Market sentiment on Chinese stocks reached the bottom only secured weeks ago after President Xi Jinping a historic third term in power and stacked his top team with loyalists in a clean run not seen since the Mao era.
But in the past week, a series of unexpected moves by Beijing – the relaxation from draconian zero covid restrictions, is moving around save the ailing real estate sector and Xi’s personal return onto the world stage – triggered a huge rally.
Hong Kong’s benchmark Hang Seng
(HSI) The index is up 14% since last Friday, putting it squarely in bull market territory or more than 20% above its recent low. A major index of Chinese stocks in New York rose 15% over the same period.
In the tightly controlled mainland markets, shares in Shanghai and Shenzhen are also up more than 2%.
“China continued to experience a flurry of bullish moves… as reopening measures are a clear buy signal,” said Stephen Innes, managing partner of SPI Asset Management. “We are in a sea of fundamental change after China’s more progressive political development came unexpectedly.”
Investors now have a “tactically constructive” view on China after key concerns were allayed by credible policy action, according to Bank of America’s monthly survey of Asian fund managers released on Wednesday.
Some investment banks have even raised their growth forecasts for China following the policy changes. On Wednesday, ANZ Research raised its GDP forecast for China to 5.4% for 2023 from a previous 4.2%.
“The changes reflect the party leadership’s intent to halt losses. They aim to correct market perceptions of China’s economic prospects as President Xi Jinping interacts with global leaders at the G20,” it said.
investors China stocks sold in October amid fears that Xi’s increasing power grab to continue existing policies like zero-Covid and the common prosperity campaignwhich have affected the economy and financial markets.
A leadership team loyal to Xi also suggested that China could continue to prioritize ideology over the kind of pragmatic decision-making that had fueled the country’s rapid economic rise over the past four decades.
But recent policy changes, while not a full-scale economic opening, have been enough to excite investors and analysts awaiting signs that China is relaxing its rules.
From Bali to Bangkok, Xi returned to the world stage after a nearly three-year absence. It gave particularly encouraging signals the historic meeting between Xi and US President Joe Biden on Monday, fueling expectations of stronger economic ties between the two major world powers.
“US willingness to set a ‘floor’ for US-China relations likely means the US is keen to find common ground with China to prevent extreme outcomes,” Jefferies analysts said In a research note earlier this week.
Chinese companies on Wall Street have been hammered by removing risks since last year over a simmering dispute between the two countries over audits. In December, US regulators closed rules to ban Chinese companies from trading in their shares if they can’t access their exam papers, a motion Beijing rejected on national security grounds.
“We believe the Xi-Biden meeting could reduce the risk of Chinese ADRs being delisted,” Jefferies analysts added.
In August the two countries reached an agreement Allowing US officials to inspect the audit records of these companies as a first step in resolving the dispute.
Reuters too reported Wednesday that US regulators were given “good access” in their review of audit work at New York-listed Chinese companies during a seven-week inspection in Hong Kong.
Despite this week’s rally, some analysts remain cautious. Qi Wang, Hong Kong-based CEO of MegaTrust Investment, said the recovery could be fueled by plenty of buying to close out earlier short positions and money chasing quick returns.
“I don’t think the long-term appetite for Chinese and Hong Kong stocks will return any time soon. Right or wrong, there were some fatal blows to global investor confidence earlier this year,” Wang said.
“There has been some good news lately, but the big institutional bucks still need time to assess the situation, including the economic outlook for next year,” he added.
Including the recent rise, the Hang Seng index is still down 23% this year, making it one of the world’s worst-performing indices. The Nasdaq Golden China Index, a popular index that tracks Chinese companies in New York, is down more than 33% so far in 2022.
“This week’s rally is a strong overreaction to mildly positive news,” said Brock Silvers, chief investment officer at Kaiyuan Capital, a Hong Kong-based private equity investment firm. “The market has been desperate for good news but it is foolish to think that once Covid is behind us we will return to the go-go days of high-octane growth.”
Silvers added that the economic factors and political risks that made China “uninvestable” a month ago are still rife and are likely to resurface shortly.
China is still grappling with Covid outbreaks and is clinging to measures long since abandoned by most other nations. Even more serious are the real estate crisis and the risks for the banking sector, he said, adding that the 16-point bailout plan announced by Beijing last Friday does not go far enough.
Hao Hong, chief economist at Grow Investment Group, described the rally as sentiment-driven and technical in nature as the market was previously oversold to epic levels.
But when winter comes, Covid cases will increase.
“Whether we can manage the resurgence with proper medical facilities and without panic remains to be seen,” he said, adding it also remains uncertain how effective the new property support measures are and whether developers will “rise from the ashes.” be able.
If China tightens Covid restrictions again or US-China tensions flare up again, market sentiment could plummet again, he said.