China’s markets clutch at economy reopening straws

Rumors of a possible end to a COVID-19 lockdown have sent China’s stock markets flying this week despite a lack of announced changes, showing how desperate investors are to end months of news relentlessly negative.

The authorities have said nothing about the zero-COVID policy that has made China a global outlier, keeping infections down but affecting the world’s second-largest economy. In fact, official announcements supported 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 a tough COVID approach at a key Communist Party meeting last month and state media has repeatedly said zero-COVID is critical to protecting people’s lives.

Even the unverified social media post on Tuesday that sparked market turmoil said a “Reopening Committee” would not aim to ease the curbs before March.

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

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

“I don’t know if the rumor is true or not. My view is that China will eventually have to (open up)… because of the priority of economic growth.”
Friday’s jump in share prices and the yuan’s rally were helped by reports that US audits of Chinese companies had ended prematurely and that Beijing was working on a plan to end a system that barred solo flights to bringing in passengers infected with COVID.

Investors have jumped into sectors that would benefit from a reopening, such as tourism, hotels and catering. US-listed tech giants led the charge following news of the audit.

But cooler heads warn that China’s easing of the COVID rule will not be like this week’s stock charts.

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Reopening from COVID is likely to take a “steady and gradual approach”, similar to China’s long but successful economic liberalization, said Zhang Kaihua, a hedge fund manager based in Nanjing.

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

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

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

Yin Peixin, investment manager at Shanghai Jianlong Asset Management Co., said: “If our leadership does not adhere to zero-COVID, China will be put in a terrible position.”

Infections would jump, medical systems would collapse, there would be labor shortages and inflation would rise, Yin said.

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

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“The older generation is really protected by zero-COVID. But zero-COVID has significant costs for the younger generation, so I believe China will make a trade-off after considering all factors,” said Liqian Ren, director at WisdomTree Investments Inc.

Growing signs indicate that the curbs of COVID are already becoming less severe than several months ago even with zero-COVID yet, Wang MegaTrust said. Openings in Hong Kong “show that China really wants to reopen its economy,” he said.

Jason Lui, head of East Asia strategy at BNP Paribas, said the rally cannot be sustained unless there is an official announcement on COVID policy in the coming weeks, given the other real economic headwinds.

“The market understands the spirit of the reopening well, but it takes some concrete evidence and announcement to sustain the market movements we have seen in the past week,” said Lui.
Source: Reuters (Reporting by Samuel Shen and Georgina Lee; Editing by Vidya Ranganathan and William Mallard)


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