China’s markets clutch at economy reopening straws

SHANGHAI/HONG KONG  – Rumors of a possible end to stringent COVID-19 lockdowns have sent China’s stock markets flying this week despite the lack of any announced changes, showing how desperate investors are for an end to months of relentless negative news.

The authorities have not said anything about easing the zero-COVID policy that has made China a global outlier, keeping infections down but battering the world’s second-largest economy. Indeed, official announcements have backed the “dynamic zero” approach.

Nearly three years after the coronavirus was first detected in central China, daily cases hit a six-month high on Friday. President Xi Jinping endorsed the strict COVID approach at a key Communist Party meeting last month and state media has repeatedly said zero-COVID is key to protecting people’s lives.

Even the unverified social media post on Tuesday that sparked the market’s exuberance said a “Reopening Committee” would not aim at relaxing the curbs before March.

Still, investors have piled in, adding more than a trillion dollars to the value of the stock markets in just over four days. The benchmark CSI300 Index jumped more than 6 percent this week, while Hong Kong’s Hang Seng Index is up nearly 9 percent – its best week in a decade.

“Will China open or not? It’s what investors care about the most right now,” said Qi Wang, CEO of MegaTrust Investment (HK).

“I don’t know whether the rumour is true or not. My view is that China will eventually have to (open)… because of the priority on economic growth.”

Friday’s jump in share prices and the yuan rally was aided by reports that U.S. inspections of Chinese company audits had finished ahead of time and that Beijing was working on a plan to end a system that banned individual flights for bringing in COVID-infected passengers.

Investors have jumped into sectors that would benefit from reopening, such as tourism, hotels and catering. Tech giants with U.S. listings led the charge after the audit news.

The test of history

But cooler heads warn that China’s trajectory of COVID rule relaxation will not resemble this week’s stock charts.

Reopening from COVID will likely take “a steady and gradual approach”, similar to China’s lengthy but successful economic liberalisation, said Zhang Kaihua, a Nanjing-based hedge fund manager.

“I don’t think China will swerve toward Western-style openings because if it’s a mistake, the consequence would be unbearable.”

He dismissed this week’s rumours as mere excuse to pump up battered shares, saying China’s leadership needs time to “make the right decision that stands to the test of history.”

Even after the rally, the CSI300 index is down 24 percent this year.

Yin Peixin, investment manager at Shanghai Jianlong Asset Management Co., said: “If our leadership doesn’t stick with zero-COVID, China will be thrown into a hellish condition.”Infections would jump, medical systems would collapse, there would be an acute labor shortage and inflation would surge, Yin said.

But some think China must balance COVID control against economic growth, which is under intense pressure as the rest of the world opens up and chooses to live with COVID.

“It’s true zero-COVID protects the older generation. But zero-COVID has significant costs for the younger generation, so I do believe China will make a trade-off after considering all the factors,” said Liqian Ren, a director at WisdomTree Investments Inc.

Growing signs suggest COVID curbs are already becoming less strict than several months ago even as zero-COVID remains, said MegaTrust’s Wang. Openings in Hong Kong “shows China genuinely wants to reopen its economy,” he said.

Jason Lui, head of East Asia strategy at BNP Paribas, said the rally likely cannot be sustained if there is no official announcement on COVID policy in the coming weeks, given other economic headwinds.

“The spirit of reopening is well understood by the market, but it takes some concrete evidence and announcement to sustain the market moves we have seen in the past week,” said Lui.