[MarketING] Renewed Expectations for China's Reopening

KOSPI Falls for the First Time in 8 Days Due to Institutional Selling
KOSDAQ Also Declines After Four Days of Gains

The KOSPI closed lower for the first time in eight days. With China's economic indicators for the first quarter showing favorable results, expectations for China's reopening (resumption of economic activities) are expected to expand again. Accordingly, Chinese consumer-related stocks recorded an upward trend.

KOSPI Closes Lower for the First Time in Eight Days

On the 18th, the KOSPI closed at 2,571.09, down 4.82 points (0.19%) from the previous day. The KOSDAQ ended the session at 909.02, down 0.48 points (0.05%).

[Image source=Yonhap News]

Both the KOSPI and KOSDAQ started higher but turned lower, with the KOSPI falling for the first time in eight trading days and the KOSDAQ weakening for the first time in four days. Institutional investors led the decline in the indices. On that day, institutions sold 664.5 billion KRW in the KOSPI market and 107.5 billion KRW in the KOSDAQ market. Although individual investors net bought 364.4 billion KRW and 265.1 billion KRW respectively, it was insufficient to prevent the index decline. Foreign investors showed buying pressure of 341.5 billion KRW in the KOSPI market but recorded net sales of 131.8 billion KRW in the KOSDAQ market.

Kim Seok-hwan, a researcher at Mirae Asset Securities, analyzed, "The index showed overall weakness due to institutional selling and concentration in secondary battery supply and demand," adding, "Chinese-related consumer stocks such as apparel, duty-free, and cosmetics showed strength as China's March retail sales recorded a surprise."

Expectations for earnings improvement of related stocks due to the recovery of Chinese consumption expanded, leading to stock price increases. On that day, AmorePacific rose 5.18% from the previous day, LG Household & Health Care increased by 5.10%, F&F by 4.40%, and Hotel Shilla by 3.59%.

On the same day, China's National Bureau of Statistics announced that China's first-quarter gross domestic product (GDP) increased by 4.5% year-on-year to 28.4997 trillion yuan (approximately 5,460 trillion KRW). This exceeded both the previous quarter's growth rate (2.9%) and market expectations (4.0%). It was the highest quarterly figure in over a year since the first quarter of last year (4.8%). March retail sales increased by 10.6% year-on-year, significantly surpassing the previous month's figure (3.5%) and the forecast (7.4%). This was the first time since June 2021 (12.1%) that China's monthly retail sales growth rate showed double digits. On a quarterly basis, retail sales rose 5.76% year-on-year. Industrial production fell short of expectations. March industrial production increased by 3.9% year-on-year. Although the improvement was greater than in January-February (2.4%), it was below market expectations (4.0%). Fixed asset investment recorded 5.1% for January to March, below the previous month's figure (5.5%) and the forecast (5.7%).

Since China shifted to a "with-COVID" policy at the end of last year, the reopening effect appears to be gradually materializing. Along with this, the upcoming Chinese Labor Day holiday (April 29 to May 3) is expected to benefit Chinese consumer-related stocks.

Lim Hye-yoon, a researcher at Hanwha Investment & Securities, analyzed, "China's first-quarter economic growth rate exceeded expectations, led by consumption," adding, "Service consumption is increasing flexibly due to eased quarantine measures, so robust growth is possible in the second quarter as well." She added, "However, for flexible growth to continue until the second half of the year, recovery of household purchasing power must precede."

China's Economic Recovery Expected to Be Stronger in Q2 than Q1

Although a clear recovery in Chinese consumption has been confirmed, there is analysis that the normalization of the real economy still falls short of expectations.

Park Sang-hyun, a researcher at Hi Investment & Securities, said, "China's economy in the first quarter can be said to have benefited significantly from the reopening effect centered on domestic demand recovery, but the normalization of the real economy such as production and investment still falls short of expectations, as confirmed again in the March indicators," adding, "The slow recovery of production and investment indicators seems to be greatly influenced by sluggish exports to advanced countries and inventory burdens."

The Chinese economy in the second quarter is expected to improve compared to the first quarter. Researcher Park said, "As the second-quarter Chinese GDP growth rate is expected to be significantly higher than in the first quarter, expectations for the trickle-down effect of China's reopening will strengthen from mid-second quarter," adding, "Since consumption recovery began in earnest from March, the revenge consumption cycle is likely to peak in the second quarter."

However, excessive expectations for China's economic recovery should be approached with caution. Large gaps between expectations and actual indicators can lead to increased volatility. Lee Kyung-min, a researcher at Daishin Securities, said, "What is important in checking Chinese economic indicators is the gap between expectations and reality regarding speed and strength, that is, how much the economic indicators exceeded expectations," adding, "The Chinese Economic Surprise Index has exceeded 150%, the highest since 2006, indicating that expectations for the economy have reached historically high levels. It is time to be cautious about the possibility that upcoming economic indicators may fall short of forecasts." He added, "Investment based on the direction of the Chinese economy is valid, but if concerns about the speed and strength of China's economic recovery arise, short-term volatility expansion will be inevitable."