From a financial point of view, among the main themes in 2022 are the Ukraine-Russia conflict, the energy crunch, and the rising inflation at a global level. Recently, though, investors are again shifting their focus to what happens in China. While the Western World seems to have learned how to cope with the pandemic, without putting restrictive measures in place, not the same can be said about China.
The lack of efficient vaccines for the latest strains, as well as a growing number of senior citizens, led to multiple outbreaks, forcing authorities to restrict economic activity in 2022. However, that doesn’t seem to be the case any longer, as the latest measures taken by authorities suggest the country is keen on reopening.
Alt-text: Shanghai financial center
Source: https://unsplash.com/photos/mnyJEvSLtvk
Less COVID restrictions
Starting on January 8th, 2023, China will scrap quarantine for travelers, a significant shift away from the zero-COVID policy that has been in place for more than two years. People traveling to China for work, study, or family visits will only need to provide a negative PCR test.
Restrictions are lifted at a time when Beijing is reporting approximately 4,000 new cases each day. European countries have already imposed stringent rules for travelers coming from China, out of fear that the outbreak might be larger than authorities are reporting.
On the flip side, the easing of restrictions in China can have positive economic implications, domestically and globally, at a time when there are growing fears of a recession.
Organic economic growth
During the last decade, China has been the growth engine of the global economy. With restrictions in place, supply chains were heavily disrupted, considering the country is still the largest exporting nation in the world. Now that domestic economic activity is poised to improve, analysts at easymarkets project that it may ease price pressures and provide a non-inflation growth boost.
As Chinese companies resume activity and people go out and spend, their revenues can potentially improve, which creates a bullish environment for stocks. That comes on top of favorable technical conditions, with benchmarks such as the Hang Seng Index being on a bearish trend for over 3 years.
Price-wise, Chinese stocks are much more attractive and at least for the short-term, the enthusiasm associated with an economic reopening can further support the positive mood that started in November 2022.
Monetary stimulus
Elevated inflation in countries like the USA, the UK, and Germany prompted central banks to act by lifting short-term interest rates, on top of reducing the size of their balance sheet. With economic restrictions in place, China managed to avoid rampant inflation thus far, which is why the PBoC (People’s Bank of China) was not forced to tighten monetary policy.
In fact, it recently made a significant injection of liquidity as a measure to boost economic prospects. Favorable monetary policy conditions are another supporting factor for Chinese stocks. Investors and traders should be aware that even in the most optimistic forecasts, the stock market recovery won’t be a straight line up, given there are still plenty of uncertainties, including the growing tensions between China and the USA.
