China’s economy is showing signs of recovery following a surge in spending last month, driven by the reopening of in-person businesses like catering and tourism. The Lunar New Year holiday led to big jumps in revenue for these industries, and an official survey on services activity showed that people in China are becoming more willing to travel and spend money. This has led to economic growth forecast upgrades from the International Monetary Fund, as well as from various investment banks.
China’s focus on boosting consumption has been supported by top leaders, including President Xi Jinping, who called for greater efforts to ensure income stability among residents and encourage spending. Despite the positive data, some areas of the economy remain weak. Sales of durable goods like cars have been tepid, with just a 3.6% increase in revenue during the holiday period compared to the previous year. Home sales continue to be a drag, with the top 100 real estate developers reporting a 32.5% drop in sales in January compared to the previous year.
The industrial sector is also likely to take longer to recover, as manufacturers typically have a slower period during the Lunar New Year holiday, and the wave of Covid-19 that hit China as restrictions were lifted likely contributed to worker illnesses. An official gauge of manufacturing activity signaled expansion in January, but a private survey showed that smaller firms are still struggling, with the index remaining in contraction for a sixth consecutive month.
Overall, the recovery of China’s economy is not yet on a sure footing, as pent-up demand for in-person services may not benefit other areas like durable goods consumption, and the pandemic continues to take a toll on the economy. However, the rise in the official PMI and optimism among businesses suggests that conditions are improving and that a post-Covid economic recovery is expected.
Some sectors that may potentially benefit from a stronger Chinese economy include consumer-oriented businesses, such as retail and travel, technology, and infrastructure. Companies in these sectors that have a strong financial position and a favorable outlook could be potential candidates for and attractive investment.
Analysts have identified a few companies that they believe will outperform in the current recovery:
Alibaba-Strong Buy-$135 Target
Canada Goose-Buy-$36 Target