January 17, 2023

Weekly Market
Update

Inflation Decelerates and China Reopens

  • Last week, the S&P 500 rose 2.7% to rise above its 200-day moving average and come within a whisker of 4,000.
  • The Dow Jones index climbed 2.0% and the Nasdaq composite jumped more than twice as much, 4.8%, as the Consumer Price Index (CPI) declined to 6.5% year-over-year in December from 7.1% in November.
  • China’s reopening has caught many by surprise. The world’s second largest economy reversed its zero-Covid policy on December 7, 2022, and caseloads subsequently soared. It is possible that heard immunity has now been reached.

3 Things to Know

China's reopening rally

China’s unexpected Covid policy reversal and its economic reopening have surprised many global investors. Health experts believe China has already reached herd immunity across the country and policymakers have comprehensively refocused efforts on restoring economic activity and bolstering market sentiment. These factors have produced a sharp equity rally off the bottom. Some observers wonder if the bull market is already over. CGWI believes substantial appreciation potential remains for Chinese shares as revenue growth and earnings are likely to exceed modest expectations.

What does this mean for investors?

In the near term, China’s economy is likely to rebound sharply while the rest of the world is still likely to slow down.

There are many signs of a rapid “return to normal” among China’s population, including mobility data, which has been improving sharply in January, and a rise in travel bookings of mainland China tourists before the Lunar New Year to Southeast Asian countries. China’s GDP growth in 2023 is likely to materially exceed CGWI’s original GDP growth forecast of 4.5%. There are five key drivers of this growth: faster-than-expected reopening from Covid-zero is helping to boost a consumption recovery in 2023 that may match or exceed that seen in 2021. Chinese households have accumulated CNY 15 trillion worth of new deposits in 2022, or a record 14% of GDP.

The central bank and banking regulator have reopened credit and equity channels for property developer financing, which could potentially help the beleaguered property sector. Money supply growth in China remains elevated in contrast to the US. The government vowed to unwaveringly support both state-owned and private-owned enterprises, with fiscal, monetary, industrial, technology, innovation and social policies to engineer an economic recovery post-pandemic.

Economic data has not improved for 4Q22; it’s likely real GDP shrunk sequentially in Q4, taking the full-year GDP growth to 2.5-3.0%, below our earlier expectation of 3.5%. But now we see the opposite effect as likely in 1Q23 and beyond, with factories reopening and people returning to their job sites.

Addressing lingering concerns over geopolitics and regulations

On the geopolitical front, the strategic competition between US and China would likely continue for many years to come. However, recently, China has taken a few steps to tone down confrontation, including replacing the combative foreign ministry spokesperson and naming a milder official as the ambassador to the US.

Even though we do not expect a major improvement in the relationship, serious escalations may be avoidable in a year without major elections on either side. We suspect that geopolitical risks are unlikely to become an immediate hurdle to economic recovery in 2023.

On the regulation side, several corporate developments may be notable. Various parts of government had taken small but “golden” shares in major internet platform companies. This may be seen as a sign of rising state influence, but it could also be seen as a prerequisite for maintaining access to capital markets.