China Relaxes Covid Curbs. But Is Now The Time To Buy Stocks?

China is finally shifting away from some of its strictest Covid control measures, a move spurring market rallies as investors bet the world’s second-largest economy will reopen further and companies will see renewed growth after a prolonged slump.

The optimistic sentiment is already reflected in gains for Hong Kong’s benchmark Hang Seng Index, which was up 4.5% on Monday after major Chinese cities from Beijing to Shanghai announced adjustments to their Covid-related restrictions over the weekend. The financial hub Shanghai, for example, has stopped requiring people to show PCR test results in order to take public transport or enter outdoor venues, such as parks and tourist attractions, joining metropolises like Beijing, Guangzhou and Hangzhou in adopting a looser approach.

Although cases are surging, with the country reporting a record level of more than 40,000 daily infections on Sunday, analysts say authorities are unlikely to revert back to their old playbook of employing mass lockdowns and quarantine camps. This, coupled with a recent raft of measures to support the beleaguered real estate sector, means the Hang Seng Index may have a chance to surge past 20,000 points before year end, says Dickie Wong, Hong Kong-based executive director of research at Kingston Securities. The Chinese yuan also strengthened on Monday, breaking past the closely watched 7-per-dollar level, while stocks listed in the mainland gained as well.

“You can see Covid cases are still sitting at a very high level,” says Wong. “But you can also see that the Chinese government is changing policy at the moment.”

The adjustments come at time when the economy has been battered on multiples fronts. Most economists believe China won’t meet its previous stated goal of roughly 5.5% growth in its gross domestic product this year, after the nation’s stringent Covid controls exacerbated a real estate downturn, disrupted supply chains, suppressed consumption and even led to widespread protests in a country that otherwise sees little display of public discontent. As a result, investors had been dumping China-related assets across the board on the belief that its “Covid-zero” policy was here to stay, especially after President Xi Jinping secured in October a precedent-breaking third term in office.

Now, with reopening on the way, Goldman Sachs economist Kinger Lau is telling the state-run China Daily that the investment bank sees the country’s GDP growth rebounding from 3% in 2022 to 4.5% in 2023. Companies reaping immediate benefits are those in consumption and aviation-related sectors, says Kenny Ng, a Hong Kong-based securities strategist at Everbright Securities.

“Next year, we will see less volatility than this year,” he says, pointing to the U.S. Federal Reserve’s slower pace in hiking interest rates as another major reason alongside China’s loosening Covid policies.

Ng also points to the internet industry, which has seen market caps slump amid economic headwinds and regulatory pressure, is now also on a recovery footing. The view is echoed by Jefferies analyst Thomas Chong, who wrote in a Monday research note that the country’s listed internet companies now only trade at an average of 14 times next year’s earnings, much lower than their global peer’s average of 22 times.

“We expect the market to look beyond the 2022 turmoil and revisit the sector in 2023,” Chong wrote.

Billionaire Pony Ma, for one, has already seen his net worth jump $1.5 billion within just a couple of hours as shares of his Hong Kong-listed Tencent notched up a 5% gain Monday. But Brock Silvers, a Hong Kong-based chief investment officer at Kaiyuan Capital, cautions that investors shouldn’t be overly optimistic. He says Covid in China “has always been a temporary wound exacerbating other important issues.” The government remains intent on its common prosperity drive, which involves regulating wealth accumulation possibly through taxing the rich, and its support for the property sector seems only limited to ensuring delivery of pre-sold but stalled housing projects.

“China still faces a difficult slowdown, real estate and banking sectors in desperate need of restructuring, a rapidly deteriorating U.S.-Sino relationship, and rising global rates,” he writes in an emailed note. “Post-Covid, the prior era still won’t return.”