China Rebound

The main takeaways from China’s latest activity indicators are: (1) the economy is rebounding faster than expected, and (2) the recovery is likely to be driven more by services/consumption from now on with manufacturing/net exports taking the backseat (for now). All “mainstream” indicators – December retail sales, industrial production, fixed assets investments, and real Q4 GDP growth - beat consensus by a wide margin (see chart below). And higher-frequency indicators (flights, subway rides, etc.) point to rapid improvements in mobility in the second half of December after the initial surge in infections. Fewer movement restrictions and huge pent-up demand should boost consumption and its contribution to growth as the re-opening progresses – but would this be enough to support the V-shaped recovery? Real estate can still be a major drag on growth – especially in H1 – as the recent policy support might take some time to sift through.

Market Reaction to China Reopening

A prospect of China’s faster recovery did not go unnoticed by sell-side analysts - Deutsche Bank has just lifted its 2023 growth forecast from 4.5% to 6%. But there are also plenty of skeptics, who pointed that softer monthly numbers were not entirely consistent with stronger aggregate quarterly data. We totally acknowledge these concerns - China has a certain reputation in the data department. However, what matters from the market perspective right now is that China is still “under-owned”, which is why improving domestic activity and the right type of policy support (especially in the housing sector) continue to drive market inflows (and performance).

China and Global Growth

The pace of China’s rebound is an important driver for global commodity prices and commodity exporters. Asian EMs also stand to benefit from a larger number of Chinese tourists – the Thai baht’s stellar performance so far this year (the second highest spot return) is a reflection of these expectations. Finally, China’s faster recovery could also be a boon for Europe – China accounts for about 7.5% of German exports (in 2021) – supporting the emerging narrative of softer landing/no recession in 2023, and maybe driving the euro’s strength for a little longer. Stay tuned!

Chart at a Glance: China Activity Recovers At A Faster Pace^*

Source: Bloomberg LP.

^*CHVAIOY: China Value Added of Industry YoY.