China reopening is mixed blessing for emerging-market assets

The China reopening story is fast becoming the most important trading theme in emerging markets, so figuring out its potential impact across asset classes is vital for global investors.

For stocks it is a boost as it promises to raise consumer demand, improve corporate cash flows and revive trade volumes. For currencies, however, it could be a drag by reducing real yields via inflation, pressuring China’s current account and delaying a policy pivot by the Federal Reserve. For bonds, it is a mixed offering.

The nation’s easing of the zero-Covid policy and stimulus to revive growth have sent Hong Kong-listed Chinese stocks to the best start to a year since 2006, the yuan to a six-month high and its bonds towards a third monthly rally. It has also sparked gains across emerging markets, from the Thai baht to SA rand and Brazilian stocks. Projections show the second-biggest economy may grow at 4.8% in 2023, compared with a 0.4% expansion in the US and 0.1% in the EU.

“The China reopening story will be the key driver of emerging-market sentiment, bringing positive spillovers especially to regional economies and global commodity suppliers,” said Galvin Chia, a currency strategist at NatWest Markets in Singapore. “China on the way up at a time when the US and the eurozone are on the way down is definitely a source of optimism as it will partially offset the demand slowdown.”

Developing-nation stocks and currencies have made the strongest start to a year since the 1990s, and bonds are posting the best gains in more than a decade, as investors who stayed on the sidelines during China’s pandemic struggles are coming back. GAMA Asset Management turned bullish on emerging markets last month. Fidelity International, which was bearish for most of the past year, is now overweight the assets, favouring China and Latin America.

“China’s pro-growth policies was the last driver I was waiting for,” said Rajeev De Mello, a global macro portfolio manager at GAMA. “Taiwan, South Korea and Malaysia will be the bigger beneficiaries of a greater Chinese demand for goods, while Chile, Brazil, Indonesia and SA offer exposure to China via their commodity exports. The opening up of international travel will benefit first the closest destinations for Chinese tourists like Thailand.”

What is more, China’s narrowing factory-gate deflation has hinted at a return of activity, while a small up-tick in consumer inflation still leaves room for the central bank to add stimulus. Morgan Stanley expects the yuan’s gains to continue and its quant strategists say hedge funds and long-only money managers have begun looking for A-share ideas. BNP Paribas has raised the target for the MSCI Emerging Markets index, saying policy support will ensure China’s growth above 5% this year.