In brief

• China’s real GDP growth reached 4.5% year-over-year in 1Q2023, pointing to significant improvement from previous quarter.
• Monthly data reflected the same trend for sustained recovery, while some challenges still remain in business confidence and real estate sector.
• Continuous policy support is expected to support confidence and promote domestic technology development.
• Strong economic data affirmed the recovery trend in the Chinese economy, which could be a catalyst for better market performance.

Chinese economic activities quickly bottomed out in the first quarter of 2023, after domestic mobility restrictions were mostly removed. Newly released monthly activity data also pointed to further momentum in March. That said, there are still some challenges in private business confidence and the real estate sector, and hence sustained policy support will be necessary.

Economic recovery stronger than expectation

According to Chinese National Bureau of Statistics, China’s real GDP growth reached 4.5% year-over-year (yoy) in 1Q2023, stronger than the expected growth rate of 4.0%. This points to significant improvement from previous quarter (4Q2022: 2.9% yoy). Service sectors were major beneficiaries when mobility restrictions were removed late last year, reflected by the 5.4% yoy growth in value-added in the tertiary industry. Meanwhile, manufacturing activities remained steady, and value-added in secondary industry increased by 3.3% yoy.

Looking forward, we expect to see higher GDP growth rate in upcoming quarters as a result of the low base from last year, and the annual growth target of 5% should be achievable.

Monthly economic data published for March also delivered the same message of steady economic recovery. Driven by the continuous release of pent-up consumer demand, retail sales increased by 10.6% yoy (Feb 2023: 3.5%). Particularly, food services surged by 26.3% yoy (Feb 2023: 9.2% yoy) as more people are dining out. Infrastructure investment remained an important stabilizer, up 8.5% yoy in the first three months. Industrial production grew by 3.9% yoy, highlighting strong momentum in advanced manufacturing such as electric vehicles (33.3% yoy).  

Further policy support still possible

Due to the strong economic data, expectations for continuous policy easing weakened, which led to a correction in the onshore market. That said, some challenges still exist in the economy, making it necessary for further policy support.

Recovery of business confidence might be slower than expected. While public sectors are leading fixed asset investment (1Q2023: 10% yoy), investment growth was only at 0.6% yoy in private sectors, suggesting business confidence still has a long way to go before being fully restored.

Another dragger is real estate investment (1Q2023: -5.8% yoy), which might have put sustained pressure on local government finance. Meanwhile, this also affected consumer spending on related durable goods, such as household appliances (Mar 2023: -1.4% yoy) and decoration materials (Mar 2023: -4.7% yoy).

On the external side, export growth rebounded to 14.5% yoy in March, beating market expectations (down 5.0% yoy). However, if and when demand from developed economies slow further, export growth might dip again.

To address these challenges and making the recovery sustainable, policy makers might maintain a tone for proactive fiscal policy and prudent monetary policy, while structural measures might be adopted to address those weaknesses. There might be cuts to the deposit rate and 5-year loan prime rate, so to lower funding costs and support long-term business loans.

Meanwhile, the government might take further efforts to reassure the market of its stance in supporting the development of the private sector, as they are trying to improve the regulatory environment for private enterprises.   Stabilization of foreign direct investments will also be a priority.

Investment implications

In previous months, overall earnings expectations for Chinese equities have been revised down given cooling market sentiment. The strong economic data affirmed the recovery trend in the Chinese economy, which could be a catalyst for bottoming-out of earnings expectations. Combining with further downward revision in U.S. equity earnings, we expect to see Chinese equities outperforming that of U.S. equities.

Exhibit 1: MSCI China earnings growth estimates

Earnings per share, year-over-year change, consensus estimates

Source: FactSet, MSCI, J.P. Morgan Asset Management. Tech refers to Technology; Cons. Staples refers Consumer Staples; Comm. Services refers to Communication Services; Cons. Discr. refers to Consumer Discretionary. Consensus estimates used are calendar year estimates from FactSet. Past performance is not a reliable indicator of current and future results.Guide to the Markets – Asia. Data reflect most recently available as of 24/04/23.

In the near term, consumer sectors might benefit from the continuous recovery. As we are approaching Labor Day holiday, demand might heat up in tourism, restaurants and entertainment services. Furthermore, large-scale outbound tourist flows are expected this summer and in the October National Day holiday when more people renewed their passports and visas. Airlines might be able to recover their losses during the previous years.   

On the longer investment horizon, we continue to prefer advanced manufacturing sectors, which should benefit from expanding domestic market and sustained policy support. As a result of the recent market correction, valuation might have become attractive in sectors such as semiconductors, renewable energy, robotics and automation. Continuous policy measures are expected to support domestic R&D activities and improve self-sufficiency of key products, and sector leaders  might have more chances to expand market share and improve competitiveness in the domestic and global markets. 

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