China’s Reopening Sparks Mixed Sentiment

China’s reopening tale is quickly becoming the most significant business topic in fast-growing economies. As a result, global investors must evaluate the potential effect of asset classes on one another.

The best start to a year since 2006 has seen Hong Kong-listed Chinese stocks rise as the nation’s relaxation of the COVID Zero policy and stimulus to growth have boosted optimism. In addition, the yuan climbed to a six-month high, and its bonds have reached a third monthly rally. Emerging markets, including the Thai baht, the South African rand, and Brazilian equities, have benefited. Forecasts for 2023 show that the second-largest economy will grow by 4.8%, compared to 0.4% growth in the US and 0.1% in the EU.

Emerging Market Currencies on The Rise?

Developing-nation equities and currencies had the best start to a year since the 90s. Investors who remained on the sidelines during China’s pandemic struggles are returning. In the meantime, bonds post the best gains in over a decade. Last month, GAMA Asset Management became optimistic about developing countries. Fidelity International is now overweight the assets, favoring Latin America and China, after being bearish for most of the past year.

In addition, China’s factory-gate deflation has hinted at a return to activity. Consumer inflation has increased somewhat, but the central bank has room to inject stimulus. According to Morgan Stanley’s quant strategists, hedge funds and long-only money managers have started looking for A-share ideas. They expect the yuan’s gains to continue. According to BNP Paribas SA, the policy support will ensure China’s growth exceeds 5% this year, raising the target for the MSCI Emerging Markets Index.

Meanwhile, Stagflation Risks Still Loom Over

But, the euphoria is starting to attract flak from critics. Investors are discussing the risk that inflationary pressures will intensify before the pace of growth strengthens. Meanwhile, Chinese factories return to life. The yuan is too expensive, according to UBS Group AG. The China reopening theme, however, is better played through the stock and ratepayers. According to Manik Narain and his strategists, the currency has more to lose from the reopening, who analyzed it through the balance-of-payments lens.