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China Tries to Put Its Economy Back on Track After Covid Shutdowns

People gather at a Beijing shopping area that remained quiet after stores were allowed to reopen earlier in December.

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Kevin Frayer/Getty Images

Chinese authorities’ blueprint to stabilize the world’s second-largest economy focuses on boosting consumer spending and rebuilding business and investor confidence as China tries to reopen after years of strict Covid restrictions, a property slump and ideologically driven policies that rattled investors.

Much like investors are trained not to “Fight the Fed,” the axiom for investors looking to benefit from China’s recovery may be: “Follow Beijing.” And right now, Beijing is intent on reviving consumer and business sentiment and beefing up its capabilities in key sectors as the U.S. and others increase efforts to curtail its access to advanced technology.

At the country’s annual Central Economic Work Conference late last week, Chinese authorities stressed growth and short- and long-term plans to make consumer spending a bigger share of economic activity.

Unlike in the U.S., Chinese consumers didn’t get stimulus checks during the pandemic, but they have much higher levels of household savings that expanded further during the pandemic. Still, economists like TS Lombard’s Rory Green warn that consumers are scarred by the hit to household wealth as property prices have tumbled, the pain of living under Zero-Covid and what could still be a difficult winter as China sees a surge in infections.

Already, the medical system is showing strain and crematoriums in Beijing have seen a surge in demand. A lack of data makes it hard to grasp the true scale of the outbreak, even as public-health experts brace for a surge.

Air quality data, a proxy for economic activity, shows an uneven path out of Zero-Covid. Shanghai, which recently closed schools, shows activity picking up modestly though the city just closed schools. Beijing is seeing little pick up, while central Chongqing, which is allowing people with mild Covid cases to go to work and has eliminated the need to show a negative test result in certain places like schools and nursing homes, shows accelerating output back to 2019 levels, according to DataTrek Research.

A broad-based consumer recovery requires an improvement in unemployment among those under 25, which sits at 17%, and wage growth, which is about four percentage points below its pre-Covid trend, Green writes in a client note. A pickup in new service-sector jobs as China eases restrictions should help.

Beijing is also intent in boosting demand for property with more stimulus including bank financing for leading developers that could put a floor under the ailing property market. If that helps developers finish projects, it could improve confidence among prospective home buyers, creating a virtuous cycle. However, stimulus will be targeted, with officials reiterating housing is for living and not speculation.

Beijing is also trying to mend investor and business confidence following the harsh crackdowns on the private sector that battered China’s most well-known internet giants, pushed once outspoken executives like Jack Ma, founder of
Alibaba Group
(BABA), to go quiet and upended the business models of after-school tutoring companies. After Xi Jinping concentrated power with a third term this fall, analysts expected a more state-driven economy that could weigh on long-term growth.

But as Beijing focuses on growth, Xi has been trying to quell fears, with senior leaders vowing to encourage and support private enterprises. The economic confab had little mention of “common prosperity,” a term in vogue last year that investors took as prioritizing social good over corporate profits. That shift in messaging is intended to raise confidence and get large employers hiring again, but Green is skeptical.

Though common prosperity isn’t likely to disappear, the messaging pivot suggests the internet sector, at least for next year, may not be the target of more of the overt policies that battered it in recent years, lifting a dark cloud hanging over these stocks.

In a note to clients this week, Mark Haefele, chief investment officer at UBS Global Wealth Management called out Chinese internet stocks as an area that could benefit as China emerges from Zero-Covid. During the harsh crackdown on the sector in recent years, Haefele noted that many companies have become much more operational, bolstering margins and an eventual recovery in discretionary spending and expanding ad budgets helping revenue growth next year.

Michelle Qi, head of equities at Eastspring Investments, says via email, that leading domestic brands catering to the mass- and mid-end consumer will likely see the biggest pop as spending recovers. These brands have become more reliable and have a price advantage over international brands, she adds.

In the shorter-term, Beijing will likely turn to projects and investments in manufacturing fixed assets to prop up growth. Authorities are also more aggressively investing in strategic industries where Beijing is trying to reduce its reliance on the U. S.—like new energy, artificial intelligence, bio-manufacturing, green low-carbon sectors and quantum computing. That investment should also support multiples in these sectors, Green says.

The iShares China, an exchange-traded fund (CNYA) that invests in the mainland market and is dominated by domestic investors, is up 10% since late October but still down 26% so far this year. Meanwhile, the
iShares MSCI China ETF
(MCHI) that is dominated by foreign investors, is up 30% since late October but down 23% this year.

Write to Reshma Kapadia at reshma.kapadia@barrons.com


Credit: marketwatch.com

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