Market sentiment on Chinese stocks hit rock bottom just weeks ago after President Xi Jinping secured a historic third term in office and piled his best team with loyalists in a sweep not seen since Mao era.
But last week, a series of unexpected moves from Beijing — the easing of draconian zero Covid restrictions, steps to rescue the struggling real estate sector and Xi’s personal return to the world stage — sparked a huge rally.
Hong Kong’s benchmark Hang Seng Index (HSI) has gained 14% since last Friday, putting it squarely in bullish territory, more than 20% above its recent low. A key index of Chinese stocks in New York jumped 15% over the same period.
In tightly controlled mainland markets, shares in Shanghai and Shenzhen also rose more than 2%.
“China continued to see a barrage of upside activity… as reopening measures are a clear buy signal,” said Stephen Innes, managing partner at SPI Asset Management. “We are in a sea change after the unexpected arrival of China’s more progressive political development.”
Investors now have a “tactically constructive” view of China after major concerns were resolved with credible policy action, according to Bank of America’s monthly survey of Asian fund managers released Wednesday.
Some investment banks have even raised their growth forecasts in China following the policy changes. On Wednesday, ANZ Research raised its forecast for China’s GDP to 5.4% for 2023, from 4.2% previously.
“The changes reflect the party leadership’s intention to stop the losses. They want to correct the market’s perception of China’s economic outlook as President Xi Jinping interacts with world leaders at the G20,” he said.
Investors sold Chinese stocks in October on fears that Xi’s tightening grip on power would lead to a continuation of existing policies, such as zero-Covid and the Common Prosperity Campaign, which have driven the economy and devastated the financial markets.
A leadership team loyal to Xi has also suggested that China could continue to prioritize ideology over the kind of pragmatic decision-making that has enabled the country’s rapid economic rise over the past four decades.
But the latest policy changes, while not a full-blown economic opening, have been enough to excite investors and analysts who are awaiting any sign of China relaxing the rules.
From Bali to Bangkok, Xi has returned to the world stage after an absence of nearly three years. There were encouraging signs, in particular, coming from the historic meeting between Xi and US President Joe Biden on Monday, which fueled expectations of stronger economic ties between the two major world powers.
“The United States’ desire to set a ‘floor’ on U.S.-China relations likely means that the United States wants to find common ground with China to avoid extreme outcomes,” Jefferies analysts said in a statement. research note earlier this week.
Chinese firms on Wall Street have been hammered by delisting risks since last year due to a spat between the two countries over audits. In December, U.S. regulators finalized rules to ban trading in shares of Chinese companies if they cannot access their audit documents, a request that had been rejected by Beijing on national security grounds.
“We believe the Xi-Biden meeting could reduce the risk of delisting from Chinese ADRs,” Jefferies analysts added.
In August, the two countries reached an agreement allowing US officials to inspect the audit documents of these companies, which is a first step towards resolving the dispute.
Reuters also reported on Wednesday that U.S. regulators had been granted “good access” in their review of audit work carried out on Chinese companies listed in New York during a seven-week inspection in Hong Kong.
Despite this week’s rally, some analysts remain cautious. Qi Wang, CEO of MegaTrust Investment in Hong Kong, said the rally could be driven by lots of buying to close previous short positions and money looking for quick returns.
“I don’t think the long-term appetite for Chinese and Hong Kong equities will return so quickly. Rightly or wrongly, there were fatal blows to global investor confidence earlier this year,” Wang said.
“There has been some good news recently, but big institutional capital still needs time to assess the situation, including the economic outlook for next year,” he added.
Taking into account the recent surge, the Hang Seng index is still down 23% this year, making it one of the worst performing indices in the world. The Nasdaq Golden China Index, a popular index that tracks Chinese companies in New York, has plunged more than 33% so far in 2022.
“This week’s rally is a strong overreaction to mildly positive news,” said Brock Silvers, Hong Kong-based chief investment officer at Kaiyuan Capital, a private equity investment firm. “The market was desperate for good news, but it’s foolish to think that once Covid is behind us, we’ll be back to the days of high octane growth.”
Silvers added that the economic factors and political risks that made China “uninvestable” a month ago are still present and are expected to reassert themselves before long.
China is still dealing with Covid outbreaks and remains firmly committed to measures long abandoned by most other nations. Even more serious is the real estate crisis and the risks it poses to the banking sector, he said, adding that the 16-point bailout announced by Beijing last Friday did not go far enough.
Hao Hong, chief economist for Grow Investment Group, described the rally as technical in nature and sentiment-driven, as the market was previously oversold at epic levels.
But as winter approaches, Covid cases are expected to rise.
“It remains to be seen whether we could deal with the resurgence with adequate medical facilities and without panic,” he said, adding that he also remains uncertain about the effectiveness of new homeownership support measures and whether promoters can “rise from the ashes”.
If China tightens Covid restrictions or US-China tension escalates again, market sentiment could fall again, he said.
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