China’s reopening has spurred a rebound in its economy and financial markets. But how should investors view what lies ahead? Richard Edgar, Editor in Chief, met with Andrew McCaffery, Fidelity’s Global CIO, Asset Management, to learn more.
Sentiment toward China is changing. As we entered 2023, there were concerns that significant challenges to growth would persist. Much of that belief was driven by fears that pandemic containment was taking priority over economic expansion. Yet, this mindset was abruptly altered with China’s COVID policy pivot and subsequent reopening. More broadly, we also saw a greater level of engagement by the country’s leaders at, for instance, the G20 meeting in Bali and the World Economic Forum; where proactive and robust statements about China being open for business were delivered.
China’s policy-led revival
McCaffery says that “recent developments could be viewed as the first phase of China’s re-engagement. Next [is] the follow through from the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC)”.
Over the medium term, there will be a desire to encourage consumers to spend not only what was saved during the pandemic, but also cement sustained consumption trends. He points out that nearly US$2.5 trillion of savings may have accumulated in the past few years1. McCaffery further added that “the Chinese authorities tend to be very focused on supply-side challenges to ensure people can buy what they need. As such, they tend to think tactically and adopt a longer-term approach.”
Structural engagement in the real estate sector
In tandem with the consumer recovery, investors are retaining a watchful eye on developments in China’s property market. McCaffery believes that for confidence to become more entrenched, we need to see signs that the freefall is now behind us. Although there has been a good deal of policy support and structural engagement, that will not necessarily fuel the levels of growth we have witnessed in the past. “I think it's more important to see steady, if not accelerated, progress.”
Beyond the garden fence
Looking farther afield, one of the immediate effects of China’s reopening has been a reduction in the global risk premium. Given the country’s significant presence in the world economy, any absence would inevitably trigger fears of a slowdown. But quite suddenly, China is recovering its position at the forefront of momentum and “I think that's had an important impact across all markets,” says McCaffery. This will be felt more acutely by countries closer to China in terms of the supply chain, such as exporters. That said, the services supply chain could also receive a boost if consumer activity picks up. As such, China’s near neighbours, the ASEAN bloc, and Australia, should reap benefits.
Europe and the US could also see an upturn, especially in the luxury goods space or other consumption-related businesses like tourism. Still, McCaffery suggests that improvements may, at least initially, be more muted than anticipated, as “it takes a while for any recovery to gain traction.” He adds that established concerns, like worries about the health of the property sector, are instilling a sense of caution among investors. “Therefore, we should view this as a period of consolidation while we wait to see what initiatives and targets are on the table,” he continues.
Mindful of emerging data
Coupled with this, global investors will be analysing the post-reopening economic data that is starting to appear. Based on what has already been released, the impression is that the economic outlook feels a lot better than before. “China will see sustained growth as we go through the year and beyond,” suggests McCaffery. It is also worth remembering that investors will be aware of potential roadblocks closer to home. Hopes for a soft landing are being balanced by fears about persistent inflation and how central banks will respond in terms of interest-rate hikes.
You can further read Andrew McCaffery’s thoughts on how to invest for China’s next phase here.
