China: from recovery to opportunity

The status of the Chinese economy is keenly watched by corporates and investors across the world. Now that China’s post-pandemic recovery is underway, there is a growing focus on the future: the economy’s long-term growth trajectory, the next wave of opportunities, and the level of accessibility available to international investors.

All of these topics were discussed at the HSBC 10^th Annual China Conference – a flagship event that brought together leading investors, corporates, and analysts to address the future of the world’s second largest economy.

In the first quarter of 2023, there was evidence of a rebound in the world’s second largest economy, which expanded 4.5% year-on-year¹. This was a significant increase on the full year GDP growth of 3% in 2022, with HSBC forecasting 5.3% of growth for 2023.

The standout data point in the first quarter was retail sales, which grew by 5.8% in the January to March period², compared to the same period last in 2022. Consumers maintained the momentum in April, with retail sales up a hefty 18.4% year-on-year³.

A retail-led recovery is significant from both short-term and long-term perspectives. The immediate impact will be stronger demand for goods and services that are popular with Chinese consumers. Over the long term, it bodes well for the country’s shift towards a consumption-driven economic model, reducing the economy’s dependence on investment.

The other side of the story is what is missing from the recovery. Unlike previous rebounds in China, which were characterised by strong stimulus spending on infrastructure, investment in fixed assets has been relatively subdued. This will be disappointing for commodity exporting countries that have in the past sold the metal and other resources necessary for completing projects like airports, bridges, and other forms of hard infrastructure.

One of the most fundamental shifts in Chinese society is demographic, with an ageing population to result in a gradual decline in the country’s working population. This demographic shift clearly presents an economic challenge to policymakers, but one that, if managed carefully, could realise long-term benefits.

Although there are expectations that an aging population will result in a shrinking labour force, the transition could accelerate the adoption of automation and move China’s economic activity up the value chain.

Another significant challenge that presents the potential long-term benefits is climate change, as China has a target to reach a peak in its carbon dioxide emissions by 2030 and become a net zero economy by 2060.

China’s commitment to greening its economy has the potential to drive growth and productivity in a range of new sectors. Battery technology and solar power are examples of sectors that are growing rapidly.

And from a financial perspective, the drive towards sustainability will fuel demand for green finance to direct capital towards renewable power projects. The development of carbon markets will also be an important part of China realising its net zero ambitions.

When it comes to mutual access between China’s onshore and offshore markets, the direction of travel is clear, with a number of significant developments over the last year. In the summer of 2022, exchange traded funds (ETFs) were added to Stock Connect. And already in 2023, the range of eligible stocks available for trading on Stock Connect has widened significantly.

The recent launch of Swap Connect provides international investors access to China’s onshore interest rate swaps (IRS) for the first time. This new access channel complements Bond Connect, as it allows fixed income investors to better manage volatility on their Chinese bonds, as onshore IRS are less volatile and correlate better to onshore yields than the offshore counterparts.

All these access channels have one thing in common: they provide a route into China’s onshore market via Hong Kong, highlighting the city’s ongoing importance as a connector between China and the rest of the world, with opportunities to come from the city’s status as the international financial centre for the Greater Bay Area.

The GBA represents the most dynamic part of China’s economy, with world-class capabilities in technology and manufacturing, as well as a growing market for wealth management.

Greater connectivity is just one aspect of a new chapter in China’s economic development, alongside the growing focus on green growth and enhanced productivity. Taken together, they suggest a future economy that is more open, sustainable and efficient. And this helps put the current recovery in context – as the potential stepping stone to the next wave of growth drivers.