A pivot to growth: Which sectors will benefit the most as China reopens?

The door is open. China is finally opening at light speed after three years of zero-COVID. The plummeting economy and the increasingly unsustainable fiscal cost to keep the stringent measures are only two of the many reasons behind the sudden change. Retail sales contracted 5.9% YoY in November 2022. Property investment and home sales also dropped 9.8% and 28.4% respectively year-to-date. But it is better late than never. The pivot to growth in China is positive for itself and many sectors in APAC, especially airlines, consumption and automobiles. As the economic burden grows, the Chinese government is also losing its grip on two key sectors in trouble, i.e. real estate and internet platforms.

Regarding China’s reopening, airlines are the most obvious winners with the renewed travel demand. As global air passenger revenue stood at 72% of the pre-pandemic level in September 2022, China and APAC have only recovered to 37% and 51% respectively. As many airlines globally are approaching the pre-pandemic revenue level, there is huge potential for Chinese and APAC airlines to catch up. This is not only a cyclical story. Before the pandemic, the importance of Asia in global air passenger traffic had been growing from 31% in 2011 to 35% in 2019. The COVID disruption will not change the structural drivers in favor of Asia, such as the rising middle class and population growth.

On consumption, it will take time to repair household confidence, but zero-COVID exit will help revive retail and tourism spending. China’s domestic tourism will return to the once-growing trajectory, which fell from 5.8% of GDP in 2019 to 1.9% in Q3 2022, bringing an additional spending of RMB 3.4 trillion. Externally, the net capital outflows of outbound tourism in China amounted $278 billion in 2019, and the reopening means the potential annual spending of $165 billion into the world, which will be most positive for the related sectors in Hong Kong, Macau, Thailand and Japan in APAC. Still, there is a risk that a rapid revenge outbound travel may hurt some domestic firms in China as they were benefited from the closed border and trapped consumption, such as the duty-free sector.

Within consumer discretionary, China's automotive industry is a rare sector with better performance than the pre-pandemic level and global peers. Even since the pandemic, mobility and subsidies have been the two main factors. With improved mobility and fewer restrictions, China's car sales shall see a cyclical rebound if households are convinced of the reopening direction. To counter the economic pressure, the government has also extended subsidies on electric vehicles (EVs) until end-2023 with doors open for continuation after that. In addition, APAC is well positioned to capture the opportunities and China is the biggest EV maker with 51% of market share in H1 2022 (including joint ventures).

Moving to the full-scale regulatory changes, real estate and internet platforms are the two major victims. Ever since the demise of Evergrande, the contagious bond defaults and mortgage boycotts have dampened the confidence of homebuyers and investors. But China has stepped up the measures to support the financing of property developers. It is an encouraging sign, and the policy support seems the strongest in the recent two years. However, the reality is this can only buy time and ease liquidity pressure. Without a rebound in home sales, there is no way that property developers are out of the wood. The mortgage rate is now at 4.12% in October 2022, falling from 5.64% in 2021, but home sales are still down. There is no short-term solution on demand as it takes time to repair household confidence.

The improved overall market sentiment on China's assets will also benefit internet platforms, or in other words, Big Tech. It is hard to see any further tightening of regulations at the time being, especially as it is already tight. The regulatory storm is a blow to the prospect and valuation of internet platforms, but it does not mean the sector will not grow. Based on market expectations, investors still see growth potential, but it is weaker than in the past.

Still, the common problem of real estate and internet platforms in China is there are cyclical upsides but without a major change in the structural policy direction, which was the root cause of the market selloff. It means China's real estate sector will be treated as utilities with tight control, and the current grips on internet platforms are here to stay, casting doubts that the good old days are forgone.

All in all, 2023 may starts with a challenging macro environment in H1, but there are cyclical sectoral opportunities closely linked to China’s reopening. Beyond the above, the growing economic pressure is also pushing the Chinese government to soften their regulations on real estate and internet platforms. 

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