: Yield to maturity (2022 – 2023 YTD)

Source: Bloomberg, data as of January 4, 2023. Past performance does not guarantee future results. An investment cannot be made in an index.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.

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