China's equities off to good start in 2023 on recovery hopes

BEIJING -- Chinese equities kicked off 2023 with remarkable gains and continued capital inflows amid the renminbi's bullish momentum. This reflects the global investors' positive outlook on China's economic growth and their confidence in the country's economic fundamentals.

China's fast economic recovery will attract more inflows of northbound capital, or the amount that overseas investors pump into A-shares via the Stock Connect program linking Shanghai, Shenzhen, and Hong Kong bourses.

As of Tuesday, the net inflow of northbound capital neared 33.52 billion yuan ($4.94 billion) this year, the benchmark Shanghai Composite Index gained 2.6 percent, and the Shenzhen Component Index expanded 4.46 percent from the end of last year.

A report released by CITIC Securities showed that Chinese assets will gather greater appeal in 2023, and the net inflow of capital will exceed 100 billion yuan amid the steady appreciation of the renminbi.

Goldman Sachs said that overseas capital's increase in A-shares represented a trend and the logic behind it is that A-shares provide a relatively safe haven during the global market turbulence.

Analysts also believed overseas investors have been attracted to the A-share market for its lower price-to-earnings ratio, a widely watched measure of valuation on whether the market (or a stock) is overvalued, fairly valued, or undervalued.

The capital inflows can also facilitate the renminbi to improve its performance in the currency market.

The central parity rate of the renminbi strengthened 654 pips to 6.7611 against the US dollar Tuesday, on top of the 647-pip appreciation on the previous day, according to the China Foreign Exchange Trade System.

Industry data showed the renminbi rose over 6 percent against the greenback since last November. "Faster-than-expected economic recovery is a key driver behind the yuan's recent strengths, for it made yuan-denominated assets more investment-worthy," said Li Liuyang, a forex analyst with investment bank CICC.

China's efforts to better coordinate anti-virus efforts and economic development heartened investors. In its latest move, the country downgraded its management of COVID-19 from Jan 8 to treat it as a Class B infectious disease rather than a more severe Class A, enabling quarantine-free global travel and easing other curbs.

Global observers speak highly of China's prospects. Swiss private bank Pictet said China's economy is to expand in 2023, and Chinese equities are expected to yield a higher return. "We believe that the Chinese economy will improve in 2023. We think that a growth of 5 percent is possible and achievable thanks to the reopening of the economy," said Luca Paolini, chief strategist at Pictet Asset Management.

In a recent report on the global economic outlook, Goldman Sachs predicted China's GDP growth to rise from 3 percent in 2022 to 4.5 percent in 2023. According to J.P. Morgan Asset Management's forecast, China's GDP growth may rebound to over 5 percent this year, while Morgan Stanley's outlook on growth has risen to 5.4 percent.