scorecardresearchWhat the China Covid Pivot Means For its Beaten-Down Markets

What the China Covid Pivot Means For its Beaten-Down Markets

Updated: 11 Nov 2022, 01:22 PM IST
TL;DR.
Risk appetite in Chinese assets surged after Beijing unveiled the biggest pullback in its strict Covid Zero playbook yet, triggering a rally in stocks and sharp gains in the country’s currency.
Currency traders work at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Thursday, Nov. 10, 2022. Asian stock markets followed Wall Street lower on Thursday ahead of a U.S. inflation update that will likely influence Federal Reserve plans for more interest rate hikes after elections left control of Congress uncertain.(AP Photo/Ahn Young-joon)

Currency traders work at the foreign exchange dealing room of the KEB Hana Bank headquarters in Seoul, South Korea, Thursday, Nov. 10, 2022. Asian stock markets followed Wall Street lower on Thursday ahead of a U.S. inflation update that will likely influence Federal Reserve plans for more interest rate hikes after elections left control of Congress uncertain.(AP Photo/Ahn Young-joon)

(Bloomberg) -- Risk appetite in Chinese assets surged after Beijing unveiled the biggest pullback in its strict Covid Zero playbook yet, triggering a rally in stocks and sharp gains in the country’s currency. 

The domestic benchmark CSI 300 Index advanced as much as 3.9%, while a key gauge of Hong Kong-listed Chinese shares jumped a maximum of 8.6%. The onshore yuan rose about 1.7% against the dollar at one point. 

The gains came after China reduced the amount of time travelers and close contacts must spend in quarantine, and pulled back on testing. Authorities also scrapped a controversial system that penalizes airlines for bringing virus cases into the country. 

Here’s what analysts and traders are saying.

Khoon Goh head of Asia research at Australia & New Zealand Banking Group

This Asian FX relief could extend into year end, as investors start to position for a Santa rally, and given how beaten down some Asian assets are, the attractive valuations may start to entice foreign inflows back in, given the sharp outflows this year”

Yuan just broke the 50-day moving average of 7.11. The next major level would be 7.

Ken Cheung, chief Asia FX strategist at Mizuho Bank

The confirmation of the loosening Covid policy is an important bullish RMB driver because previously there were just rumours and investors were unsure if the government would delay the reopening plan amid the recent case resurgence.

In the near term, the breaking news headlines could squeeze the CNY short positions and send the CNY toward 7.05

We may see narrowing US-China monetary divergence and easing headwinds for China growth by year-end

Wang Yugang, fund manager at Beijing Axe Asset  Management Co. 

This is a huge positive for the market, and added to the fact that we are in an earnings vacuum this may allow stocks to revert to their normal valuations and median trading range until March,.

For the CSI 300 I think this is around 4,200 points, though how much efficacy these measures have to lift the economy will need to be closely observed in the months leading up to the next major shift.

Wang Zhuo, fund manager at Shanghai Zhuozhu Investment Management Co. 

These changes are within my expectations. It was only a question of time. The authorities’ hands were forced, as the credit figures were terrible and the economy is in a bad state.

The news, coupled with the economy hitting the bottom and low valuations together mean that this rebound will be more rapid and intense than others before. But we should bear in mind that despite the changes, expectations are that the economy will remain weak for a while.

Xiaojia Zhi, Economist at Credit Agricole

The measures are quite detailed and specific, quite clear for the local governments and related departments to follow, and should help reduce the risk of over tightening at local levels.

The leadership shows its willingness to gradually relax its Covid policy with a more realistic and scientific approach.The bearishness around Chinese markets has probably peaked out

That said, the sharp CNY rally was also based on a major USD correction so the future USD/CNY direction would also be dependent on the USD trend. The monetary policy divergence is still here, with the PBOC potentially introducing more easing measures to further boost demand, while inflation pressure in the US is still quite sticky even with last night’s downside surprise

Jin Dong-Yan, virologist at the University of Hong Kong 

The policy changes are in a right direction. But if you want China to reach the end game immediately, that’s not possible. China is moving ahead, at least by a small step, addressing the most chaotic and messy areas of the Covid rules.

While the measures may not be entirely scientific China can only do it step by step.

 

First Published: 11 Nov 2022, 01:22 PM IST