1. There are several positive catalysts that could help China’s market recover. These include an easing of zero-Covid restrictions, a reduction in geopolitical tensions and clear evidence of no further tightening in the regulatory environment. We see reasons for optimism in each area. The government is likely to continually adjust Covid-19 policies – driving greater economic resilience and flexibility in the face of localised restrictions – and utilise flexible policy tools.

2. Areas aligned with the Chinese government’s long-term goals should offer the most opportunities for investors. Common prosperity, for instance, could expand the aggregate size of disposable income and support social welfare as lower-tier cities remain a large untapped market for many consumer products and services. Green development, with orderly decarbonisation to avoid disruption to economic growth, should enable Chinese companies to secure global leadership in supply chains spanning from new energy vehicles (NEVs) to solar. In our view, sectors with high exposure to NEVs, solar, wind power and energy storage have upside potential due to strong NEV growth momentum, high energy prices, the ongoing Russia-Ukraine war and government subsidies. In addition, gaining independence from imports through domestic substitution in key technologies, such as semiconductors, represents a huge growth opportunity with strategic benefits.  Putting this in context, China imported over $400 billion in semiconductors in 2021.

3. Wheat prices: The Russian invasion of Ukraine pushed wheat prices on the Chicago Board of Trade to $12.9 per bushel in April 2022, compared to a prior three-year average of $6. However, prices have recently declined to $8.03 per bushel, driven by a number of factors. These include the US Department of Agriculture forecast of a 1% drop in global consumption of wheat, the resumption of grain shipments from Ukraine, and a record Russian wheat harvest offsetting lower production in China – the world’s largest wheat producer – which has been impacted by drought. The drop in wheat prices should contribute to reduced inflation pressures in EMs, which are also benefiting from discounted access to Russian energy exports that have been re-routed to these markets following sanctions imposed by the United States and European Union.

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