A more broad-based recovery after initial reopening,
though some bumpiness is expected.
Despite some softer macro data recently, the initial stage of economic reopening largely met our expectations, with the services sector leading the way.
We expect the recovery to broaden with some bumpiness due to the volatile base, uncertainties in the external economy, and geopolitical tensions.
The regulatory environment should normalize, with more support for the private sector. Valuations are attractive versus growth for China equities.
China’s economic reopening has largely played out as we had expected in December 2022. Initially, there were a string of positive economic surprises that boosted investor confidence. China’s first‑quarter gross domestic product (GDP) growth number, for example, came in at 4.5%, much better than the consensus forecast of 4%. The consumption rebound was also strong, led by strong services sector recovery.
Travel-related consumption services rebounded very strongly.
Catering notched above 20% growth in March and overall around 14% in the first quarter.
Industrial production was a little weak as were exports prior to the rebound in March, but both were within expectations.
Residential property remains a key uncertainty after the sharp contraction last year. The property market in the first quarter appears bifurcated. We have seen a healthy rebound in higher-tier cities where policy restrictions on home purchase at the city level have eased. Sales numbers inlower-tier provincial cities remained weak, however, which may be partly due to net migration to larger cities. Property sales by value rose 4.1% in the first quarter, while new home prices increased for a third consecutive month in March. First-quarter national new home starts remained in contraction territory, though the magnitude narrowed.
Outlook for the Second Half of 2023: Recent Softness in Macro Data Unlikely to Derail 2023 Economic Recovery Trajectory
We believe the recent weakness in China’s macro data is more likely to be a temporary hiccup than a major trend that could derail 2023’s recovery trajectory. We anticipate a gradual but more broad-based economic recovery for the rest of the year and into 2024, with some bumpiness expected due to the volatile base, uncertainties in the external economy, and geopolitical tensions. In such an environment, stock picking is our focus in navigating the uncertainties.
Annual growth rates for retail sales, fixed investment, and industrial output surged in April, but this was due to the base effects arising from Shanghai’s lockdown in April 2022. Base effects are likely to distort year-on-year data comparisons throughout 2023, adding considerable "noise" to the monthly data releases. Four‑year compound annual growth rates show that the Chinese economy lost some momentum after the first phase of reopening ended.
Following softer economic data in April, investors have recently become concerned about the sustainability of economic recovery. As a result, the rallyin Chinese stocks that began last October has stalled recently, leaving the market at attractive valuations, especially in sectors such as communication services and information technology (IT) (Figure 1).
China Valuations Are Attractive
(Fig. 1) 12-month forward price/earnings ratio. Five years historical data.
As of April 30, 2023.
Sources: FactSet, I/B/E/S, MSCI, Wind, Goldman Sachs Global Investment Research. Financial data and analytics provider FactSet: Copyright 2022 FactSet. All rights reserved. Please see Additional Disclosures page for information about this MSCI information.
We believe the initial phase of China’s reopening—benefiting consumer services in areas such as travel, entertainment, hotels, and restaurants—has largely played out. However, the economic recovery should have legs. Because of the pandemic, it is estimated that the services sector failed to create as many as 30 million jobs cumulatively in the past three years (source: Morgan Stanley Research). As “experience” types of consumption recovered in the first phase, we expect employment in these areas to improve and the recovery to broaden out in the second phase to include job recruitment agencies and the broader consumer space, including goods consumption. Later in 2023 or early in 2024 we should see the third recovery phase begin as late-cycle themes start to gain traction with improved business confidence, such as advertising companies and private investment.
Given the recent softness in macro data, the possibility of selective fiscal measures to support growth is increasing, although it is difficult to forecast their timing and magnitude. Monetary policy in China should remain supportive throughout 2023. The People’s Bank of China (PBoC) cut its reserve requirement ratio for banks in March. Credit growth, like other economic data, showed some volatility in recent months and most China economists now expect one or more interest rate cuts this year. This may be facilitated if the Federal Reserve is currently close to peak monetary tightening in the U.S. In addition, should there be external demand uncertainty to weaken China’s export growth, we believe regulators have fiscal tools or easing housing policies, such as second home restrictions, to support better growth.
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