China’s long-awaited reopening following the Covid pandemic is both similar to and different from earlier re-openings in the US and Europe, as well as China’s own initial reopening in 2020.
GAM’s Jian Shi Cortesi and Swetha Ramachandran outline the drivers and likely beneficiaries of an expected sharp resurgence in Chinese consumption in 2023.
Chinese consumers have had plenty of reasons to celebrate. The Year of the Rabbit which recently replaced the year of the Tiger, was celebrated in full swing. It was the first in China since 2019 without any Covid restrictions.
At the same time, the easing of China’s zero-Covid policy has granted the Chinese economy and markets a much-anticipated boost for the rest of 2023. We are reminded of another rabbit – the White Rabbit from children’s classic Alice’s Adventures in Wonderland, fretting anxiously: “Oh dear! Oh dear! I shall be late!”
Investors who have seen the Chinese market, as well as China-exposed stocks, rebound materially since November may share this sentiment of having ‘missed out’ on the Chinese recovery story. However, we believe that the coming upturn in Chinese consumption is far from priced into share prices of Chinese equities or global equities with a significant China consumer exposure (including luxury stocks), as we expect the pace and extent of demand recovery both to exceed current market expectations.
Pent up demand will have positive impact on domestic economy
While the relaxation of Covid restrictions in China may not be all smooth sailing, China’s reopening is already being noted to have a substantially positive impact on the domestic economy, as ‘pent up’ demand starts to be unleashed.
In the US and Europe, the reopening was marked by a gradual reversal of spending away from goods into services (such as recreation, dining out of the home) – with the latter not being an option for consumers during lockdowns.
As in the West, we are likely to see the pendulum shift sharply back towards bricks and mortar retail from online in the immediate term, as consumers rediscover the joy of instore shopping and offline entertainment and experiences.
Return of revenge spending
One key difference between Chinese and US households is that Chinese households have had high savings rates historically – in the 30%+ range compared to 5-6% in the US, even before the pandemic, before rising to a record 38% in 2020. Chinese consumers are going into reopening with strong household balance sheets. The below-trend consumption activities in the past three years have led to a large amount of excess savings.
It is useful to recall that it was China where the phenomenon of ‘revenge spending’ first occurred in 2020 – leading to consumers spending freely in a wave of post-lockdown euphoria. The difference this time is that consumers have had nearly three years’ worth of accumulated excess savings, versus three months in 2020. There is now an even greater amount of pent-up demand.
The policy backdrop supports consumption
According to China State Council’s Strategic Guidelines on Expanding Domestic Demand 2022-2035, the government will continue to promote traditional consumption such as housing and cars, while vigorously developing services consumption including tourism, sports, childcare, and elderly care.
Recent comments around ‘common prosperity’ continue to emphasise the expansionary nature of the policy for all, rather than a redistribution of income, with the ultimate aim to double the size of China’s middle class to 800 million by the end of the current decade.
The likely ascent of offline to online, as well as the pent-up demand for dining out of the home and physical retail are all potential beneficiaries of the reopening.
We expect Chinese companies exposed to discretionary spending – which will be supported by household savings – to benefit particularly, such as hotels, airlines, movies, restaurants, sportswear, and cosmetics.
Global luxury brands should gain significantly from the ongoing resumption in international Chinese tourism, the return of the ‘feel good factor’ among consumers, as well as the skew of household savings disproportionately towards higher income groups who are these brands’ target consumers.
And, beneath the current wave of reopening, the structural trends driving China’s consumer potential – namely, the expansion of the middle class, as well as ‘consumer upgrade’ (trading up) remain intact and supportive.
China remains a dynamic and exciting consumer story for global investors and, as active investors, we remain alert to ongoing developments in this market and the implications for our investments. After all, as Alice of Alice’s Adventures in Wonderland herself says, “I could tell you my adventures—beginning from this morning, but it’s no use going back to yesterday, because I was a different person then.”
Jian Shi Cortesi is Investment Director, managing China and Asian Equity funds at GAM Investments. Swetha Ramachandran is Investment Director, of Luxury Equities at GAM Investments.