After years of stringent local lockdowns, Chinese citizens can now go about their everyday lives and travel freely in their country. Restrictions on international travel have also been loosened. Will a return to normal be a straight path?
Coming out of isolation, weakened immune systems may be more vulnerable to virus spikes, flu, or respiratory issues. Supply chains may face some disruption. Pent-up demand and revenge spending may result in service inflation as we’ve seen around other parts of the globe. And China’s exports are likely to face some international demand pressure as the global economy slows. Despite these challenges and China’s delay in getting to this stage compared to the rest of the world, the signs are encouraging. Overall, the backdrop is favorable, and we are cautiously optimistic on China’s reopening.
Attractive GDP Growth and Rising Household Savings Rates
China’s gross domestic product (GDP) grew a modest 3% in 2022, its lowest rate since 1976. To reinvigorate the economy, the government implemented stimulus measures, including renewed support for the property sector where roughly 70% of household wealth is stored. Additional fiscal and monetary support is likely to come. The World Bank forecasts China’s GDP growth at 4.3% in 2023 and 5.0% in 2024. While lower than its long history, that’s an attractive rate compared to the World Bank’s meager 0.5% 2023 projection for advanced economies.
Figure 1: World Bank GDP Growth Estimates
| 2020 | 2021 | 2022E | 2023F | 2024F | |
|---|---|---|---|---|---|
| Advanced Economies | -4.3% | 5.3% | 2.5% | 0.5% | 1.6% |
| United States | -2.8% | 5.9% | 1.9% | 0.5% | 1.6% |
| Euro Area | -6.1% | 5.3% | 3.3% | 0.0% | 1.6% |
| Japan | -4.3% | 2.2% | 1.2% | 1.0% | 0.7% |
Emerging Market & Developing Economies |
-1.5% |
6.7% |
3.4% |
3.4% |
4.1% |
| China | 2.2% | 8.1% | 3.0% | 4.3% | 5.0% |
| Indonesia | -2.1% | 3.7% | 5.2% | 4.8% | 4.9% |
| India | -6.6% | 8.7% | 6.9% | 6.6% | 6.1% |
| Latin America & the Carbbean | -6.2% | 6.8% | 3.6% | 1.3% | 2.4% |
Source: World Bank, Global Economic Prospects Report, January 2023
2022 updated to China official preliminary figure
Household savings rates have increased around 400 basis points since 2019 to roughly 34% as consumer confidence was negatively impacted by China’s zero-COVID policy. As we expect confidence to come back, a significant amount of excess savings, estimated at 7 trillion renminbi (China’s currency), may come back into various forms of consumption.
Figure 2: China Per-Capita Household Savings as a Percent of Disposable Income (1990 to 2022)
Savings = per-capita disposable income minus per-capita consumption
Source: National Bureau of Statistics China, Statista
Focus on Domestic Consumption – E-Commerce, Restaurants, Travel, and Gaming
In e-commerce, regulations have leveled the playing field by ending exclusivity agreements with vendors. We think JD.com may benefit from this, while the end of such agreements should have a negative impact on Alibaba in terms of market share. But as e-commerce penetration continues to grow, both JD.com and Alibaba should thrive. In the near-term, Alibaba may be in an advantaged position coming out of the pandemic given it is more exposed to consumer discretionary categories, such as apparel. Alibaba may see a recovery in cloud revenues and margins through its cost-cutting initiatives.
Consumers that have been isolating for the last several years will likely be hungry to dine out. Restaurants such as Yum China, which operates KFCs and Pizza Huts throughout China, may be well positioned. Previous investments in its online ordering and digital capabilities enabled the company to navigate the pandemic better than its competitors, which are primarily mom and pops.
We expect people will be eager to travel, and Macau resort and gaming operator Sands China may be a beneficiary of this trend. In addition to travel reopening, gaming concessions have been renewed, which removes that potential overhang from the market for the next many years. According to the Cultural and Tourism Ministry, over the seven-day Lunar New Year holiday, more than 300 million travelers spent a total of $56 billion, a 30% increase over the prior year.
On the consumer staples side of consumption, premium spirit maker Kweichow Moutai should be well positioned for a return to bars, restaurants, and socializing. Outside of leisure, students returning to schools and workers returning to offices may bode well for companies like Shanghai M&G Stationery, which manufactures writing instruments and stationery products.
Along with the reopening, we see online gaming approvals starting to resume. However, China’s online gaming industry has come under regulatory pressure in recent years due to concerns over social issues, such as youth gaming addiction as well as content. This type of regulation has waxed and waned over the years and large operators such as NetEase and Tencent have made efforts to address these concerns. While Tencent has seen some additional pressure given its platform reach across other IT businesses, we think much of that is factored into its stock price.
We remain cautious on China’s real estate sector and basic materials tied to construction. We have historically steered clear of Chinese banks due to a lack of transparency and their role as policy tools of the government. We are also mindful of areas that we believe have higher regulatory risk, such as some of the education services stocks.
Coming out of China’s Lunar New Year celebrations, the U.S. identified and shot down a Chinese surveillance balloon off the Carolina coast – a fresh reminder of the geopolitical tensions between the two countries. Is the U.S. simply better at identifying such objects than it has been in past? Maybe. Regardless, the incident could further strain relations and is a reminder that investing in this part of the world is not without volatility and headline risk. It does not change the way we invest. We believe there are many attractive opportunities in China, particularly in areas of domestic consumption. We focus on those companies that we believe have strong fundamentals, lower regulatory risk, and maintain an absolute risk mindset.
Investment Partner
The commentary is the opinion of Vontobel Asset Management. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
Past performance is no guarantee of future results.
All investments carry a certain degree of risk, including possible loss of principal.
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