The MSCI China index fell 4.9% last week, ending a five-week rally, and declined a further 2.6% on Monday. But despite the setback, economic data and developments in the past week have underscored our positive outlook on China. We expect the economy to rebound in 2023, led by a recovery in consumption after three years of zero-COVID policy.
Business surveys for January and holiday consumption data suggest the recovery has begun. The official manufacturing PMI rebounded to 50.1 after contracting for three months, led by new orders and improved suppliers’ delivery times. The official non-manufacturing PMI rebounded even more strongly to 54.4, expanding for the first time in four months, driven by the retail, accommodation, and catering sectors on the back of the reopening.
Recent consumption data also point to a recovery, as seen from the higher consumer revenues during the holidays: up 12.2% year-over-year (or 112.4% of the 2019 level). Movie box office sales marked a second record high to reach 114% of the 2019 level, and domestic tourism recorded the strongest visitor and revenue levels since the pandemic. Encouragingly, the rise in domestic travel did not lead to a spike in COVID infections, despite earlier fears. We think this will likely pave the way for production and consumption to recover further.
Cross-border travel is set to recover further as more requirements are scrapped. Outbound and inbound trips to and from mainland China climbed 121% and 127% year-over-year, respectively, during the Chinese New Year holiday. Although still relatively low at around 20% of 2019 levels, we expect cross-border travel to recover further as more travel requirements are scrapped. Beijing on Friday announced that cross-border travel with Hong Kong and Macau would fully resume from 6 February, and all existing conditions like quotas and testing would be lifted. We expect the return of mainland travelers to lift the outlook for the Macau gaming, aviation, and domestic consumption sectors, as well as Hong Kong landlords, insurers, and securities firms. The resumption of mobility should also boost demand for crude oil and base metals.
The government is returning the focus to economic growth. President Xi Jinping last week signaled that domestic consumption will be key to China’s economic recovery this year, as he called for stronger efforts to boost the nation’s consumption by improving income. His remarks followed a similar pledge by the cabinet a few days earlier. The Ministry of Commerce also announced that it plans to roll out policies to boost consumption, placing autos and home appliances as key focus areas.
So, we expect China’s GDP to rebound to around 5% this year from 3%in 2022, led by a recovery in consumption, which we expect to grow 7% this year after a contraction of 0.5% last year. We are most preferred on Chinese and emerging market equities. We see opportunities in Chinese sectors that will directly benefit from the country’s reopening, including pharmaceuticals, medical equipment, consumer, internet, transportation, capital goods, and materials. Broader emerging market equities as well as US and European companies highly exposed to Chinese spending, including German equities, should also benefit.
Main contributors - Mark Haefele, Patricia Lui, Eva Lee, Christopher Swann, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - China's rally interrupted, not ended, 7 February 2023.