China’s grand-reopening – Setting the scene for a strong 2023

The removal of China’s pandemic control measures at the end of 2022 was a pivotal development for the Chinese economy. The reopening of the world’s second largest economy is already underway, setting the scene for a positive 2023 – a year that will be characterised by a recovery in consumption and stabilisation in the property market, according to the HSBC Asian Outlook 2023.

The economic recovery will lead to China’s GDP growing by 5.6% in 2023, with the momentum carrying into the next year – a 5.5% expansion is forecast in 2024¹. Short-term indicators already point to a normalisation in activity, with a pickup in subway usage in large cities, as well as an increase in domestic flights.

Consumer spending will help fuel the upcoming growth. Ever since the beginning of the pandemic consumption in China has been sluggish. High levels of uncertainty towards the economic outlook led to precautionary savings, with people putting money aside for a rainy day. From 2020 to 2022, Chinese consumers saved an excess RMB 6.6 trillion (USD 970 billion)².

The dry powder saved over the last three years will be highly positive for consumption,” said Ms. Liu.

There are some concerns however, that as China reopens, it could have the same kind of upward inflationary pressure that other economies experienced as they came out of the pandemic. Ms. Liu said that although inflation is likely to rise in 2023 alongside the economic recovery, it will remain manageable due to the slack in the labour market, which will keep wage inflation in check.

Around the same time China relaxed its pandemic controls, it also implemented several measures to help the struggling property market. The so-called “three arrows” aim to help developers to access funding from different channels – including loans, equity finance and bond issuance. These new policies were a “game changer”, according to Keith Chan, Head of Asia Credit Research, HSBC, who anticipates that 2023 will be a good year for high yield China property bonds.

Policy support has already resulted in a rapid recovery in bond prices. In October 2022, over 80% of US dollar denominated Chinese property developer high yield bonds were trading at 20 cents on the dollar or less. As of mid-January, only around 40% were trading at these distressed valuations³.

Can the rally be sustained? Mr. Chan believes it can, although he notes that the market’s upward movement will be volatile and not follow a straight line, meaning that investors should pay attention for the right entry points.

In the equity market, investors are optimistic towards China. The Hang Seng China Enterprises Index gained 36% in the last quarter of 2022. The market has reacted favourably to the change in China’s COVID-19 policies, the property market policy package, as well as a growing belief that the US Federal Reserve will adopt a less hawkish policy tone.

In terms of investment themes, Mr. Sun highlighted several areas to watch in 2023. One is supply-side reform in the service sector, which will be similar to the reforms seen in the industrial and manufacturing sectors over the past few years. Consolidation will take place at the same time as recovering demand, allowing the leading businesses in sectors like logistics and aviation to take market share.

State-owned companies (SOEs) will also continue their reform process, with the valuation gap with their privately-owned counterparts expected to narrow

Another theme is global manufacturing leaders. China accounts for 29.8% of global manufacturing output⁴, and the A share market is attractive to overseas investors due to its world-leading manufacturers.

At the start of 2023, there is clear upward momentum in China – both in the economy, as well as in financial markets. Renewed consumption and policies designed to stabilise the property market are fuelling the positive sentiment.

For the rest of the year, corporates and investors will be looking for signs that the recovery remains strong. These will include a sustainable rally in equities, developer bonds showing a return to health in the real estate sector, as well as further improvements in economic indicators. These will be the signs to look out for during the Year of the Rabbit.

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