Chinese Stocks are Poised for a Rally in 2023

The resurgence of the pandemic and Beijing’s zero-covid policy pulled the reins hard on the Chinese economy, which almost screeched to a halt. China’s economy grew by merely 3% in 2022, below most G20 countries. The news triggered massive stock selloffs by large investors, including Japan’s SoftBank Group and Warren Buffett’s Berkshire Hathaway, causing panic among retail traders.

With the turn of the new year, we saw the Asian dragon unfurl its wings. In the first quarter of 2023, the Chinese economy grew by 4.5%, handsomely surpassing expectations. Was this merely due to pent-up demand or can China still breath fire to fuel the global economy?

What’s Feeding the Dragon Now?

The supply chain constraints during the pandemic forced foreign companies to pull out of China and its exports took a massive hit. The country had no option but to look inwards. But there was a silver lining. Through the pandemic, resurgence and reopening, China held its position as the world’s second largest consumer. Although China faces an uncertain global economic environment, its domestic consumption appears strong enough to drive the country’s economic growth in 2023.

China’s consumer confidence improved to 94.90 in March, from 94.70 in February and 91.20 in the previous month. Retail sales made a strong rebound in March, growing by a healthy 10.6%, after the previous month’s tepid 3.50% growth. The trend continued in April, with China reporting 18.40% retail sales growth.

Strength in China’s consumer demand could propel the stocks of the top three ecommerce companies, Alibaba, JD.com and Pinduoduo. Alibaba has been in the spotlight this year. Speculations of the company moving out of China hit the stock hard in January. It soon rebounded on Alibaba’s plans to integrate Tongyi Qianwen, its ChatGPT-style robot, beginning with the workplace-messaging app DingTalk. The Chinese ecommerce giant’s stock spiked by a whopping 14% on March 28, after the company announced plans to split into six separate units, each with its independent IPO.

Alibaba swung to profits of 23.52 billion yuan in the latest quarter, versus a year-ago loss of 16.24 billion yuan. Despite this, its stock declined more than 5% as investors were disappointed with its revenue growth in the quarter. This could be only a temporary hiccup before the stock reverses and begins its upward trajectory this year.

JD.com reported 1.4% revenue growth for the first quarter of 2023. While this was nothing to write home about, its bottom-line certainly was. JD.com posted a net profit of $912 million, versus a loss in the year-ago quarter. The retail giant ended the first quarter with around 590 million active customer accounts.

Pinduoduo’s stock also attracted a lot of short interest even after reporting 46% revenue growth and 42% earnings growth for the fourth quarter.

For JD.Com news sentiment has turned more bullish in recent days and price is yet to react. News volume has also increased sharply, which may be positive for price in the short term.

It’s no wonder that famous short seller Michael Burry has decided to go long on China’s tech sector. Burry’s Scion Asset Management hedge fund doubled its Alibaba stock holding to 100,000 and tripled JD.com to 250,000. Alibaba and JD.com are now Scion Asset Management’s top two holdings and comprise 20% of its assets under management.

News sentiment in relation to Alibaba is not offering any real direction at present, but we note the increase in news volume above the 90 day average in the past few sessions. The increased news flow is likely to provide clearer direction of the news sentiment front in the near future.

How to Train Your Dragon?

The government did a 180-degree turn in late 2022. Not only were the stringent covid-19 restrictions relaxed, but the government is also taking measures to stimulate domestic demand. These efforts are supporting several industries.

The Chinese government has also relaxed its crackdown on tech companies, which had impacted some leading internet-based conglomerates. The government’s pro-growth policies will support internet giants like Baidu and NetEase this year.

Baidu swung to profits of 5.83 billion yuan in the first quarter of 2023, versus a year-ago loss of 885 million yuan. The search engine giant generated 10% revenue growth, beating the consensus estimates for both the top- and bottom-line. Baidu is still waiting for regulatory approval of Ernie, its rival to ChatGPT. Ernie’s official launch could be a major catalyst for Baidu’s stock this year. Overall the news sentiment remains positive, possibly an indication that price is ready to move higher.

What’s Powering the Dragon?

China leads the global alternative energy market, with a 97% share in solar wafer production, 85% in photovoltaic cells, and 75% in solar panel polysilicon. Despite China and the US being at loggerheads, the recently passed Inflation Reduction Act of 2022 that incentivises clean energy companies in America could see these two major economies come together. This could lend significant upside to companies in the alternative energy space as well as EV makers like Nio.

EV sales in China grew by 87% in 2022 and is expected to hit 8 million units in 2023. Nio delivered 40,052 cars in the final quarter of 2022, resulting in over 60% revenue growth.

What Lies Ahead in 2023?

China has announced a modest growth target of 5%. Even then, several experts have raised their projections for China’s economy. While the IMF has raised its 2023 growth forecast to 5.6%, analysts at Goldman Sachs have upped their projection to 6%.

The Chinese economy is looking healthier than it did in a long time. It is garnering momentum and appears poised for stronger growth ahead. Even if it does grow at the government’s conservative target, China will continue to be among the world’s fastest-growing major economies, while the US and EU fend off recessionary risks.

The stock market will likely remain volatile in the second quarter. We wouldn’t be surprised, though, to see a rally in the second half of the year.