China: recovery delayed, not cancelled

August 31, 2023

Arriving in China, our minds took us back to our last trip – and to a time before Covid. The intervening years have been interesting ones, and we were ready to see what China following lockdowns has to offer. However, at first glance, we were surprised to see the extent to which life seems the same.

The ‘Covid infrastructure’ has been fully dismantled, with white hazmat suits and long queues at PCR testing stations a distant memory. Masks are still in existence, however shopping malls and restaurants have sparked back into life, and the summer tourist season is in full swing.

Yet, beneath the surface, the picture isn’t as rosy. The confidence of the prosperous middle class has been shaken recently by China’s faltering economy recovery, a government under pressure and the deepening property crisis, amongst other factors.

As always, China is interesting and providing plenty of talking points. In our piece below, we discuss:

  1. Digitalisation: China is a leading light in digital trends and has become one of the world’s largest and fastest-evolving digital economies. Covid accelerated these trends, and self-service vending machines for medicinal drugs, ‘AI doctors’ and street musicians using QR codes are now an everyday part of China’s post-Covid world.

  2. Consumption: the government’s focus on improving consumption has had a positive impact. Retail sales were up 6.7% year-on-year in the first half of 20231 and are continuing to recover from last year’s lockdown, albeit slower than initially expected. Auto sales are also increasing, with electric vehicle penetration growing rapidly.

  3. Property: the weak real estate market has hit sentiment, given that it accounts for most of China’s middle-class wealth. Yet the government is acknowledging this weakness and official rhetoric has turned positive. Premier Li Qiang has a reputation for being pro-business and market friendly, and we have seen a pro-growth policy orientation since his appointment in March.

  4. Policy: in July’s Politburo meeting, which typically sets central government’s economic policy tone for the second half of the year, policymakers announced ‘a basket of plans’ to address local government financing issues. We expect central government to intervene in some cases and restructure local government debt terms, using its own balance sheet to guarantee payments.

In sum, the rebound has been weaker than expected, with ‘revenge consumption’ failing to materialise. We expect the economy to continue to gradually recover as consumer confidence improves, however investors will need to be patient.

The government is shifting away from its previous debt-fuelled growth and this means that overall growth should continue to trend down. If this means China’s economy becomes more consumer-led rather than infrastructure-led, we see this as a positive, from a long-term equity market perspective. This is because less overcapacity and a stronger consumer should translate into improved margins – and thus – returns.

1. Bloomberg Economics, 18 July 2023.

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