Investors are watching closely as China emerges from three years of pandemic restrictions, but shifting supply chains are also a factor in the industrial rebound - and not necessarily an inflationary one.
Consumers are in the spotlight as China reopens from three years of Covid restrictions, but how is it impacting the midstream industrial companies that you cover, Theresa?
In December, China went through a massive wave of Covid infections and that really impacted production activities across the industrial value chain. But we had a nice production recovery in January and most of my companies are seeing 90 per cent of their employees are back to work and operations are just about back to normal.
What’s driving that, outside of the reopening?
Firstly, on the supply side, 2022 brought a lot of disruption to supply chains, logistics, and transportation networks. That is now normalising and industrial activity is picking up. And demand is also bouncing back thanks to the policy stimulus and the recovery in consumer demand. That’s already driving demand for some industrial companies, for example manufacturers of home appliances or consumer products.
Companies are also hedging or reorganising their supply chains.
I think a lot of Chinese companies realised the importance of localising or shortening their supply chains to reduce the risk of logistical or transportation disruptions. We see those as the companies that will become more competitive with their end products going forward.
Isn’t that also deflationary?
Yeah. I’ve seen examples of how localised supply chains are driving down costs in the chemicals sector and the automotive supply chain. In the past, a lot of the auto original equipment manufacturers (OEMs) relied on foreign suppliers for some critical components, for example, connectors. But increasingly they are sourcing locally and that can reduce costs by 20 to 30 per cent. That eventually will translate into lower prices of the cars themselves.
But some of this localisation is being driven by geopolitical forces and trade restrictions, isn’t that a liability?
Actually, I think some Chinese companies will benefit from that. For example, the homegrown companies who are replacing foreign competitors as suppliers are getting more orders from their local customers and hence enjoying rising market share in China.
Markets have obviously been exuberant about China’s reopening in the last few weeks, is that sustainable?
We do think it’s sustainable. Look at overall activity. There is no more fear about Covid and people are feeling comfortable enough to go offline and do a lot of different consumption activities. And on the industrial side, we see normalisation of supply chain logistics and also a very strong rebound in industrial activities.
But what are the risks?
There are some concerns about a second wave of Covid. Another risk is obviously from the external environment. If a global recession continues, how would that impact overall demand for exports from China? And geopolitics is always a risk that we need to be mindful of as well.
