At the end of last year, we could learn that China's budget deficit reached record highs from January to November 2022. The property crisis and the zero-tolerance policy for COVID-19 may have contributed to this, with fiscal spending outstripping revenue by US$1.1 trillion and being twice as large as the year before. However, it seems that we may see a light at the end of the tunnel in the form of a loosening of the pandemic policy. Is it worth investing in shares of Chinese companies?
Macroeconomic data from China
Official figures from China say that the increase in the deficit was due to a fall in land sales, a fall in tax revenues and an increase in health and welfare spending, which was linked to the coronavirus outbreak. The authorities in the Middle Kingdom now appear to be under pressure to cut spending, as the deficit target has remained unchanged. Public finances are forecast to probably improve in 2023, when China exits the zero COVID policy completely. This could be seen from the latest readings of the PMI sentiment index for the industrial sector, which exceeded expectations and rose to 50.1 points (49.8 expected), up from 47 points in the previous month. The future outlook appears to be improving, as evidenced by increases in the share prices of Chinese companies. The ChinaH Index (CHINAH) has risen 50% from its October lows. This seems to have broken a 2-year slump. Nevertheless, a correction could be expected in the near term, so caution should be exercised when investing in this market.
Source: Conotoxia MT5, CHINAH, Daily
Pandemic situation
According to WHO data, the weekly record of confirmed infections of more than 40 million cases was in the second half of December 2022. Since then, the number of weekly infections has fallen to the 175,000 cases recorded last week, a reduction of 99.5 per cent. However, it should be noted that the Chinese authorities have ended their mass testing programme, so the latest data may not be very reliable.
Up to 89.5 per cent of the Chinese population is fully vaccinated. According to official data from November 2022, Chinese health services have already vaccinated 40 per cent of people over 80 with two doses of vaccine and a booster dose. China has now set a target of vaccinating 90% of the elderly by the end of January. The difference in the percentage of the population fully vaccinated was a result of the focus on vaccinating working-age people first. It seems that by reducing the number of tests performed and the number of new vaccinations, China may be optimistic about the future of the pandemic situation.
Source: WHO, China confirmed Cases
What lies ahead?
Looking, among other things, at the purchases of the largest mutual funds, which in a recent Bank of America research report declared that emerging market equities, including China's, are most prevalent in their portfolios. We can assume that, in the long term, these shares appear to be an attractive investment.
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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