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China’s Next Chapter: Reopening, Recovery and Beyond

April 20, 2023  |  15 Minute Read

Stephanie Hui

Head of Private Equity in Asia and Global Co-Head of Growth Equity

Stephanie Hui

Salman Niaz

Head of Asian Fixed Income and Co-Lead for Emerging Corporate Debt

Salman Niaz

Christine Pu

Co-Head of China Equity

Christine Pu

Key Takeaways

  • China’s economic policy has shifted to growth, COVID-19 restrictions have been lifted, regulatory rhetoric has relaxed and the tone toward the property and private sectors has become more supportive.
  • While we expect China's growth momentum to improve further in the coming months, a hard-hit property sector, aging demographics and geopolitics remain headwinds to China’s growth trajectory.
  • Long-term themes remain intact and a vast potential opportunity set exists across public and private markets. Investors should be ready to revise their approach to successfully navigate China’s next chapter.

China has reopened. The recovery of the world’s second-largest economy is underway after three years of some of the strictest public health measures globally. An earlier and faster-than-expected departure from zero-COVID policy began at the end of 2022 as major cities abolished mandatory mass testing requirements. Rules around domestic quarantine requirements and inbound travelers eased in January as China welcomed the Year of the Rabbit with Lunar New Year holiday celebrations. The reopening has occurred in tandem with a strong policy shift towards supporting growth by facilitating a consumption recovery and rebuilding consumer confidence, including measures to stabilize China’s property sector. This policy pivot led to a cyclical recovery between November 2022 and February 2023 as sentiment toward Chinese assets improved and fueled one of the best performing three-month periods on record for the MSCI China Index—albeit from a depressed starting point. A nine-day long policy event, the National People’s Congress (NPC), concluded on March 15 with policymakers re-emphasizing stability of growth as a key goal of the government and reassuring the private sector and international business community of Beijing's pro-business stance. As many aspects of China’s economy and society normalize over the coming quarters, we expect China’s growth momentum to improve. While a cyclical recovery may continue to drive markets in the near term, successfully navigating China’s next chapter will also require public and private investors to refocus on a wide set of new opportunities—and new risks. These include long-term secular tailwinds and structural headwinds with the potential to affect asset class performance and investment portfolios in the years ahead.



Reopening and Recovery


The potential pace and magnitude of a consumption rebound in China this year remains firmly in focus among market participants. Chinese household consumption was ~7% below potential in 2022, implying significant room for recovery.1 If the post-pandemic consumption pattern of other economies leaves any indication, China may see sharp rebounds in discretionary consumer goods and services spending, especially domestic tourism. During China’s Lunar New Year Golden Week (January 21-27), movie box office revenues, postal package delivery, and restaurant sales all exceeded 2019 levels. There was also a V-shaped recovery of domestic air traffic and booming hotel demand. Consistent with the mobility data, China has returned to work with a sense of urgency. Purchasing Managers’ Index (PMI) data came in above consensus expectations in February, with the Caixin Services PMI—the most sensitive part of the economy to a reopening—surging to 55.0 well above the historical mean of 53.7.2 We believe China’s reopening has the potential to trigger a consumption revival in 2023 led by a release of pent-up demand, improvement in the labor market and incomes, and a broader recovery in consumer confidence. However, it is still too early to tell how robust and durable China’s economy will be, and three years of zero-COVID policy and eighteen months of property sector stress have left scars that could hinder a broad-based consumption recovery. For example, elevated unemployment rates among China’s 16-24-year-olds could weigh on the consumption capability of this cohort, even as the recent relaxation in various regulated areas, such as tech and education as well as the more recent recognition of platform companies as national champions and employment generators, provides some support for job prospects and income security. Meanwhile, cumulatively, from 2020 to 2022, excess savings in China—which we define as the amount of savings above what a “normal” pre-COVID savings rate would imply—appear to be relatively small in contrast to other economies such as the US, estimated at less than 3% of GDP or 6% of household disposable income at the peak during the pandemic, though in absolute terms this number exceeds RMB 3tn (~$435bn).3



A Consumption and Services-Centric Rebound in China Could be Hindered by Lingering Economic Scars


Source: (Top) NBS, Goldman Sachs Global Investment Research. As of December 31, 2022. (Bottom) People’s Bank of China (PBoC), Haver Analytics, Goldman Sachs Global Investment Research. As of December 31, 2022.



Along with signs of a consumption rebound, we believe it will be vital for investors to closely monitor global spillover effects from China’s reopening on goods trade, international travel, and commodities. Increased domestic demand in China could boost goods exports from other economies, for example. We expect Asian economies—which account for more than 50% of China’s import demand—to be the key beneficiaries of this growth impulse, though results will vary at a country level. China is the largest export market for most economies in the region, absorbing 50% of exports from Taiwan and Australia, 30-40% from New Zealand, Korea, Malaysia, and the Philippines, and around 20% from the rest (with a notably smaller 7% for India). The distribution of benefits will also depend on which sectors in China experience the strongest growth. Taiwan accounts for a quarter of tech imports into mainland China, for example. Demand recovery in foreign services, particularly for international travel, would additionally provide a modest boost to global activity. Again, Asian economies and some developed markets are likely to benefit if international travel returns to pre-pandemic levels. Higher commodity demand and prices are another channel through which China’s reopening will affect other economies. China is the world’s largest commodity consumer and biggest oil importer, and we expect its reopening to be moderately inflationary due to higher commodity prices. Within China, the unique nature of the post-reopening recovery may result in a mixed inflation picture. Prices of pork, a staple in China, surged in 2022 but may be less of an issue as supply disruptions begin to ease. Durable goods such as autos, smartphones, and computers tend to have long and sophisticated supply chains and are likely to be affected differently by reopening.


China’s reopening and recovery will be closely watched by many investors over the coming quarters. Data suggests hedge funds moved swiftly to rebuild China exposure from November to January. Active mutual funds globally re-risked to a lesser extent. However, by the end of February, Chinese equity funds had recorded steady year-to-date inflows of ~$3.6bn from global mutual fund investors.4 We see large pools of capital that do not have the level of holdings in China that they used to allocate. This implies that net foreign buying may continue in the months ahead, especially given the recent improvement in China’s fundamental outlook. Revenue normalization in areas that have been impacted the most by COVID restrictions may remain a tailwind and could drive further equity gains. The downside risk of maintaining underweight exposure to Chinese assets could therefore be high. We see public market strategies well placed to capture further upside in the near term. These strategies can take advantage of both improving fundamentals and tactical re-rating opportunities in areas where valuations are still suppressed relative to historical ranges, notwithstanding the recent rally. We expect China’s equity and fixed income complex to contain an abundance of alpha generating opportunities for bottom-up, active managers in 2023 and beyond. Many investors still include China as part of a broader allocation to Asia or emerging markets; however, China’s size and the breadth of its equity and fixed income markets could merit a standalone country or incremental regional allocation for investors considering Chinese equity and fixed income exposure. Both China’s A-share market and Chinese fixed income markets boast a strategic investment case for international investors underpinned by their size, liquidity, and diversification appeal.



Beyond Reopening


Despite optimism around China’s reopening and recovery in the near term, we expect headwinds to shape China’s growth trajectory and asset class performance in the years ahead. We examine three key issues in more detail: property sector stress, demographic shifts, and geopolitics.


First, China’s property market remains a key concern. The country’s real estate market stayed soft in 2022 amid continued liquidity and credit stress for developers, even as greater concerns over contagion risks stemming from Evergrande’s default began to abate. More recently, sentiment has further improved as policymakers’ tone towards the sector has turned decisively more dovish. Credit support to both high-quality developers and homeowners has been introduced and we expect more policy easing to come. We have since seen a recovery in both primary and secondary property transactions year-to-date. The long-term policy focus is likely to be on managing a multi-year property sector slowdown, rather than engineering an upcycle. Property developers’ debt-repayment problems have been among the biggest issues affecting Asia’s credit markets over the past two years. More recently, the asset class has experienced a forceful rebound. A recent rally of China property high yield bonds reflected a reduction of left tail risk for the stronger developers. We think stresses and defaults could continue to build and the near-term outlook remains challenging. Even so, we believe there is a potential opportunity for attractive total returns in the deleveraging of the Chinese property sector through active security selection, while recognizing that Asia’s credit markets represent a diverse opportunity set beyond China.


Second, China’s changing demographics will likely present long-term challenges to the country’s growth potential and alter the structure of its economy. China’s population started shrinking in 2022 for the first time in six decades.5 The demographic transformation has led to an increasingly top-heavy population pyramid. China’s old-age dependency ratio (the ratio of the population aged 65 and over to the population aged between 15 and 64) is expected to increase from 10% in 2000 to 41.5% by 2040, according to United Nations projections.6 Although China loosened its family planning restrictions in 2015 to address emerging demographic problems, birth rates have not improved following the implementation of the two-child policy. Even if China were to further relax its birth policies, fertility rates may not increase due to structural factors, including the fall in the number of women of childbearing age—a result of family planning that began in 1980; and improving living standards and education levels delaying marriages and childbirth, and the pressures and costs of parenting. Demographic headwinds are not unique to China. Many countries have increasingly aging populations, but China is already home to the largest population of older people in the world. Investors have opportunities to lean into areas of demographic change. Segments of China’s healthcare sector stand to benefit as aging consumers start to spend a higher proportion of their budget on medical services and less on tangible goods. At the same time, President Xi Jinping has put health and social care at the center of the government’s policy agenda. More broadly, lower labor force participation rates tend to raise labor costs and result in retirees drawing down savings. This may constrain the available supply of capital, potentially creating compelling opportunities for private investors seeking to put capital to work in China.



China’s Shrinking Working Age Population is Contributing to a Slower Pace of Potential Growth


Source: Goldman Sachs Global Investment Research, NBS, United Nations World Population Prospects. As of February 10, 2023.



Third, geopolitical risk remains a significant overhang on Chinese assets. The Russia-Ukraine war raised investor concerns around geopolitical issues, including China-Taiwan tensions and US-China trade and technology frictions. Diplomatic tensions with the US increased at the start of 2023 as the US shot down a suspected surveillance balloon and Secretary of State Blinken postponed his planned trip to Beijing. Strained relations between the US and China appear to have encouraged both to strive for more self-sufficiency in key industries. This may lead to more centralized economic policies where state intervention plays an important role, either directly or indirectly, through incentives and disincentives to decision makers and businesses. The US move to ban the transfer of advanced semiconductor technology to China may prompt Chinese leaders to ramp up state-directed investment in domestic chip producers and bolster onshore manufacturing. This could intensify the race between the two countries for dominance in the tech sector. Elsewhere, Beijing and Washington have also been at odds over access to audit papers of Chinese companies. Since 2021, Chinese offshore initial public offerings (IPOs) in the US have almost ground to a halt. However, February saw the first Chinese company to raise more than $100 million in the US in 15 months as China’s securities regulator eased curbs on overseas IPOs, sparking hopes that Chinese companies will restart their ambitions to list in major markets such as New York.


Geopolitical headwinds and new alliances ultimately create a more uncertain environment that weighs on consumer and corporate confidence. Governments’ fiscal spending priorities may also change, with increased spending on defense and/or more support for domestic industries. Private capital may be advantaged by its ability to provide long-term, patient capital that can respond to long-term shifts, while reacting less to near-term geopolitical gyrations. Private capital can also provide investors with access to a broader selection of industries given the stops and starts in the IPO market. From an FX perspective, global instability is also leading to a desire for greater currency diversification and could give rise to more institutional investor allocations and central bank reserves potentially shifting to RMB and EUR, alongside the dollar. That said, there are still material barriers to a wholesale shift into RMB. For example, foreign ownership of Chinese Government Bonds (CGBs) remains low at around 12%, although we think CGBs continue to offer investors diversification benefits given their low correlation with other assets.7 We also expect structural inflows as a result of increasing weights of CGBs in major bond indices to be supportive for the asset class over the long term.



Secular Trends


Every new cycle has new winners, and in China, picking the right themes and sectors in the right cycle has demonstrated to be highly rewarding. As China enters a new chapter, we believe it will be critical for investors to align their portfolios with long-term secular trends. This may include opportunities that are essential building blocks to—or at least well-synced with—initiatives set to guide China’s economic growth orientation in the decades ahead. China’s Common Prosperity vision, for example, is a concept which we believe represents a growth reorientation where policy support could pivot towards industries that carry long-term strategic value to China, including areas of technology, healthcare, and decarbonization.


Prosperity heavily depends on the ability for China to grow its economy in a high-quality, efficient, and sustainable manner. We believe China will have to develop its internal production capabilities in foundational technologies, specialized equipment and essential materials along key supply chains, such as semiconductors and enterprise software, if it is to improve its global competitiveness and self-sufficiency—especially against a backdrop of elevated US-China tensions. Building out digital infrastructure will also be essential to enable China to reach its long-term growth targets. Digitization will touch most areas of China’s economy, but we believe it could have the greatest impact on the enterprise technology and financial sectors.


Core technology aside, energy security is another necessary condition for sustained growth. While China is the largest producer of rare earth elements critical for energy transition, it is also the largest energy consumer in the world, representing 14% of oil and 52% of coal demand globally. About 73% of its oil consumption and 8% of coal is sourced externally, underscoring China's heavy dependence on energy imports in areas that could expose the country to national security concerns.8 The word "ecology" has also received significant mentions in many official Common Prosperity reports, and reducing energy pollution is a core component of sustainable development. We believe China's pledge to reach peak CO2 emissions by 2030 and carbon neutrality by 2060 will continue to underpin its quest for less-polluting energy supplies and enhancing energy efficiency. This could usher in secular investment opportunities centering on renewables (e.g. solar, wind, hydrogen) and environmentally-friendly energy applications, notably electric vehicles and related supply-chain components (e.g. battery technology and charging piles). Policymakers are also increasingly focused on alleviating water scarcity and reducing water pollution.



China’s Carbon Reduction Targets are Likely to Usher a Clean Tech Industrial Revolution


Source: Company data, Energy & Climate Intelligence Unit, and Goldman Sachs Global Investment Research. As of January 20, 2021. For illustrative purposes only. The economic and market forecasts presented herein are for informational purposes as of the date of this material. There can be no assurances that the forecasts will be achieved. Please see additional disclosures at the end of the material.



We believe finding and executing public and private investments in areas that benefit from structural tailwinds will prove rewarding. The make-up of China’s newly born unicorns—privately held start-ups with valuations over $1 billion—is increasingly concentrated in industries that are more aligned with China’s national development goals. In 2022, 70% came from four fields: clean technology, renewable energy, healthcare and smart logistics.9 Economies of scale and industry consolidation have historically been winning formulas in China. Going forward, a focus from policymakers on regulating anti-monopoly behaviors, discouraging cross-sector capital expansion for platform operators, and offering targeted support to emerging companies may strengthen the competitive positioning of small and medium sized enterprises. ‘Little Giants’—emerging companies handpicked by China’s authorities for explicit policy support—are particularly aligned with strategic policy goals. These small/mid-caps are mostly found in capital goods, new materials, technology hardware and semiconductors. These sectors are critical to Chinese national security, growth sustainability, and the Common Prosperity initiative.



New China Playbooks


China remains a large, growing market with a vast opportunity set. But as China reopens and its economy recovers, the country’s next chapter is set to look a lot different than the last. This means investors cannot rely on their existing game plan. As the long-term trends in China shift, it is important to see the change, understand the change, and continue to look forward. We believe investors will need to take a more nuanced view of public market exposures and add thoughtful idiosyncratic exposure to private markets with managers able to identify and execute in thematic areas with structural tailwinds. This could make portfolios more resilient as China enters its next chapter.





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1Goldman Sachs Global Investment Research. China post-reopening consumption recovery: Large potential, lingering scars. As of January 18, 2023.

2Goldman Sachs Global Investment Research. As of March 1, 2023.

3Goldman Sachs Global Investment Research. China Data Insights. As of February 7, 2023.

4EPFR, Morningstar, MSCI, FactSet, Goldman Sachs Global Investment Research. As of February 28, 2023. Morningstar data includes flows across China Equity and China A-Share Equity categories. Past performance does not guarantee future results, which may vary.

5National Bureau of Statistics of China. As of January 18, 2023.

6Goldman Sachs Global Investment Research. Population Aging, Pension System, and Individual Retirement Savings in China. As of February 10, 2023.

7Source: IMF, Goldman Sachs Global Investment Research, Goldman Sachs Investment Strategy Group, and Goldman Sachs Asset Management. As of January 29, 2023.

8Goldman Sachs Global Investment Research. Finding the "Common" paths to "Prosperity". As of October 25, 2021.

9South China Morning Post (SCMP). China added 74 unicorns in 2022, maintaining steady pace of growth despite fundraising crunch. As of February 3, 2023.


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South Africa: Goldman Sachs Asset Management International is authorised by the Financial Services Board of South Africa as a financial services provider.

Malaysia: This material is issued in or from Malaysia by Goldman Sachs (Malaysia) Sdn Bhd (880767W)

Hong Kong: This material has been issued or approved for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited.

Singapore: This material has been issued or approved for use in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H).

Israel: This document has not been, and will not be, registered with or reviewed or approved by the Israel Securities Authority (ISA”). It is not for general circulation in Israel and may not be reproduced or used for any other purpose. Goldman Sachs Asset Management International is not licensed to provide investment advisory or management services in Israel.

Jordan: The document has not been presented to, or approved by, the Jordanian Securities Commission or the Board for Regulating Transactions in Foreign Exchanges.

Colombia: Esta presentación no tiene el propósito o el efecto de iniciar, directa o indirectamente, la adquisición de un producto a prestación de un servicio por parte de Goldman Sachs Asset Management a residentes colombianos. Los productos y/o servicios de Goldman Sachs Asset Management no podrán ser ofrecidos ni promocionados en Colombia o a residentes Colombianos a menos que dicha oferta y promoción se lleve a cabo en cumplimiento del Decreto 2555 de 2010 y las otras reglas y regulaciones aplicables en materia de promoción de productos y/o servicios financieros y /o del mercado de valores en Colombia o a residentes colombianos. Al recibir esta presentación, y en caso que se decida contactar a Goldman Sachs Asset Management, cada destinatario residente en Colombia reconoce y acepta que ha contactado a Goldman Sachs Asset Management por su propia iniciativa y no como resultado de cualquier promoción o publicidad por parte de Goldman Sachs Asset Management o cualquiera de sus agentes o representantes. Los residentes colombianos reconocen que (1) la recepción de esta presentación no constituye una solicitud de los productos y/o servicios de Goldman Sachs Asset Management, y (2) que no están recibiendo ninguna oferta o promoción directa o indirecta de productos y/o servicios financieros y/o del mercado de valores por parte de Goldman Sachs Asset Management.

Esta presentación es estrictamente privada y confidencial, y no podrá ser reproducida o utilizada para cualquier propósito diferente a la evaluación de una inversión potencial en los productos de Goldman Sachs Asset Management o la contratación de sus servicios por parte del destinatario de esta presentación, no podrá ser proporcionada a una persona diferente del destinatario de esta presentación.

Bahrain: This material has not been reviewed by the Central Bank of Bahrain (CBB) and the CBB takes no responsibility for the accuracy of the statements or the information contained herein, or for the performance of the securities or related investment, nor shall the CBB have any liability to any person for damage or loss resulting from reliance on any statement or information contained herein. This material will not be issued, passed to, or made available to the public generally.

Kuwait: This material has not been approved for distribution in the State of Kuwait by the Ministry of Commerce and Industry or the Central Bank of Kuwait or any other relevant Kuwaiti government agency. The distribution of this material is, therefore, restricted in accordance with law no. 31 of 1990 and law no. 7 of 2010, as amended. No private or public offering of securities is being made in the State of Kuwait, and no agreement relating to the sale of any securities will be concluded in the State of Kuwait. No marketing, solicitation or inducement activities are being used to offer or market securities in the State of Kuwait.

Oman: The Capital Market Authority of the Sultanate of Oman (the "CMA") is not liable for the correctness or adequacy of information provided in this document or for identifying whether or not the services contemplated within this document are appropriate investment for a potential investor. The CMA shall also not be liable for any damage or loss resulting from reliance placed on the document.

Qatar This document has not been, and will not be, registered with or reviewed or approved by the Qatar Financial Markets Authority, the Qatar Financial Centre Regulatory Authority or Qatar Central Bank and may not be publicly distributed. It is not for general circulation in the State of Qatar and may not be reproduced or used for any other purpose.

Saudi Arabia: The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. If you do not understand the contents of this document you should consult an authorised financial adviser.

The CMA does not make any representation as to the accuracy or completeness of these materials, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of these materials. If you do not understand the contents of these materials, you should consult an authorised financial adviser.

United Arab Emirates: This document has not been approved by, or filed with the Central Bank of the United Arab Emirates or the Securities and Commodities Authority. If you do not understand the contents of this document, you should consult with a financial advisor.

Date of First Use: April 20, 2023.  310270-OTU-1771097

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