For over a year, investors have waited for the zero-covid policy to end and have anticipated a great reopening boom in China. When President Xi finally reversed the policy at the end of last year, investors responded positively, and Chinese stocks surged. But now, as the rally winds down, investors are realising that not even China - which remains a positive story - is immune to a global recession, says Brian Coffey, portfolio manager, Nedgroup Investments Global Emerging Markets Fund.

Policy hindered growth 

China's zero-covid policy - stringently enforced across cities and regions to suppress spikes in cases - hampered its economy and added to global supply issues that arose immediately after the pandemic. As the West reopened and their economies recovered, investors in Asia turned to the leadership in Beijing, asking when it would be China's turn. As lockdowns continued in major cities, however, investors began to question whether China remained investible.

Only in November, faced with widespread protests, did President Xi finally decide to lift lockdowns and bring an end to the zero-covid policy. This was a dramatic and pragmatic policy reversal that made economic sense - it reopened the economy which had faced intermittent closures since 2020. Cue the great reopening boom.

Since October, anticipating the reversal of zero-covid, investors have bet on a reopening rebound. And they haven't been disappointed: Chinese equities have rebounded almost 40%, and tech stocks like Ten Cent Holdings have nearly doubled. Meanwhile, pent-up consumer demand resulted in a January domestic spending splurge. 

The role of China remains vital

It is clear that globalisation has not ended, and China continues to be a crucial exporter to the world. In this respect, in areas where it has a strong sectoral ecosystem and remains globally competitive, China appears very attractive to investors.

Yet, we haven't seen the transformative ‘reopening boom' in markets and economic growth that some had predicted. Frankly, we do not expect it to materialise - we view stocks as now pricing in the reopening.  Indeed, Chinese stocks have only recovered to September levels, and the rally has been uneven. Established tech stocks and internet companies have led the rally, but areas such as commodities have lagged and face challenges.  

Reopening underwhelms

Three factors underpin the comparatively underwhelming economic reopening experienced in China versus what the rest of the world experienced post-lockdown. 

Firstly, on the domestic front, China's reopening wasn't pan-national, unlike in Europe or the US. For the past two years, China has been in limited lockdown, with restrictions only ever applied to cities and regions experiencing infection spikes. This allowed the economy and consumers breathing space, muting the overall pent-up demand. When all restrictions were finally lifted, stocks had already advanced, thus making the domestic bounce-back much less pronounced than in Europe and the US. 

Secondly, Chinese authorities are keen to prevent an inflationary boom. They are therefore taking a much less expansionary approach to the money supply. One consequence of this is that property prices are being allowed to continue to fall. 

Thirdly, and perhaps most evident, the recovery that China was set to experience has been more than offset by the current global economic downturn. The environment of high global inflation, rising interest rates, and increasing chances of a global recession, all against the backdrop of deteriorating US-China relations, is far removed from the conditions facing the West when it reopened two years ago. Quite simply, the global economic environment is not conducive to the levels of growth that were previously predicted for China. 

Cautious on prospects

We are ultimately more cautious than others on China. One reason is that the conditions for a global economic recovery are weaker than last year. Another is that China's domestic economic prospects are different to those in the West and other emerging markets. 

Moreover, other emerging markets, such as India, are beginning to appear as manufacturing competitors to China. This will begin to challenge China's preeminence as a global exporter, even if its leadership will remain undisputed for some time yet. 

By Brian Coffey, portfolio manager, Nedgroup Investments Global Emerging Markets Fund.