China’s economy looks poised for a rebound in 2023, but a lot depends on one variable — the consumer, said investment management firm KraneShares.

“As external demand falls due to an impending recession in the West, China’s economy must rely more heavily on the consumer,” said KraneShares’ international head, Xiaolin Chen.

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

China’s gross domestic product grew 3% in 2022, less than half of 2021’s rate. The country’s zero-Covid policy, worsening relations with the U.S., as well as the real estate “taper tantrum” in 2022 dampened growth, KraneShares said in a report released last week.

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

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

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

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

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

“While offshore stocks (predominantly internet companies) suffered from industry regulations and geopolitical risks, the A-Shares market (predominantly consumer staples, healthcare, and clean technology) benefited from the stimulus and supportive policies,” she said.

Chen added that emerging sectors such as cloud services and semiconductors, though promising, may take years to contribute significantly to China’s economy.

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

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