Chinese Stocks Rally As Beijing Signals Reopening—But Economists Divided Over Covid Rebound

Topline

Chinese and Hong Kong stocks rallied on Monday and the renminbi jumped against the dollar, a positive sign of returning investor confidence amid rising public discontent and ongoing economic turmoil from years of strict lockdown, though experts are not universally optimistic China can cope well with the inevitable wave of infections reopening entails.

China is reportedly relaxing its zero-Covid pandemic curbs.

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Key Facts

On Monday, Hong Kong’s Hang Seng index rose 4.5% and China’s CSI 300 index—a measure of the largest mainland-listed companies—rose nearly 2%, both indices’ highest level since September.

The renminbi also gained ground and was up more than 1% against the U.S. dollar on Monday, moving past 7 to the U.S. dollar and to its highest level since September.

Oil prices also jumped amid hopes of increased Chinese demand, with global benchmark Brent and U.S. benchmark West Texas Intermediate both up more than 2%.

Morgan Stanley upgraded Chinese equities to overweight on Sunday after almost two years at an equal-weight position, optimism the firm said was buoyed by numerous positive developments in China and what it viewed as a path to future reopening.

Goldman Sachs, already bullish on Chinese equity markets, said on Monday there was now a greater possibility China would abandon its zero-Covid policy before April, when it previously predicted China would reopen.

Contra

Investment firms are not universally effusive about China’s potential reopening. Many economists and health experts expect restrictions to stay in place until the middle of 2023 at least and possibly stretching into 2024. Ting Lu, an economist for Japanese investment bank Nomura, warned Monday that the “road to reopening may be gradual, painful and bumpy,” noting that China is ill-prepared for a large wave of infections. Chetan Seth, an equity strategist at the bank, told the Wall Street Journal the current market optimism “is exactly what we saw in some other markets globally in their initial phases of reopening.”

Key Background

Market optimism and optimistic comments from investment firms come as part of an increasingly bullish attitude towards China from global investors, particularly in recent weeks as hopes grow Beijing will relax its strict zero-Covid policies. China’s policies—geared towards eliminating, rather than controlling, Covid—have been applied harshly and with broad strokes, often locking down entire cities over a few cases. As the world’s second largest economy and the world’s leading exporter, the economic impact of zero-Covid reaches far beyond China’s borders and its continuation threatens global recovery. It has led to the shutdown of factories, cities and other economic hubs and influenced the import and export of goods, which has caused global supply chain issues and shortages.

News Peg

Waves of protests rippled across China last week targeting Beijing’s strict Covid-19 restrictions. The demonstrations are one of largest displays of civil unrest seen in mainland China for decades and, unusually, directly called out Chinese President Xi Jinping and the communist government. The protests came amid record cases—which pale in comparison to U.S. figures—and demonstrators demanded Beijing drop the curbs, which have been criticized widely outside of China as unsustainable and ineffective. Beijing, while still upholding the policy, has started to show signs it is softening its approach and some cities have started easing restrictions.

What To Watch For

China could be poised to announce a flurry of new easing measures as early as Wednesday, according to Reuters. Citing two sources familiar with the matter, Reuters said 10 new measures to ease restrictions could be introduced to supplement the 20 already unveiled in November. Easing measures already in place include home quarantine for those testing positive and removing the need to show negative tests to use public transport.