China is aiming for a fast economic recovery this year after ending its strict Covid-related restrictions and put its economy, badly affected by the pandemic, back on track for rapid growth. After pursuing a strict zero-Covid policy of rigorous lockdowns and mandatory quarantines, China’s government completely abandoned its zero-tolerance policy in December and also opened the country’s borders a month later.
Although the change, as feared, naturally brought a new wave of infection, it has already produced positive results in some economic barometers this year. The official Purchasing Managers’ Index (PMI) showed a return of China’s economy to growth January. The Purchasing Managers’ Index for the manufacturing sector rose to 50.1 points after 47.0 in December, passing the 50-point threshold above which growth is signaled. The purchasing managers’ index for the service sector rose even more sharply from 41.6 to 54.5 points.
The Purchasing Managers’ Index compiled by the news portal Caixin and S&P also showed a clear recovery in the service sector, rising from 48.0 to 52.9 points. After the wave’s surprisingly rapid peak in infections, new vigrour in consumer spending was particularly evident during the week-long Chinese New Year holiday, experts report. Other economic indicators from January also recently pointed upward again. For example, industrial production rose by 1.3 per cent year-on-year in December, which was stronger than expected.
Domestic Consumption Recovering From Strict Lockdowns
Domestic consumption, which had suffered particularly from China’s sharp lockdowns, is also showing signs of recovery. Although retail sales in December fell by 1.8 per cent, the decline was less pronounced than one month previously. Consumer prices are also already reflecting consumers’ increased appetite for spending, with inflation at 1.8 per cent in December up from 1.6 per cent in the month before. In the previous year, the zero-Covid policy had turned a number of Chinese cities into virtual ghost towns, severely dampening consumption.
China’s government now wants to further drive economic recovery this year, as the pandemic has had a strong impact on the economy. In the pandemic’s first year, China’s economy grew only moderately by 2.2 per cent. In 2021, a recovery followed with 8.4 per cent growth, but in 2022 China clearly missed its target again, with growth topping out at 3.0 percent. In Q4 of 2022, economic growth exceeded expert expectations at 2.9 per cent, but also fell well short of the government’s target of 5.5 per cent. Additionally, the effects of the pandemic were exacerbated by a crisis in the real estate market.
China’s Government Plans to Actively Drive Economic Recovery
Looking to drive economic recovery, the government is now primarily focusing on a rapid revival of domestic consumption. President Xi Jinping recently issued the motto: China should take steps so that consumers “dare to spend money without worrying about the future.” A recovery in domestic demand is important because China’s important export economy is currently in crisis as a result of the pandemic and weakening global demand. In January, China’s customs reported a 9.9-per-cent decline in exports calculated in dollars. Trade between China and Germany suffered particularly badly, with China’s exports to Germany dropping by 27.9 per cent.
However, experts recently expressed skepticism about the volume of the spending stimulus: Issuing vouchers on a large scale could further fuel inflation, and moreover, the return of pent-up demand could be enough to revive consumption anyway. Measures to boost spending are therefore likely to be mainly local and limited in scope, government advisers told news agency Reuters.
Technology groups hope for relaxation of regulations
Many experts expect China’s government to rely more on proven concepts such as subsidies for key industries and investment in infrastructure. “The government prefers investment and projects,” Reuters quoted Guo Tianyong of Beijing’s Central University of Finance and Economics. Technology companies are also hoping for a relaxation of regulations in the industry. In addition, recovery is likely to depend heavily on the developments in the crisis-ridden real estate market. Experts estimate that, for lack of investment alternatives, around 75 per cent of private assets in China are in real estate.
However, China’s government also wants to get the economy moving again by opening up more to foreign countries, planning to attract talent from abroad to the People’s Republic to work there. Furthermore, the foreign investors’ interests are to be protected more strongly, government representatives recently announced.
Many Companies Focusing on Chinese Market Despite Political Tensions
This initiative comes at a difficult time, as many countries in the West are currently discussing plans to distance themselves somewhat from China economically in view of, among other things, foreign policy tensions. The Netherlands and Japan recently joined the US in banning exports of certain computer chip manufacturing machinery to China. With these measures, the US wants to slow down technological and military progress in the People’s Republic. Tensions between China and the US most recently rose again over the weekend following the shooting down of a suspected Chinese spy balloon by US fighter jets.
However, many companies and industries – such as Germany’s automotive industry – continue to rely on China as their most promising market. “We believe decoupling cannot solve the problems of the 21st century,” Volkswagen’s China board member Ralf Brandstätter said recently.
Fund manager Tinti: 2023 will be a good year on the Chinese stock market
The stock markets in Shanghai and Hong Kong have already rewarded the new economic signs in the “Year of the Rabbit” with price increases. For Gabriela Tinti, Erste Asset Management’s fund manager responsible for emerging market equities, one reason is the government’s broad support package for the real estate sector and the disappearance of problems in supply chains. Despite the recent price rises, 60 per cent of Chinese companies listed on the stock exchange are valued lower than in 2019, she said, adding that she expects a positive development, but not a linear one. The state’s intervention in technology companies has left scars, she recently told the daily Kurier.
“Despite the recent price rises, 60% of Chinese companies listed on the stock exchange are valued lower than in 2019.”
Gabriela Tinti, Head of Equities Austria Erste AM
The state wants to have more control than in earlier years and to exert its influence. The problems with the US Securities and Exchange Commission have also not yet been finally solved: The sword of Damocles of a delisting still hangs over about 200 companies. Investors have to be able to live with that. The People’s Congress in spring will show how the ministries will be filled and which personalities will play a decisive role. Erste Asset Management funds with a focus on China are currently investing in stocks from the consumer sector, the leisure industry, sporting goods manufacturers and tour operators as well as airlines, casinos and semiconductor stocks.
Equity funds with investment opportunity in China
The funds listed below offer an opportunity to profit from the opening of China after the Corona pandemic. The high potential returns are also accompanied by risks, which risk-tolerant investors should always keep in mind.
ERSTE STOCK EM GLOBAL
The ERSTE STOCK EM GLOBAL invests primarily in companies based or doing business in global emerging markets. The fund’s investment process is based on fundamental business analysis. The fund employs an active investment policy and is not oriented towards a benchmark. The emerging markets of Asia (including China) are currently weighted at almost 80 percent.
Advantages for the investor
- Broadly diversified investment in companies in emerging markets with little capital investment.
- Active stock selection based on fundamental criteria.
- Participation in global emerging market growth opportunities.
- Opportunities for capital appreciation.
- The fund is suitable as an addition to an existing equity portfolio and is intended for long-term capital appreciation.
Risks to be considered
- The price of the funds can fluctuate considerably (high volatility).
- An investment in emerging markets has a higher risk potential than an investment in developed markets.
- Due to the investment in foreign currencies, the net asset value in Euro can fluctuate due to changes in the exchange rate.
- Capital loss is possible.
- Risks that may be significant for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk and operational risk. Comprehensive information on the risks of the fund can be found in the prospectus or the information for investors pursuant to § 21 AIFMG, section II, “Risk information”.
ERSTE STOCK ASIA INFRASTRUCTURE
The ERSTE STOCK ASIA INFRASTRUCTURE invests primarily in Asian companies from the infrastructure sector (e.g. energy supply, transport, water supply, telecommunications). The fund’s investment process is based on fundamental business analysis. The fund employs an active investment policy and is not oriented towards a benchmark: When selecting stocks, the focus is on high-quality, high-growth companies. Chinese equities currently account for around 40 percent of the fund’s holdings.
Advantages for the investor
- Broadly diversified investment in Asian infrastructure companies.
- Participation in Asian growth opportunities.
- Active stock selection based on fundamental criteria.
- The fund is suitable as an addition to an existing equity portfolio and is intended for long-term capital appreciation.
Risks to be considered
- The price of the funds can fluctuate considerably (high volatility).
- Due to the investment in foreign currencies, the fund value can fluctuate due to changes in the exchange rate.
- Capital loss is possible.
- Risks that may be significant for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk and operational risk. Comprehensive information on the risks of the fund can be found in the prospectus or the information for investors pursuant to § 21 AIFMG, section II, “Risk information”.
ERSTE STOCK ASIA PACIFIC PROPERTY
The ERSTE STOCK ASIA PACIFIC PROPERTY invests primarily in real estate stocks and REITs (Real Estate Investment Trusts) from the regions of Asia and the Pacific. The fund’s investment process is based on fundamental business analysis. The fund employs an active investment policy and is not oriented towards a benchmark When selecting stocks, the focus is on high-quality, high-growth companies. China and Hong Kong equities take up more than half of the portfolio.
Advantages for the investor
- Broadly diversified investment in residental, office and retail properties. Participation in Asian growth opportunities.
- Active stock selection based on fundamental criteria.
- The fund is suitable as an addition to an existing equity portfolio and is intended for long-term capital appreciation.
Risks to be considered
- The price of the funds can fluctuate greatly (high volatility).
- Due to the investment in foreign currencies, the fund value can fluctuate due to changes in the exchange rate.
- The investor mainly bears the risk of the Asia/Pacific stock markets especially the risk of the local real estate industry.
- Loss of capital is possible.
- Risks that may be significant for the fund are in particular: credit and counterparty risk, liquidity risk, custody risk, derivative risk and operational risk. Comprehensive information on the risks of the fund can be found in the prospectus or the information for investors pursuant to § 21 AIFMG, section II, “Risk information”.
For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management
Legal note:
Prognoses are no reliable indicator for future performance.