After a volatile year with the MSCI China down -19.56% and the CSI Index down -20.16% in USD terms, Chinese equities have never looked so attractive. The correction brought MSCI China back to June 2007 levels with MSCI China trading at 9.8x 2023 PE, 1.1 2023 PB, and 2.7% yield, making it the cheapest market in Asia.  

COVID-19

China’s zero-COVID policy, until recently, has been seen as a success by President Xi Jinping and the Chinese Communist Party (CCP). China had successfully kept COVID deaths at a minimum, especially relative to the U.S. and the U.K., whose deaths per 1 million were 3,079 and 2,712, respectively, compared to 3.7 in China.¹ This success came at a cost, as it was achieved through draconian lockdowns across major cities, sometimes for several months. For the CCP, it was imperative the number of deaths and the critically ill needing access to healthcare remained low, as China’s healthcare infrastructure could                                              have been easily overwhelmed. 

Fast forward to today, China’s COVID policy has taken a definitive turn. Since early November there have been several notable announcements from the CCP including a vaccination schedule for the elderly. By the end of January 2023, China expects that 90% of those over 80 years old should receive a first dose of the vaccine and 95% of those aged 60-79 should reach full vaccination. Sun Chunlan, the architect of China’s zero-COVID policy, also stated that the country is moving on to the next phase of COVID management as the pathology of the virus                weakens, the popularization of the vaccine has been growing, and experience has accumulated around prevention and control.

Further, China’s top leadership, the seven-member Politburo Standing Committee (PSC), updated its messaging to include minimising the impact on economic and social development and to advance the research and development of vaccines and drugs to restore normal daily activities. In fact, there has already been a significant easing of travel restrictions across cities. Based on the experiences of western economies opening after COVID restrictions, there is likely to be some fine-tuning in China’s policy, especially when approaching the winter season. A fuller reopening scenario will likely occur after the Chinese lunar new year in the spring.  

Property 

The People’s Bank of China (PBOC) has taken a number of actions to support the property market, and the recently announced policy adjustments are largely seen as a turning point. The new policy includes measures that will support property developers. It includes financing to help complete unfinished projects by providing more loans to developers and extending the maturity of loans currently held.

The most eagerly awaited change to the property sector policy is the ability for commercial banks to grant property developers letters of guarantee, allowing them to withdraw as much as 30% of presales funds from their escrow account. These funds can be used for project construction and the repayment of debt as a priority. They are not to be used to purchase land, make new investments, or repay shareholder loans. These additional measures should stabilize the property sector and prevent it from being a significant drag on GDP growth in 2023.  

Digital  

After authorities fined companies for noncompliance with reporting requirements, finding more than 100 internet violations, awareness of antitrust regulations has been on the rise. Subsequently, the digital sector is pulling back on engaging in reckless market gains or monopolistic exploitation. Further, Chinese officials suspended the approval of gaming licenses for an eight-month period with the objective of protecting minors and preventing addiction. These measures have largely achieved their objectives and gaming license approval is now stable with a limited number of licenses approved each month. Going forward, we are likely to see more gaming approvals, and as antitrust regulations look to have peaked, there should be a normalisation in antitrust regulations going forward.

Most of the challenges China has faced over the past two years have been self-imposed. This includes its zero-COVID policy, a regulatory crackdown on the technology and education sectors, and reining in excesses in the property market. While the risk of a recession in the United States remains and the potential for a further trade war exists, China’s focus on key policies should boost investor sentiment and confidence in the region’s overall performance. China could be the only major economy globally to deliver positive GDP growth delta with relatively easy policy and mild inflation in 2023.