Market sentiment on Chinese stocks bottomed out just weeks after President Xi Jinping secured a historic third term in power and assembled his top team with loyalists in a quarter not seen since the Mao era
But in the past week, a series of unexpected steps by Beijing – the easing of draconian zero-Covid restrictions, moves to save the ailing real estate sector and Xi’s personal return to the world stage – have triggered a major rebound.
Hong Kong’s benchmark Hang Seng Index (HSI) has gained 14% since last Friday, putting it squarely in bull market territory, or more than 20% above its recent low. A key index of Chinese shares in New York rose 15% over the same period.
In closely watched mainland markets, shares in Shanghai and Shenzhen also advanced more than 2%.
“China continued to see a flurry of bullish 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 China’s most progressive political development came unexpectedly.”
Investors now have a “tactically constructive” view of China after key concerns were addressed through credible policy action, according to Bank of America’s monthly survey of Asian fund managers released on Wednesday.
Some investment banks even upgraded their growth forecasts for China after the policy changes. On Wednesday, ANZ Research raised its forecast for China’s GDP growth to 5.4% in 2023 from 4.2% previously.
“The changes reflect the intention of the party management to stop the losses. They want to correct the market’s perception of China’s economic outlook as President Xi Jinping interacts with G20 world leaders,” he said.
Investors sold off China stocks in October on fears that Xi’s tightening of power will lead to a continuation of existing policies, such as zero-Covid and the Common Prosperity campaign, that have dragged the economy and mistreated the 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 enabled the country’s rapid economic rise over the past four decades.
But the latest policy changes, while not a full economic opening, have been enough to excite investors and analysts waiting for any sign that China will ease its rules.
From Bali to Bangkok, Xi returned to the world stage after an absence of almost three years. There were encouraging signs, in particular, from the historic meeting between Xi and US President Joe Biden on Monday, which fueled expectations of stronger economic ties between the two world powers.
“The US willingness to establish a ‘floor’ in US-China relations likely means the US is willing to find common ground with China to avoid extreme outcomes,” Jefferies analysts said in a research note earlier this week.
Chinese firms on Wall Street have been hit by delisting since last year due to a dispute between the two countries over audits. In December, US regulators finalized rules to ban trading in shares of Chinese companies if they cannot access their audit documents, a request Beijing had denied 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 to allow US officials to inspect the audit documents of these companies, taking a first step towards resolving the dispute.
Reuters also reported on Wednesday that US regulators got “good access” in their review of audit work done on New York-listed Chinese companies during a seven-week inspection in Hong Kong.
Despite this week’s rally, some analysts remain cautious. Qi Wang, managing director of MegaTrust Investment in Hong Kong, said the recovery may be driven by a lot of buying to close previous short positions and money chasing quick returns.
“I don’t think the long-term appetite for China and Hong Kong stocks will return so quickly. For better or worse, there were some fatal blows to global investor confidence earlier this year,” Wang said.
“There has been good news recently, but big institutional money still needs time to assess the situation, including the economic outlook for next year,” he added.
Including the recent rally, 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% through 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 go back to the days of high-octane growth.”
Silvers added that the economic factors and political risks that made China a “no-investment” a month ago remain prevalent and are likely to reassert themselves shortly.
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 rescue plan Beijing announced last Friday did not go far enough.
Hao Hong, chief economist at Grow Investment Group, described the rally as sentiment-driven and technical in nature, because the market was previously oversold to an epic level.
But as winter comes, the cases of Covid will increase.
“It remains to be seen whether we could deal with the resurgence with adequate medical facilities and without panic,” he said, adding that it also remains uncertain how effective new property support measures will be and whether developers can ” rise from the ashes”.
If China tightens its Covid restrictions again or the tension between the US and China rises again, market sentiment could plummet again, he said.