In 2022, prices rose by 1.8% in China, compared to 9.2% in the Eurozone and 7.1% in the US. Lower inflation rates allow the central bank (PBoC) to have much more flexibility in its monetary policies than its Western counterparts.

The Chinese government has recently adopted more accommodating fiscal and monetary policies to support the economic recovery through household consumption and small business activity. While most central banks in developed markets are trying to curb inflation by raising interest rates, China is following an expansionary monetary policy.

In 2020, the Chinese government had implemented new rules (e.g. debt limits) to curb speculation in the real estate market in 2020. These new measures caused a collapse of the housing market and the Evergrande crisis in 2021. Regulators have recently shown signs that they may relax these rules, giving some breathing space to struggling developers and reassuring their customers (households).

More than a year ago, Chinese regulators had struck a blow by implementing new rules in some "disruptive" industries, such as the technology sector or the education sector. The cancellation of Ant Group's IPO had weighed heavily on investor sentiment.

The government has recently shown signs that this regulatory frenzy may soon come to an end.

Frequently mentioned in the press, the risk of a Chinese ADR delisting from the U.S. markets has put off many international investors from the stocks they usually hold for exposure to the region. While this risk still exists, it is now probably much lower than many had feared. U.S. auditors recently gained access to these Chinese companies, a crucial and sensitive pointthat would have triggered delisting under other circumstances. Moreover, if China has agreed, it is probably because it believes that the majority of the companies under scrutiny will pass muster, at least the largest ones (e.g. Alibaba, Tencent, JD...).

From 2014 to 2021, short sales averaged 12% of the Main Board. In 2022, that number averaged 17.6%, up 42% from the seven-year average.

Further increases in Chinese stocks could force some short sellers to buy the shares in order to close out their positions, pushing the markets higher and potentially generating additional short selling.

Chinese stocks have been cheaper than their U.S. counterparts since 2008, while technology stocks have been trading at a historical discount on the Nasdaq lately.

In recent history, Chinese stocks have tended to outperform when the U.S. dollar depreciates. Given a less dollar-friendly environment this year (narrowing credit spreads), this scenario could very well happen again in 2023.