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Asian Stocks Begin 2023 on a Positive Note, but China Concerns Limit Gains

Asian stock markets generally rose on Tuesday, with investors taking heart from the expectation that U.S. interest rates will increase at a slower pace this year.

A person watching stock market tickers
A person watching stock market tickers

However, concerns about China's economic recovery and a warning about a potential recession kept gains in check. The Shanghai Shenzhen CSI 300 and Shanghai Composite indexes rose by 0.2% and 0.7%, respectively, while the Hong Kong Hang Seng index jumped 1.4%. These three indexes had fallen between 14% and 21% in 2022.

While analysts expect China's economy to bounce back once it fully reopens, they predict that the country will suffer in the short term due to the current surge in COVID-19 cases. Chinese President Xi Jinping also highlighted the ongoing challenges posed by the pandemic in his new year's address, which was more cautious than markets had anticipated. Recently, data showed that China's manufacturing sector contracted for a fifth consecutive month in December.

China's economic slowdown had a knock-on effect on several Asian economies that rely on the country, contributing to a regional stock market downturn in 2022. However, the expectation that the U.S. Federal Reserve will raise interest rates more slowly this year is providing some relief for regional stocks. A series of recent economic indicators suggest that U.S. inflation has probably peaked, which means that the central bank is less likely to adopt a hawkish stance.

Asian Stock Market Performance and U.S. Interest Rates in 2023

Investors will be watching the Fed's December meeting minutes and the nonfarm payrolls data this week for further clues on monetary policy. In 2022, rising U.S. interest rates weighed heavily on Asian stocks, with most major exchanges ending the year in negative territory. Markets are currently predicting over a 90% chance that the Fed will increase rates by 25 basis points in February.

In addition to the Chinese indexes, other Asian stocks also rose on Tuesday. India's Nifty 50 and BSE Sensex 30 indexes rose 0.1% after outperforming their Asian counterparts in 2022. The Taiwan Weighted index rose 0.6%, while most Southeast Asian stock exchanges also recorded strong gains.

However, the sentiment was also dampened by a warning from the International Monetary Fund that at least a third of the world could experience a recession this year due to high inflation and rising interest rates. If such a scenario were to unfold, especially if China's economic recovery is delayed further, it could pose additional challenges for Asian markets later in the year.