Macroscope

Frothy optimism over China’s economic recovery should be seen for what it is

The market narrative around China is almost uniformly bullish, but look beneath the surface and the picture is quite different

Investors have yet to put their money where their mouths are as doubts remain over domestic demand, inflation and long-standing structural challenges

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People visit a traditional Spring Festival flower market in Guangzhou on January 20. China’s reopening and the prospect of unleashing years of pent-up consumer demand have turned markets bullish, but the strength and durability of China’s upturn remains in doubt. Photo: AFP

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 4:30pm, 26 Jan 2023

In the past few months, sentiment in financial markets has undergone a remarkable shift from extreme pessimism to increasing optimism. While the brighter outlook stems from a number of interrelated factors, nowhere is it more apparent than in China.

Beijing’s about-face on its zero-tolerance approach to the Covid-19 pandemic, coupled with the significant relaxation of restrictions in the property sector and signals the crackdown on technology companies has come to an end, have done wonders for China’s image abroad. This is particularly so among investors who were looking for reasons to be bullish on the world’s second-largest economy.

A charm offensive by Vice-Premier Liu He at the World Economic Forum in Davos last week fuelled the new-found optimism. After telling delegates that “the door to China will only open up further”, Liu privately met a group of top corporate executives, impressing on them the importance of policies aimed at improving diplomatic ties and boosting growth. According to the Financial Times, the message was “China is back”.

In markets, the narrative around China is almost uniformly bullish. In a report published on Tuesday, JPMorgan said the demise of the zero-Covid regime meant that “one of the biggest headwinds to global growth for the past two years is ending”.

Morgan Stanley, in a note published on January 19, said “Covid management, economic policy and regulatory policy are aligning in a pro-growth fashion for the first time in four years”.

There are signs that global funds are returning to China’s markets. Foreign holdings of Chinese bonds rose in December for the first time in 11 months, according to Bloomberg data. Overseas buyers have purchased US$16.5 billion of mainland stocks so far this month, on course for a monthly record.