Mainland China: charting the path to reopening
Investor optimism about Mainland China rose in recent weeks on news that authorities are gradually relaxing various measures that had been introduced under the country’s zero-COVID strategy. After a difficult 12-month period, is the Chinese economy about to reopen and stimulate global growth?
Transitioning from zero-COVID to living with COVID-19
Being a key driver behind global growth, the timing of Mainland China’s economic reopening—when international and intercity borders reopen and business as usual resumes—is an event that has important significance for investors.
A lot has happened in the past few weeks: Several cities have relaxed requirements for PCR testing, reduced the number of areas deemed to be at risk of COVID-19 outbreaks, and the authorities have reportedly set a 90% vaccination target for the elderly by the end of January. These are very encouraging signals; however, initial optimism has given way to a sense of caution amid rising infection rates and warnings that the country could be facing as many as three waves of COVID-19 outbreaks this winter.
From an investment perspective, while we’re encouraged by the change in policy direction, we believe some caution is warranted as three core uncertainties remain:
1 High-risk areas accounting for ~50% of GDP are still subject to lockdowns
2 The level of vaccination take-up among the elderly
3 Whether the lighter-touch approach will succeed in quashing current outbreaks and the follow-up response should they fail
Our expectation for a meaningful reopening hasn’t changed: We believe the economy will reopen after the National Party Congress in March 2023. Key signposts to monitor in the coming months will be vaccination and fatality rates, healthcare infrastructure capacity, and the authorities’ response to rising infection.
"Our expectation for a meaningful reopening hasn’t changed: We believe the economy will reopen after the National Party Congress in March 2023."
Timelines and the sequence of the reopening: what it could mean for APAC
Given the role that Mainland China plays in the global economy, particularly in the Asia-Pacific region (APAC), the order in which the reopening occurs is no less important. If the reopening proceeds smoothly, it will affect each economy differently—with some benefiting more than others.
We think it’s helpful to think about what’s likely to happen next in three phases.
Phase 1
We expect a disruptive transition from zero-COVID over a one- to three-month investment horizon as COVID-19 case counts soar and restrictions are once again needed to prevent the healthcare system from being overburdened. Understandably, many will look to minimize in-person interactions as infection fears take hold, keeping a lid on mobility rates and consumption.
Phase 2
Once hospitalization and mortality rates have stabilized and start to decline, mobility rates and household consumption should recover. We believe this could happen in Q2 2023.
Implications for APAC
A recovery in Mainland China’s goods imports needs to be balanced against expected recessions in—and, therefore, weaker demand from—the United States and Europe. The extent to which China’s final demand for Asian exports offsets demand from the eurozone and the United States will also be a relevant factor; likewise, each economy’s net trade status with Mainland China. If an economy is running a trade deficit with the country (i.e., Chinese imports exceed exports), that deficit will detract from growth; the reverse is also true. Taken together, Taiwan, Australia, Malaysia, and South Korea are, on the face of it, the main beneficiaries from a recovery in Chinese goods consumption. In practice, the composition of the export basket will also matter. For instance, electronics-heavy exporters such as South Korea and Taiwan are likely to see a smaller boost to growth on the back of higher Chinese consumption than the raw material/commodity exporters due to the ongoing downturn in the technology sector and the U.S. controls on semiconductor exports to Mainland China.
China's annual trade balances with its key trading partners in the Asia-Pacific region
Phase 3
As policymakers turn their full attention to reinvigorating the domestic economy, outbound tourism and related-services demand are likely to be the last stage of the anticipated reopening recovery.
Implications for APAC
Normalization in Chinese outbound tourism should benefit Thailand, Malaysia, and Vietnam in light of their decline in travel and tourism revenue over the past two years as a result of pandemic-related travel disruptions.
Shifting global supply chain dynamics
While mainland China’s reopening could address corporate concerns around supply chain management related to lockdowns and travel restrictions, diversification of global supply chains away from the country is a structural theme that’s evolving, and it’s one that investors shouldn’t lose sight of. As the theme plays out, it could have positive implications on foreign direct investments into the region at large but particularly in South and Southeast Asia.
In the same way that news of Beijing’s decision to pivot away from its zero-COVID policy had brought about a sense of optimism and relief, the upcoming weeks could bring upsetting news and weigh on sentiment as the case count rises. It’s fair to say that Mainland China’s transition from zero-COVID to living-with-COVID isn’t likely to differ too much from other economies, but we believe this framework could provide a sensible lens through which to evaluate how quickly the country could reopen and which economies in APAC might benefit.
Important disclosures
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
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