The health authorities in China announced this week the easing of the corona restrictions, with production in the world’s second largest economy at a half-year low in the background embodying the price of the closure policy. The administration has determined that asymptomatic patients, or those with mild symptoms, will be content with home isolation, and work in areas that will not be defined as high risk will not be stopped.
A producer and consumer price index published this morning (Fri) in China met expectations due to the closures and the corona, but the question is what will happen when the closures are released. Stéphane Monnier, the chief investment officer of the Swiss bank Lombard Odier, says that the opening of the restrictions will not be smooth, economically and health-wise.
“China will reopen in 2023, and in terms of the economy, monetary and fiscal incentives will support growth until the activity will probably recover in the second half of 2023, and into 2024. But at the health level, a significant part of the Chinese population is not vaccinated, which could lead to high infection rates and renewed closures,” said Monier . “We predict that China will show only modest growth of 2.5% at the end of 2022, which will increase in the second half of 2023 so that it will be 4% at the end of the year.
“China’s reopening will be volatile, but the Chinese central bank will continue with monetary easing and even reduce its reserve requirement to increase liquidity in the banking system and allow loans. China’s fiscal policy remains flexible with tax benefits in 2022 amounting to approximately 3% of GDP. Given the pressures on the economy, we expect support equal to an additional 3% in 2023, which will be combined with strong stimulus to the economy over the next half-year. The government’s position has also recently changed in the real estate sector, with the regulators allowing real estate developers to raise capital both through bank loans, bond issuance and equity financing, and as a result we expect an easing of pressure on the real estate market next year.”
The Chinese currency may strengthen
“From May 2022 we maintained an overweight in Chinese stocks, which performed well until the declines between July and October. The attractive valuations offer the potential for a strong rally, with the recent performance strengthening our confidence in Chinese stocks especially due to the low correlation to global stocks. For now, we are still overweight Bug” h Chinese sovereigns hedged to the US dollar. The dollar strengthened by almost 9% against the yuan in the last year, but the Chinese currency may strengthen soon due to the weakening of the dollar, which will reduce the potential flow of capital to the country due to the strict balance of payments policy, and despite this, we maintain an underweight in the Chinese currency,” said Mounier.