China Economic and Market Outlook 2023

For the past two years, the Chinese economy and stock market have faced a slew of troubles at home and abroad. Overseas challenges include global rate hikes aimed at curbing inflation, sanctions against China on the semiconductor front, tightened auditing requirements on Chinese ADRs and the risk of foreign investment fleeing China. Domestically, the impact of COVID lockdowns as well as the regulatory crackdown on the property sector, platform companies and after-school tutoring services also burdened the economy. In this article, we summarize the latest developments on these trends as we enter a new year.

The End of Global Rate Hikes?

Rate hikes by central banks are slowly coming to an end. Inflation in the US consists of three main categories: goods, housing and services. To begin with, inflation of goods has been improving, coming down around one-third from the mid-to-high levels in 2022 as oil prices decline amid the ongoing economic slowdown. Transpacific container freight rates have dropped by approximately 80% from the higher levels. Food prices may be approaching a peak as well. For the housing category, the Case-Shiller Home Price index, which usually leads the rent price index by 14 months or so, has peaked and is now in decline, which means the peak in rent prices may be just around the corner. As for services inflation, which tends to be stickier, price increase seems likely to continue for the time being. Fortunately, with goods inflation easing outpacing services inflation rising, the overall inflation is slowing down. However, the Fed is only expected to consider lowering interest rates after services inflation peaks. Interest-rate futures currently point to a peak of 4.9% in the federal funds rate around mid-2023, but there may only be room for lower rates towards the end of 2023.

Improving Conditions for Domestic Capital Flows?

Capital flows in China are showing signs of improvement. As of the end of November, the nation’s broad M2 money supply balance was 264.7 trillion yuan, representing a year-on-year growth of 12.4% and faster growth compared to the previous month. People’s Bank of China (PBOC) Governor Yi Gang also stated recently that, in 2023, the central bank will focus on keeping the growth of M2 and total social financing (TSF) in line with nominal economic growth. It is worth noting that, in early December 2022, the PBOC directly purchased bonds issued by the Ministry of Finance, which could potentially be seen as a move to test out modern monetary theory (MMT). During the pandemic, the US administered a light dose of MMT policy, which led to a bull market and the inflation that followed. MMT is a double-edged sword. It helps boost the economy but comes with a clear side effect of inflation. The US only chose to use MMT out of the concern that quantitative easing alone would not be enough to fight the pandemic. Interest rates in China are still far above zero, and so far the country hasn’t resorted to QE. On top of that, since domestic banks are under government control, it is unlikely that bank lending will dry up with government backing. Meanwhile, how MMT may work out is something that merits further observation.

Has the Dollar Peaked?

Historically, a weak dollar can stimulate global capital flows, supporting the economy and stock market in emerging markets. Over the past one year and a half, the US economy has been relatively strong. This, coupled with interest rate hikes that began early on, has resulted in a strengthened dollar. As the US rate-hike cycle seems to be nearing its end, its boost to the dollar is starting to ease, which should help facilitate global capital flows. Of course, many factors can affect exchange rates. The interest rate is only one of them. For the time being, the US economy outlook is still brighter than most developed countries. A dollar bear market like the one that lasted from 2002 to 2008 does not look likely at the moment.

Are We Seeing the Worst of Tech Sanctions against China?

Not just yet. The U.S. is working with other countries to further undermine China’s efforts to develop its semiconductor industry. Dutch company ASML enjoys a monopoly position in manufacturing cutting-edge lithography machines. Japan plays a key role in supplying high-purity chemicals used in the semiconductor production process. The U.S. controls advanced chip design software. And Taiwan’s TSMC dominates advanced chip manufacturing. These four fortresses will remain hard to conquer for the time being. However, there are sectors where China is in the leading position or at least neck and neck with other countries. Such sectors include electric vehicles (EVs), EV batteries and photovoltaic (PV) panels. The automotive industry accounts for 12% of Japan’s GDP, which indicates the industry’s importance to the country’s economy. But currently Japan seems to be falling behind in the EV race. Building a strong EV industry requires battery technology and software design capabilities, both of which China already possesses. If China can seize the opportunity and leverage the size of its economy to accelerate and scale its EV industry, it has a great chance to replace Japan as an EV powerhouse, which will be crucial in driving China’s economic growth in the future. A key risk ahead would be how U.S. sanctions against China’s semiconductor industry could affect the development of the country’s EV industry.

Is Delisting Risk for Chinese ADRs subsiding?

Things are looking up. China has recently granted U.S. regulators full access to inspect audit working papers of US-listed Chinese firms, which helped ease delisting threats over US-listed Chinese companies for the short term.

Have Domestic Policies Taken Turns?

China has relaxed its strict COVID restrictions. The policy change will facilitate a return to normal life and revive economic activities. Industrial manufacturing and consumption are expected to pick up soon, and a strong economic recovery should follow consequently.

Apart from that, real estate policies and internet platform regulations are also seeing welcoming improvement.

In late November 2022, the Chinese authorities launched a 16-point plan to provide financial support for the property sector. Measures include granting loan extensions to property developers and encouraging financial institutions to provide developers with more support over mergers and acquisitions. As these measures address critical challenges faced by developers, liquidity difficulties in the real estate sector may see further improvement. The principle that “houses are for living in, not speculation” will remain as the main policy direction, but it’s safe to say that the worst is behind us. And since most banks are state-owned in China, systemic risks are unlikely to arise. The gradual release of liquidity into the real estate market should alleviate public concerns and bolster consumer confidence and market demand, which is conducive to the Chinese economy as a whole. In addition, the country’s stance towards big tech firms is beginning to change, as evident in the authorities’ latest approval of imported video games, adding another positive factor for economic recovery in 2023.

Is Foreign Capital Fleeing China?

The numbers haven’t shown any signs of capital flight from China. Although there have been reports saying foreign capital is fleeing, China’s current balance of payments does not reveal any signs of this trend. Foreign direct investment (FDI) in 2021 hit the third-highest in the history. The first half of 2022 also saw a quite FDI inflow. China’s industrial sector might be evolving beyond assembly lines that require less capital investment but generate little added value, and expanding into factories that require greater investment in equipment but could bring medium-to-high added value. While installing assembly lines only takes a few months, the business challenge lies in managing tens of thousands of workers on the assembly lines. On the other hand, investing significant capital in industrial equipment usually requires long-term planning. For instance, the investment horizon for a chemical plant can be many years ahead. In other words, the FDI numbers we’re seeing now in China’s balance of payments can be the materialization of investment plans years ago. Where foreign investment may go from here is something for investors to keep an eye on.

Overall, most factors affecting the Chinese stock market are improving. The chances are growing that China’s stock market is heading down a promising path in 2023.


This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

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