Expectations were high for the reopening of China: the hope had been that it would galvanise not only growth across Asia but also provide a shot in the arm for the flagging global economy. Six months on, it is clear that many of these expectations were overblown: the recovery has been tepid, leading some to the gloomy prognosis that the Chinese recovery is already over.
It had been assumed that significant pent-up demand and accumulated savings would see Chinese consumers roar back into action. This has not completely materialised. While services data has been relatively strong, demand for goods has remained mixed (luxury and lower priced goods are seeing some signs of recovery but the mid-tier priced products are more of a mixed bag). Chinese unemployment levels have remained relatively high, which could explain some of this tempered spending1, as is the lagging property sector.
While this has prompted some hand-wringing, we would argue that initial expectations were too high and the recent data is simply part of a bumpy return to normality for the Chinese economy. The profound impact of the zero-Covid policy for China’s citizens cannot be underestimated and it will take time to emerge fully from the dislocations it created. Further, valuations across the board are looking very attractive so we are finding a number of quality growth opportunities - and we don’t think this is an issue of falling into a value trap - more it’s a problem of plenty.
There remains relatively low confidence among Chinese consumers and little propensity to spend. Confidence plunged during the final months of the zero-Covid policy and while it has bounced higher, it remains very low on historic trends2. We don’t believe this is permanent, but recovery will take time and some patience in needed.
The same is true for the corporate sector. Management teams have been through a significant shock and it will take time for capital expenditure to revive. When it does, it should boost the labour market and start to raise confidence, but again, this will not happen over the space of a few months.
Nevertheless, there are encouraging signs in both the corporate and consumer segments. For Chinese companies, lower expenditure is being felt in improved corporate cash flows. We also see cost rationalisation and efficiency measures improving corporate earnings. Chinese companies are increasingly using artificial intelligence to offset cost pressures, while consolidation is also a feature across many industries.
Inflationary pressures remain limited. Consumers appear to be increasingly price conscious, which is hurting some mid-tier products and services. Competition is increasing everywhere – in ecommerce, electric vehicles, or energy storage for example. Even with some labour cost inflation, these factors are acting as disinflationary forces, keeping costs low for consumers.
The lack of inflationary pressure also gives the central bank plenty of flexibility to ease monetary policy should domestic demand remain weak. This could be in the form of local, bottom-up government support or more central government spending. Either would help revive confidence in the consumer and corporate sectors.
In the meantime, investor confidence remains at rock bottom. After an initial bounce, share prices have dipped again since April. Many of China’s flagship consumer and internet companies have been significantly derated. The major ecommerce platforms are now on single digit price to earnings multiples, compared to 30-40x for their US peers3. This means lot of bad news is reflected in market pricing.
It is also worth remembering that any stock market is a combination of individual companies. Individual companies are driven by idiosyncratic factors that may have little to do with the growth in the Chinese economy. China is home to a range of significant structural growth stories, including renewable energy, battery power and a rising middle class. These remain intact no matter what the pace of recovery.
No single policy is likely to bring about a dramatic change in sentiment towards China. Equally, for the naturally bearish, there are always potential problems for Chinese markets – from youth employment to ongoing problems in the property sector. However, the recovery isn’t over. Far from it, it is just getting started.
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