China is Reopening Early: What Does This Mean?
In an unexpected announcement earlier this week, the world’s second-largest economy is re-opening in the new year. After years of the strict Zero COVID policy implemented by President Xi, China is officially ditching the restrictions come January 8th. Investors are probably thinking this is a good thing, right? The lockdowns effectively closed down manufacturing and industry in the country and contracted its economy. The Hang Seng index in Hong Kong jumped following the report, but those gains have mostly been erased since.
So what does this mean for investors? Economists at Goldman Sachs are predicting short-term pain but long-term gains for China. A country with a population of this side is going to see some growing pains from a rapid reopening. Supply chains and the workforce will be compromised and this could cause a shortage of products and higher prices. Obviously, once things have sorted themselves out, Goldman Sachs anticipates that the Chinese economy and specifically the Yuan will be stronger by the end of 2023.
Are Chinese ADR Stocks a Buy?
Last week shares of electric vehicle maker Nio (NYSE: NIO) tumbled because the company lowered its production guidance due to the ongoing COVID crisis. Tesla (NASDAQ: TSLA) stopped production at its Shanghai GigaFactory because of a COVID outbreak among its workers. This led to Tesla’s stock falling by nearly 10%, adding to the miserable year that its shareholders have experienced.
The impacts of China’s reopening are beyond production and manufacturing. The upper class in China has piles of money and with global travel reopening in the new year, this will certainly benefit some countries. At the top of the list are destinations like Japan, Thailand, and South Korea. This could lead to a revival of some economies. In 2019, before the pandemic, Chinese travellers added 1.8 trillion yen to Japan’s economy through tourism alone.
As for Chinese ADR stocks, I don’t really see a major reason to be as bullish. Sure, companies like Nio will likely meet production guidance now but remember they still need to sell cars. With a potential recession hitting much of the world, buying expensive electric vehicles might not be at the top of everyone’s list.
Chinese tech stocks could see a boost from consumer demand opening up. But I’m not that interested in investing in companies that will still be regulated by the CCP. President Xi’s iron fist is a major elephant in the room for ADR stocks, and simply put, I have no reason to believe that things will return to normal.
The Bottom Line on China’s Reopening
Overall it is a net positive for the global economy, but like Goldman Sachs says, expect some short-term pain. I don’t expect any significant growth from Chinese ADR stocks simply because the COVID restrictions are being softened. It is nice to see China finally joining the rest of the world, but remember, this is also a regime that has changed its mind on major policies before. Let’s take a wait-and-see approach before investing in anything related to China right now.
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