First month in 2023 has been a great month for Chinese equities. The RMB continued to appreciate against the dollar, leading both Chinese and Hong Kong stock markets to rebound from bottom: All China-A Index rose 7.38%, Hang Seng Index rose 10.34%. Overseas investors continue to enforce their bullish views towards China with their bets, resulting into massive inflows to the Chinese capital markets. The total northbound investments (via Stock Connect) amounted RMB 48.15 bn on the last day before CNY, weekly turnover was shy from its historical high of RMB 48.8 bn in December of 2021. In January of 2023 alone there has been over RMB 131 bn flowing into A share markets, higher than the whole year of 2022 (~RMB 90bn), which was also higher than the total turnover of 2014, 2015 & 2016. We must remain vigilant and cautious, especially when the sentiment seems to be very optimistic towards the equities market – overseas market has also seen a great rebound, with NASDAQ rising 10.68% and Dow Jones up 2.83%. As according to a myth in the stock markets, January’s performance usually sets the tone for how the stock market will perform in that year. And it seems likely such trend will continue in 2023. 

CNY started early this year, and on Jan 28th, the first day after CNY holiday, Guangdong Provincial government has organized the largest ever development meeting – streamed online platforms, the Provincial government has organized a meeting with all representatives within the province, with over 1000 provincial governors physically attended and 25000 city-states representatives attending online. This shows how serious the local governments are to boost its local economy as soon as practical. 

January’s economic data would be disrupted due to the fact that almost one-thirds of the month were CNY holidays. It would be more reasonable to review the economic data combining both January and February for a more objective view. So for now, we would like to take a shift from macro data and look at the society’s well-being from a microscopic point of view. 

F&B, cinemas & theatres, travelling are set to recover quickly, provided with great internal demands in China. 

Cinemas and theatres were packed during CNY. From the two movies I have attended, both were 95%+ occupied. Statistics showed that 2023 CNY total box office hit RMB 6.76 bn, YoY up 11.89%. As of Jan 27th, 2023 full year sales was RMB 7.92 bn, up 209.88%. 

After the movies I went to dine out with my family, which took over 40 min. of waiting. Seeing how busy the restaurant waiters were, we can expect the F&B business to finally walk out of the shadow of COVID after three long years of hardship in business. 

Travelling is a more subjective call based on my personal experience: while 2022 has seen none traveling, business or leisure, the start of the year of Rabbit seems promising:before 2022 I used to have business trips twice every month. The first 6 weeks in the year of Rabbit, I have already reserved 4 flights, visiting 5 different cities at least. This does not include my usual research due diligence trips to meet with senior management of potential investments. 2023 is very likely to be a vengeful spending year for travelling, as compared with the previous 3 years.

Internal demand has seen recover – with COVID policies now up-lifted, those suppressed industries will quickly recover, leading into quick recovery in their corresponding job market. Sectors correlated to real estate (e.g. household appliances, interior renovation etc.) will still need further loosening from the current policies. While mobile phones sales are stabilizing, automobiles are seeing a down fall (which could be a reason of cancellation of EV subsidy or CNY disruption to data); Consumer discretion sectors have seen better days: the slowdown is now much confined as compared with the worst era during COVID, and if the job markets and economy continue to recover, a turnaround in such segment would become highly likely. 

Export demands

From the data that we track, the slowdown continues for exports. If we look at World Bank’s economic outlook for the Western developed markets, we should not be too hopeful in a rebound in close terms (at least for the 1H23). Together with the inventory issues, we still have to be patient before seeing the Export numbers hitting a bottom. While there’s not much that we could do (besides a weaker RMB to ease the export pressure), from the statistics in 2022, automobiles, photovoltaic, batteries etc. have seen great growth and may be the reason to bottom out sooner than expected. 

Investments

This could be the most flexible field in 2023. Policy is highly correlated to infrastructure and real estate spendings. Of which, infrastructure investments currently have two issues: high base and lack of fund source. While the high base effect lowers the overall effectiveness to investments, fund sources are now strictly tightened to control local government gearing, causing financial pressure to local governments in paying back their previous debts.While its not impossible to increase local infrastructure spendings in 2023, it would depend on the determination of the central government in restoring economic growth, versus the potential risks of high local government leverage. Successful examples were seen in both China and western countries, to allow a higher than usual leverage for local governments in return for a stimulated economic growth to reboot the economy.We would suggest to follow on the political development on such policies.   

As for real estate investments, with housing prices showing weakness in the medium term, it would be overly optimistic to expect the real estate market to rebound to its high from the previous ice age. A more realistic target should be stabilizing performances and not to hinder our economic growth. 

While mediocre look at results, professional look at causes; If Macro data are results of the economy, then Micro economic activities are the causes of such data.If we see improvements in sectors like the consumption chain, investment chain, export chains etc., a recovery in job market, thus leading to better earnings and spending would be expectable, resulting into improved consumption data and confidence level as shown in Macro data. The Central government has been issuing positive signals and announcements to encourage SMEs and Micro companies to continue their entrepreneurship, which could be seen as a great sign to address the country’s economic issues correctly. 

Capital Markets

Stock market has been rising since 2022 November, restoring investor’s confidence partially. The rapid rebound could be seen as a valuation restoration of an overly pessimistic market, as well as the better forecast for a turnaround future of the economy. 

However, we would insist to not to be overly optimistic in 2023 – we should give more time and patience to the recovery of global and China’s economy. While walking out of the bottom is highly likely, we should not expect a full bull market will just rise from the ashes of 2022. Focusing on researching companies with great potentials would give us very healthy investment returns, with limited systematic risks ahead. We would continue to be more aggressive in our investment this year as to create more value to our investors. 

WU Weizhi

2023 Jan

本期《偉志思考》簡體中文版鏈接：

伟志思考：微观看2023年经济增长的动力来自哪里？