China’s Reopening Plans Spark Rally in Consumer Stocks, Yuan

(Bloomberg) — The yuan and Chinese consumer stocks rallied as key cities eased Covid restrictions, spurring bets that the worst of the economic impact from strict lockdowns is over.

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The offshore yuan and the benchmark CSI 300 Index both rose around 1% before paring, with consumer shares leading gains. The easing of restrictions in Beijing and Shanghai are likely to boost expectations that Chinese shares are bottoming out, with investors including Amundi SA turning bullish as policymakers step up growth support.

“Covid cases and lock downs have been the key factors holding back China equity valuations, so the easing of these will be positive,” said Bloomberg Intelligence analyst Marvin Chen. Continued reopening with more stimulus may kick start a recovery in the second half, he added.

Read: Amundi Turning Bullish on China Stocks, Still Cautious on Tech

A small but growing group of investors and analysts are now calling a bottom for Chinese markets after strict lockdowns prompted banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. to slash their growth forecasts for the economy. Some of those concerns are starting to abate as Shanghai, the epicenter of the latest Covid outbreak, rolled out a raft of measures to support a return to normalcy on Sunday.

The city aims to accelerate approvals for property projects and raise the quota for car ownerships, while Beijing also started to ease its control on movements over the weekend after authorities said the outbreak there was under control.

Tsingtao Brewery Co. and Chongqing Brewery Co. were among the biggest gainers on the CSI 300 Index, rallying at least 7% each. The yuan rose to touch 6.6552 a dollar in offshore markets, while also gaining as much as 0.8% onshore. Just last week, traders had ramped up bets for the currency to fall to the psychologically important 7 level in the next few months.

Read: Yuan Basket Falls to Seven-Month Low as Growth Concerns Escalate

“Yuan is being buoyed by the 50-measure action plan for Shanghai as well as news that Beijing has also controlled the outbreak and eased some of its restrictions,” said Fiona Lim, senior FX analyst at Malayan Banking Berhad. “Broader dollar decline certainly helps the drop in the dollar-yuan rate.”

A Bloomberg real-time replica of CFETS yuan index, a gauge of yuan strength against 24 trading peers, rose 0.5% at 12:18 pm in Hong Kong. China’s sovereign bond futures dropped for the first time in six sessions while Hong Kong’s Hang Seng Index gained 1.9%.

China is moving toward a “whatever it takes” mentality, trying to re-balance between Covid control and economic growth, said Tommy Xie, head of Greater China research at Overseas Chinese Banking Corp. He expects the Chinese economy to recover from June onwards. The yuan could be a useful barometer to gauge market confidence in China’s policy efficiency, he added.

Hong Kong Rallies

In Hong Kong, sportswear maker Li Ning Co. and restaurant chain Haidilao International Holding Ltd. both jumped more than 10%, helping drive a more than 2% gain in the city’s benchmark gauge.

Meanwhile, travel and transportation shares also surged. Jinling Hotel Corp. gained by the 10% limit on the mainland as Guangzhou Baiyun International Airport Co. rose more than 6%. Trip.com Group Ltd. added more than 4% in Hong Kong.

Overseas investors have net purchased 1.1 billion yuan ($165 million) of local shares so far in May, while onshore traders have bought around HK$44 billion ($5.6 billion) of Hong Kong stocks.

To be sure, many market participants remain cautious. A Bloomberg MLIVE Pulse survey shows that a majority of 540 participants expect China’s Covid-zero strategy to remain in place for the rest of the year. About 56% of respondents expect the CSI 300 Index to close out 2022 with a loss, with most projecting that it will lag the MSCI World Index.