China reopening is mixed blessing for emerging-market assets

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For currencies it could be a drag by reducing real yields via inflation

People take pictures with Chinese Lunar New Year installation titled"Poetic Spring Garden", an installation by Kwai Chai Hong at Chinatown, Kuala Lumpur, Malaysia, on January 16 2023. Picture: HASNOOR HUSSAIN/REUTERS

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.

“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.

But the run of optimism is beginning to attract its critics. As Chinese factories roar back to life, investors are debating the risk that inflation pressures will increase long before growth impulses take root. UBS Group says the yuan is expensive and the China reopening theme is better played via stocks and rates payers. When analysed through the balance-of-payments lens, the currency has more to lose from the reopening, strategists headed by Manik Narain wrote.

By last week, China’s currency advanced 9% since early November when the reopening talk began doing the rounds in markets. Money managers are now betting it has become overvalued. JPMorgan Chase says the yuan’s carry is no longer attractive and it will look to re-establish some short positions in the offshore markets as the “China reopening euphoria” gets priced in.

 

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