With the end of China’s COVID-zero policy, the country’s economy could gradually return to its full growth potential.
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The zero-COVID policy has finally come to an end after three years of exhausting implementation of it.
There is a shift in the government’s attitude on the COVID policy front, where we think they are now seeing delivering growth and prosperity as important as protecting lives.
With the end of the COVID-zero policy, and both domestic and international traveling now fully enabled, we believe the China economy is going to gradually return to its full growth potential when things continue to normalize.
2023, however, is set to be a challenging year on the global front as global growth is slowing, inflation should remain high, and the war in Europe is prolonged. China and Asian exports have already been trending down in recent quarters, so export growth will be less of a contributor to the China economy this year.
However, the strong expected rebound in consumption pent-up demand could nevertheless act as an effective tailwind for China to deliver above-average growth this year.
On the direction of the Chinese interest rate this year, we do not expect to see it rising too much in 2023 unless consumer spending comes in too strong or we see unexpectedly high food prices, which would make inflation a real threat.
We see value in having some exposure to the Chinese government bond market because of the resilience of the underlying economy, but we do not believe it warrants a sizable overweight positioning, especially as bond supplies will be aplenty given the high fiscal deficit the government has likely budgeted.
Technicals of investing in China debt are also likely to weaken as the border reopening of China has inspired local investors to reallocate assets from fixed income to stocks.
Geopolitical risk has raised investability issues for some of the Chinese debts, especially the state-owned-enterprise (SOE) ones. There have been Chinese companies deemed to have close connections to the military that have suddenly been put on the U.S. sanction list.
You cannot research this kind of risk, and it is hard to anticipate, so for us this is one of the biggest tail risks of investing in the China debt market due to the changing geopolitical environment.
Clifford Lau, CFA, is a portfolio manager on William Blair’s Emerging Markets Debt Team.
