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Raymond Gui: We believe the economy will recover from here, with economic activity gradually coming back to normal following further fiscal stimulus, and a rebound of consumption from a low base. GDP could grow at 5% and higher in 2023. Since early November, in the offshore US dollar bond market, Chinese credits have started to price this in and performed strongly especially in the real estate sector. In the onshore market, Chinese government bond yields have also sold off since early November. Supported by the recovery story, Chinese credit could continue to outperform the rest of Asia this year as valuations are still relatively wide especially for high yield. As always, we remain prudent in terms of credit selection, based on our bottom-up credit analysis and relative value analysis.

Bin Shi: We think GDP will definitely be higher than it was in 2022 – how much higher depends on the magnitude of policy stimulus. At this point, the government is targeting 5%, but if the stimulus is stronger and the market response is stronger, it could be higher than that. When we look at Chinese equities for 2023, the theme is recovery and normalization. Many of the measures that were put in place from the second half of 2021 to the end of 2022 could be reversed, as we have seen with the COVID policy being reversed within a month or two.

We see strong signals of positive reversal for the economy and Chinese equities in 2023. Even after a strong recovery in November and December, Chinese equities are still pricing in some kind of crisis. For example, many companies still offer a dividend yield of more than 10%, which is significantly above the normal 5-6% range for stable companies. If the government implements additional long-term policies that boost the confidence of investors and entrepreneurs, there should be further upside. Despite the difficulties last year, Chinese equities outperformed some developed markets, including the US market, and we think 2023 will be a continuation of that trend.

Jia Tan (TJ): Domestic demand has to play a more important role this year than it has over the last few years. After the National Party Congress in October and the Central Economic Working Conference in December, China appears to have passed turning points in terms of COVID and property market policies. Both areas have put pressure on economic growth over the last 18-24 months. If more friendly policies to stimulate domestic demand materialize, we should be more constructive on our outlook.

As we reshape our portfolios for the new year, we are focused on pro-growth areas like internet and property. Those should be key areas for Chinese policymakers to focus on when stimulating the economy this year.

Raymond Gui: China needs an affordable and stable housing market. Recently, there has been more policy support for the property market, including efforts to improve financing channels for property developers and to promote demand for housing. We believe the property market will gradually recover this year, and developers will operate more prudently with lower leverage in future.

In the offshore US dollar bond market, Chinese real estate was a large sector for the Asia high yield market but has since corrected significantly over the past year and a half. Since late November, the sector has reacted positively to recent policy support and performed strongly. We continue to favor select Chinese property developers that will potentially benefit from the recovery of the physical market and become longer-term survivors. They could continue to be a good source of alpha generation for Asia high yield.

Bin Shi: Some of the regulations were well-intended, seeking to control the monopolistic power of the platform companies. The problem was in the execution, which created negative sentiment. The more friendly policy environment is not necessarily a reversal of the regulations, but a reasonable relaxation. This is good for platform companies, as well as the industry and the economy in the long run. We don’t expect a return to the more severe practices employed in the past.

Bin Shi: The semiconductor industry is the weakest of the high-tech industries in China. The leading manufacturing and design companies and foundries are not Chinese. China imports more semiconductors than it does energy supplies such as oil. China is particularly dependent on semiconductor companies from outside the country and the self-reliance ratio has not increased over the past five to 10 years, even though the Chinese semiconductor industry has grown substantially.

While China will continue to invest in its own semiconductor industry, catching up with the leading companies globally and building that expertise will take time, and it is not something that can be solved by throwing money at the problem. The US government is restricting exports of most but not all semiconductor components to China. Specifically, they are blocking the latest technologies, so as to keep some distance between itself and China. But while Chinese companies may be a couple of generations behind, they are not totally cut off. We believe it will take many years for China to achieve the leading-edge technologies, which is why the US-China relationship needs to stabilize.

Jia Tan: Conditions have been improving over the last few years,. When we want to build out offshore positions, we can find sufficient shorts. However, we are still awaiting a policy we have been looking forward to for three years – the new QFII rules.

Announced in the fourth quarter of 2019, the new rules would allow foreign investors to conduct short selling activities in the onshore market. If implemented, we believe that they will improve our capability in short selling over time, by a factor of three to five times. Unfortunately, it took almost three years after the announcement to get things prepared. Even today, that door has not been opened for all hedge fund managers. If China is committed to opening up its financial services industry, that would be a key policy to watch for. After the Central Economic Working Conference, we are hopeful that we will see some favorable policies this year.

Raymond Gui: Under the current foreign exchange regime for renminbi, the USD/CNY exchange rate will be driven by the overall strength or weakness of the US dollar, and also be affected by the relative performance of the Chinese and US economies. That largely explains the appreciation of the renminbi in 2020 as well as the depreciation of the renminbi last year against the US dollar.

In 2023, China looks to be in a better position compared with the rest of the world. There is good potential for China’s economy to recover this year, while the rest of the world, particularly the US and Europe, is facing recession risk. Therefore, the renminbi has good potential to strengthen further from here, although there will likely be volatility along the way. Our job is to help investors manage the volatility and capture investment opportunities.

Raymond Gui: Since last year, when we hedged USD into renminbi, it has changed from a hedging gain into a hedging cost. The major reason is because the interest rate differential between USD and CNY reversed when the US entered into an interest rate hiking cycle. Even today, the 12-month hedging cost from USD into CNY is still over 2%. This will continue to change overtime with different interest rate cycles in the US and China.

Jia Tan: We anticipate that the green economy will be an exciting opportunity for us in the coming years. China is serious about making the provinces carbon neutral by 2060, and the government has devoted a lot of resources to achieving that target. We find recurring opportunities, not only in EV or solar, but within traditional energy and independent power producers (IPPs), which could play an important role.

As a relative value investor, we can construct our portfolios based on our structured views within the different sub-sectors. For selective sectors, as capex has been rising and supply and demand dynamics have been less favorable in the last year, we are finding short opportunities. At the same time, for long opportunities there are cutting edge companies and champions in niche sectors set to deliver strong growth in the next few years.

Bin Shi: Every industry in the long run is subject to supply and demand dynamics. Renewable energy is a secular trend and is also affected by policy stimulus. As strong policies have been announced, both within and outside China, the prices of some raw materials have increased 10 times from trough to peak. As supply catches up, and as people realize the costs associated with renewables implementation, demand starts to soften. Case in point: The pace of renewables installation in China has slowed down. It is hard for power producers to absorb the cost increase.

We also see demand slowing down in Europe and in the US because of strained US-China relations. A lot of the raw materials cannot be shipped to the US market, so we are seeing some hiccups. The trendline is still up; but we anticipate a shakeup in 2023 and therefore don’t have much exposure to the sector right now. At some point we will be more interested, but not at the moment.