China’s economy looks poised for a 2023 rebound, but much depends on one variable: the consumer, said asset manager KraneShares.

“With foreign demand slowing due to a looming recession in the West, China’s economy must be more dependent on consumers,” said Xiaolin Chen, international head of KraneShares.

“We believe the reopening in early 2023 could lead to a V-shaped recovery in Chinese consumer brand share prices. The recovery could be driven by pent-up demand, high savings and a wealth effect as real estate prices recover.” Chen said.

China’s gross domestic product grew 3% in 2022, less than half the pace of 2021. The country’s zero-Covid policy, deteriorating relations with the US and real estate “taper tantrum” in 2022 have dampened growth, KraneShares said in a report released last week.

In December, China pledged to make domestic demand an economic priority.

“The effects of regulatory changes affecting the real estate development industry have lingered longer than expected, despite a government commitment to stabilize the industry,” Chen said.

China’s real estate market slowed sharply in 2022 as the government tightened restrictions on developer borrowing.

“Fortunately, reopening and a new injection of capital into China’s real estate development industry have the potential to significantly boost consumer confidence, which would be a catalyst for China’s markets in 2023,” said Chen.

She noted that internet companies such as Alibaba and Meituan were hit by the technology’s crackdown, while consumer categories fared better.

“While offshore stocks (primarily internet companies) suffered from industrial regulation and geopolitical risks, the A-share market (primarily staples of consumer staples, health care and clean tech) benefited from the stimulus and supportive policies,” she said.

Chen added that emerging industries such as cloud services and semiconductors, while promising, could take years to make a significant contribution to China’s economy.

“In 2023, we encourage investors to take a holistic view of China’s capital markets, including both onshore and offshore stocks and bonds in each allocation to both manage risk and ensure exposure to the greatest possible opportunity,” said Chen.

“We also encourage investors to take a long-term view,” she added.