There are growing signs that China’s markets and economy may be able to turn the corner soon due to authorities' decision to start gradually reopening and the announcement of various pro-growth measures. What say the banks?
Recently, there have been an increasing number of positive policy signs that could act as tailwinds to support a sustainable rebound in China’s markets and economy.
Top cities like Shanghai are beginning to gradually reopen. Authorities are rolling out a myriad of pro-growth measures including tax breaks, monetary easing, and fiscal stimulus packages.
And in the latest, there are signs that China’s internet sector may also experience a turnaround after regulators concluded probes into ride-hailing giant Didi Global and allowed the return of two other apps to online stores this week, according to a «Wall Street Journal» report citing unnamed sources.
So, what say the banks?
Bottomed Out
According to a research note by Julius Baer, Chinese markets have «likely troughed» though the pace of recovery will depend on reopening progress.
«We believe the actual progress will likely be gradual, as the government carefully strikes a balance between adhering to its zero-Covid policy and boosting economic growth,» said Asia equity research analyst Richard Tang in the note, underlining internet, auto, and consumer stocks as winners in the short-term. «Equally, it may be a long grind before the positions yield meaningful returns.»
«We believe the worst could be over for China and expect the economy to bounce back in 2H after a very weak 2Q,» added UBS in an investment report published this month which highlighted China as a preference for tactical allocations.
«The most turbulent times for the platform economy are now behind us. The resumption of capital market activities within the internet sector will be an important sign of policy normalization. While earnings will take a hit in 2Q from the pandemic, we continue to anticipate a still-decent growth rate of 9.8 percent for MSCI China. From this point, we see low-teen returns for the market by the end of the year.»
Top-Down Growth Drive
In addition to the reopening, banks have also highlighted a series of state policies that are expected to support an accelerated recovery.
According to Credit Suisse, a slew of measures are being introduced by various government bodies including the State Council, Ministry of Finance, and People’s Bank of China, which aim to significantly expand liquidity in an effort to fuel growth.
«It is a template straight from China’s playbook,» said Credit Suisse APAC CIO John Woods in a recent podcast, adding that the bank is comfortably maintaining its overweight call for China with a focus on policy-supported sectors like infrastructure and sustainability.
«Whenever the economy starts to splutter, whenever the normal levers and mechanisms designed to boost growth fail to spark, you turn on the taps, douse the economy with liquidity in an effort to coax the economic engine back to life.»
Zero-Covid Risks
Despite the positive signs, the pace and path to recovery are far from certain, especially because China remains likely to maintain its zero-Covid policy stance.
«[W]hile China’s fundamentals, valuations and technical setup are improving, inevitably there are risks to our view and chief amongst these risks is a renewed outbreak of Covid-19,» Woods noted. «The reality is the government is unlikely to abandon zero-Covid policy anytime soon.»
Goldman Sachs estimates that mobility, construction, and ports operation could recover to pre-lockdown levels in around one month assuming a smooth reopening but stresses that businesses in the service sector requiring close human contact may not «achieve a full recovery any time soon».
«The unsynchronized lockdowns and reopenings across major cities suggest that China’s ongoing post-lockdown growth recovery should be less steep than the V-shaped one in spring 2020,» said a Goldman report over the weekend co-authored by China economist Lisheng Wang and others.
