With rising US recession risk, China’s reopening is timely to provide some cushioning, alongside helping to further ease global supply chain pressures. A stronger yuan from its reopening bodes well for the ringgit (60% correlation). Malaysia’s tourism related sectors (aviation, brewers, Genting group, healthcare, REITs and telco) are key beneficiaries. Not only are the Chinese an important segment for Malaysia’s tourism, they are also “high value tourists”, spending 19-72% more vs the average tourist. Commodities (oil, palm oil, aluminium) are also a beneficiaries of China’s reopening. We keep our 2023 GDP unchanged at +4.0% and KLCI target at 1,580.

The long awaited reopening. Up until last Sunday, the global reopening drive was missing one critical element – China. Its border reopening (effective 8 Jan) allows passengers to enter without quarantine, with only a negative PCR result required within 48 hours before departure. However, those wanting to enter China on tourist or long term visa will still have to hold their horses. The communist government has signalled its intention to eventually allow this, but no timeline was given. For now, it plans to focus on facilitating visa applications for foreigners going to China for business, employment, study, family visits and reunions. This suggests that its current reopening rules would largely facilitate outbound Chinese nationals (who can later return at ease without quarantine) but not for foreign tourists wanting to visit China. Although China’s reopening isn’t yet exactly full-fledged, these steps are in the right direction towards normalcy.

Reopening grease to supply chains. While China’s zero-Covid policy worked pretty well initially – containing the spread and keeping its economy running -- the highly contagious Omicron variant in 2022 changed that, resulting to a series of unpredictable stringent lockdowns (Figure #1). Naturally, this took a toll on the Chinese economy with (i) Caixin-PMI being in contractionary territory (<50) for the most of 2022 and (ii) exports decreasing in Oct-Nov (see Figure #2). As “the world’s factory”, China’s lockdowns also impacted global supply chains – this was most evident during the lockdowns in Shenzhen (Mar-22) and Shanghai (Apr to May-22), resulting to a spike in the Global Supply Chain Pressure Index (GSCPI) in Apr-22 (3.29 vs Mar: 2.76). However, with China’s reopening momentum nicely shaping up since Nov-22, this suggests that those dreaded lockdowns should (hopefully) be a thing of the past, providing another element of recovery to global supply chains which would aid in taming inflation.

Cushioning from a US recession. China is the second largest economy in the world (estimated 18% share of global GDP in 2022) after US (24.7%). With US recession probability readings on the rise, China’s reopening comes in a timely manner to help cushion the former’s contagion impact. This cushioning effect could be relatively more visible for Malaysia as China has been its biggest trading partner post-GFC (18.9% of total trade in 2021) and second largest export destination (15.5% of exports); while US on the other hand forms 9.7% of its total trade and 11.5% of exports.

Yuan strength could bode well for ringgit. Post GFC, the ringgit has displayed a 59.7% correlation with the yuan (both measured vs USD), reflecting in part the emergence of China as the top destination for Malaysia’s exports. With China’s reopening lending strength to the yuan, we see a possible positive knock-on effect to the ringgit as well. We maintain our slight appreciation bias view for the ringgit in 2023 to average 4.34 vs USD (2022: 4.40).

Key ingredient to Malaysia’s tourist concoction. The Chinese are not only important in terms of tourist numbers to Malaysia, they are also “high-value tourists”. Prior to the pandemic, China was the third largest source of tourists to Malaysia (after Singapore and Indonesia) at 8.8-11.9%. However, in terms of contribution to tourist receipts, China ranks higher at second (11.0-17.8%) owing to their stronger spending power. Between 2017-2019, the typical Chinese tourist spent RM661-768 per day in Malaysia, which was 19-72% higher than what the average tourist did.

One’s loss is another’s gain. As some countries (e.g. US, UK, parts of EU, Canada, Japan, S.Korea and Australia) have imposed testing requirements on Chinese tourists, we believe this will divert them to countries that are “more welcoming” – such as Malaysia. Unlike selectively imposing mandatory PCR testing, Malaysia has a fairer and less cumbersome approach involving (i) heat screening for all inbound travellers and only those detected with symptoms will be tested and (ii) testing wastewater from airplanes arriving from China.

Tourism related sectors are key beneficiaries. A recent article by SCMP pointed that Singapore, Thailand and Malaysia are the top destinations for Chinese travellers. Naturally, China’s border reopening would be a boon for Malaysia’s tourism related sectors/stocks – Aviation (higher passenger flows), Brewers (increased on-trade sales), Genting Group (Chinese tourists are likely to have a greater affinity towards gambling), Healthcare (China was the second largest contributor to healthcare traveller revenue), REITs (higher footfall to prime tourist attraction malls and increased hotel occupancy) and Telco (tourist SIM sales and roaming revenue).

Commodities to benefit as well. Broadly, China’s reopening bodes well for commodities demand. China is the second largest consumer of crude oil at c.16% (15.3mbpd) of global oil production in 2021 and is estimated to hit 15.6mbpd in 2022 and 16.1mbpd in 2023. Prior to the pandemic, Chinese tourists accounted for c.10.3% (2017-2019) of international tourists globally. Given such, its reopened borders will help boost air travel and in turn, demand for downstream refined products such as jet fuel kerosene and gasoil. For palm oil, China made up 11% of global imports in 2021 (pre-pandemic 2019: 13%). However, we note that major palm oil importing countries (including China) have stepped up on their replenishing activities, resulting in higher edible oil inventories – suggesting capped potential for more aggressive buying in the near term. On aluminium while the reopening no doubt aids demand recovery, our analyst believes there will be some price offsetting effect coming from i ncreased capacity and production in China.

Property recovery? China’s economic revival from its reopening measures should help its beleaguered property sector which was hit by the government’s squeeze on new financing for developers, pandemic repercussions and mortgage boycotts by owners of unfinished homes. Recently, the Chinese government also pledged support for first time home buyers via easing of mortgage rates and lowering down payments. We believe that IOIPG is well positioned to capture this recovery in home demand. Amid concerns by Chinese home buyers on developer’s financials to deliver projects, IOIPG stands out by showcasing actual completed units. As at 1QFY23, it has a sizable RM1.26bn worth of completed inventories in China.

Key risks. Risks to China’s reopening include (i) near term economic and social disruptions from the virus’ surge which has hit unprecedented levels (by China standards) and (ii) increase in commodity prices which presents upside risk to global inflation.

Maintain GDP and KLCI target. Overall, we are upbeat on China’s reopening and its positive implications to Malaysia. Maintain 2023 GDP at +4.0% and KLCI target at 1,580.

Source: Hong Leong Investment Bank Research - 13 Jan 2023