2023 Chinese Economic Outlook: The Path Towards Reopening

As investors have kept China’s road to reopening top of mind, what comes after reopening and how might the Chinese economy and equity markets be impacted? Chief China Economist Robin Xing and Chief China Equity Strategist Laura Wang discuss.

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Laura Wang: Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist. 

Robin Xing: I'm Robin Xing, Morgan Stanley's Chief China Economist. 

Laura Wang: On this special episode of the podcast we'll discuss our 2023 outlook for China's economy and equity market, and what investors should focus on next year. It's Thursday, December 8th at 9 a.m. in Hong Kong. 

Laura Wang: So, Robin, China's reopening is a top most investor concern as we head into next year. You've had a long standing call that China will be reopening by spring of 2023. Is that still your view, given the recent COVID policy changes? 

Robin Xing: Yes, that's still our view. In fact, recent developments have strengthened our conviction on that reopening view. After several weeks of twists and turns following the initial relaxation on COVID management on November 10th, we think policymakers have made clear their intent to stay on the reopening path. We have seen larger cities, including Beijing, Guangzhou and Chongqing, all relaxed COVID restrictions in last week. We have seen the top policymakers confirmed shift in the country's COVID doctrine in public communication, and COVID Zero slogan is officially removed from any press conference or official document. They started the vaccination campaign, and last but not least, we have also see a clear focus on how to shift the public perception with a more balanced assessment of the virus. All of these enhanced our conviction of a spring reopening from China. 

Laura Wang: What are some of the key risks to this view? 

Robin Xing: Well, I think the key risk is the path towards a reopening. Before full reopening in the spring, China will try to flatten the curve in this winter. That is, to prevent hospital resources being overwhelmed, thus limiting access and mortality during the reopening process. This is because the vaccination ratio among the elderly remains low, with only 40% of people aged 80 plus have received the booster shot. Meanwhile, the medical resources in China are unevenly distributed between larger cities and the lower tier areas. As a result, we do expect some lingering measures during the initial phase of reopening. Restrictions that could still tighten dynamically in lower tier cities should hospitalizations surge, but we will likely see more incremental relaxation in large cities. So cases might rise to a high level, before a more nonlinear increase occurs after the spring full reopening. So this is our timeline of reopening, basically flattening the curve in the winter when the medical system is ready, to a proper full reopening in the spring. 

Laura Wang: That's wonderful. We are finally seeing some light at the end of the tunnel. With all of these moving parts, if China does indeed reopen on this expected timeline, what is your growth outlook for Chinese economy both near-term and longer term? 

Robin Xing: Well, given this reopening timeline, we expect that GDP growth in China to remain subpar in near term. The economy is likely to barely grow in the fourth quarter this year, corresponding to a 2.8% year over year. Growth were likely improved marginally in the spring, but still subpar as the continued fear of the virus on the part of the population will likely keep consumption at a subpar level up to early second quarter. But as normalization unfolds from the spring, the economy will rebound more meaningfully in the second half. Our full year forecast for the Chinese growth is around 5%, which is above market consensus, and that will be largely led by private consumption. We are expecting pent up demand to be unleashed once the economy is fully reopened by summertime. 

Robin Xing: So Laura, the macro backdrop we have been discussing have made for a volatile 2022 in the Chinese equity market. With widely anticipated policy shifts on the horizon, what is your outlook for Chinese equities within the global EM framework, both in near-term and the longer term? 

Laura Wang: This is actually perfect timing to discuss it as we have just upgraded Chinese equities to overweight within the global emerging market context, after staying relatively cautious for almost two years since January 2021. We now see multiple market influential factors improving at the same time, which is for the very first time in the last two years. Latest COVID policy pivot, as you just pointed out, and property market stabilization measures will help facilitate macro recovery and will also alleviate investors concerns about policy priority. Fed rate hikes cycle wrapping up will improve the liquidity environment, stronger Chinese yuan against U.S. dollar will also improve the attractiveness for Chinese assets. Meanwhile, we are also seeing encouraging signs on geopolitical tension front, as well as the regulatory reset completion front. Therefore, we believe China will start to outperform the broader emerging market again. We expect around 14% upside towards the end of the year with MSCI China Index. 

Robin Xing: How should investors be positioned in the year ahead and what effects do you think will be the biggest beneficiaries of China's reopening? 

Laura Wang: Two things to keep in mind. Number one, for the past three years, we've been overweight A-Shares versus offshore space, which had worked out extremely well with CSI 300 outperforming MSCI China by close to a 20% on the currency hedged basis over the last 12 months. We believe this is a nice opportunity for the relative performance to reverse given offshore's bigger exposure to reopening consumption, higher sensitivity to Chinese yuan strengthening and to the uplifting effect from the PCAOB positive result. Secondly, it is time to overweight consumer discretionary with focus on services and durables. Consumption recovery is on the way. 

Robin Xing: What are some of the biggest risks to your outlook for 2023, both positive and negative? 

Laura Wang: I would say the positive risks are more associated with earlier and faster reopening progress, whereas the negative risk would be more around higher fatality and bigger drag to economy, which means social uncertainty as well as bigger macro and earnings pressure will amount. And then geopolitical tension is also worth monitoring in the course of the next 12 to 24 months. 

Laura Wang: Robin, thanks for taking the time to talk. 

Robin Xing: Great speaking with you, Laura. 

Laura Wang: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review on Apple Podcasts and share the podcast with a friend or colleagues today.