Chinese Stocks Surge in Hong Kong With Hints of Reopening

Chinese shares are surging on Monday as a dozen or so major cities adjust their anti-Covid rules to make them easier to follow.

The market is also buoyed by positive sentiment from houses such as Morgan Stanley (MS) , which on Sunday raised its call on Chinese equities to "overweight". It had held an "equal weight" rating since January 2021.

The Hang Seng Tech Index shot 9.3% higher by Monday's close, gaining momentum throughout the trading day. There were massive gains for companies such as the online health clinic and pharmacy Ping An Good Doctor HK:1833 (up 37.9%), the short-video service Bilibili HK:9626 and (BILI) (up 28.8%) and the electric-car manufacturer XPeng HK:9868 and (XPEV) (up 26.4%).

Those were the top three showings in the tech index. The other U.S.-listed EV makers, Nio HK:9866 and (NIO) (up 14.9%) and Li Auto HK:2015 and (LI) (up 12.2%) also notched impressive gains. They would be prime beneficiaries of any recovery in China's battered consumer sentiment. The rival online health clinic Ali Health HK:0241, up 19.9%, also notched an eye-watering advance.

The Hang Seng China Enterprises Index also moved sharply higher in Hong Kong, up 5.3% at the close, with the broader Hang Seng Index up 4.5%. Megacaps such as cellphone maker Xiaomi HK:1810 and (XIACY) (up 13.6%), browser and cloud-computing operator Baidu HK:9888 and (BIDU) (up 11.1%), and e-commerce platforms JD.com HK:9618 and (JD) (up 11.2%) and rival Alibaba Group Holding HK:9988 and (BABA) (up 9.3%) also saw an impressive performance.

Overseas investors will do most of their buying of Chinese shares in Hong Kong, where many U.S.-listed companies now also have a listing. Access to the Shanghai and Shenzhen markets is tightly controlled for foreign investors, and there are also caps on how far a stock can move in one day. The CSI 300 of the largest mainland companies closed 2.0% higher on Monday.

In Hong Kong, the operator of the WeChat superapp, Tencent Holdings HK:0700 and (TCTZF) finished up 6.1%, with U.S.-listed videogame maker NetEase HK:9999 and (NTES) up 5.8.%. It is a sign of how sharp Monday's gains have been that those advances seem prosaic by comparison.

Make no mistake. China has not suddenly scrapped its zero-Covid stance. But a dozen major cities have loosened rules over the weekend, with what the state-run Global Timescalls "adjusted and optimized epidemic control measures."

Shanghai, China's largest city, said on Sunday that as of today it no longer requires people to show a negative result from a nucleic-acid test to ride public transportation, as well as to enter some outdoor venues.

Shenzhen, China's tech hub at the heart of Guangdong, China's most-productive province, said over the weekend that residents will no longer need evidence of a negative Covid test to take public transport, visit parks or enter outdoor tourist attractions. But it said citizens will still have to show a green health code and record entry to the venue as they enter airports and train stations.

Nearby Zhuhai, just across the border from Macau, has stopped providing free nucleic-acid testing and will now charge ¥2.6 (US$0.37) per person. Both Zhuhai and the central megacity of Chongqing are urging residents not to take Covid tests unless absolutely necessary. Casino operator Sands China HK:1928 and (SCHYY) is a classic "reopening stock," and ended Monday up 13.8% in Hong Kong.

The megacities of Guangzhou and Beijing have begun allowing some close contacts of Covid cases as well as some asymptomatic carriers to serve out their quarantine time at home. That's a major shift away from the previous policy, which forced every Covid case and many close contacts into a highly unpopular quarantine at a stark centralized facility.

I'm skeptical that this really is an end to zero-Covid. You'll see by those city-by-city stipulations that a) there are still a lot of Covid rules in China, b) it's hard to keep track of what you're allowed to do, when and where, and c) anti-Covid rules will still therefore play a dominant role in everyday life. This is the 9th edition of China's Covid protocols, with 20 "optimized measures for combating the virus."

The changes over the weekend do make life easier in many big cities. But it's equally possible that the Chinese authorities will roll out a 10th, 11th and 12th edition with dozens more "optimized" and "adjusted" measures and protocols that restrict access again should Covid infections rise substantially.

One major change in tune for the Chinese authorities is that they have started to state that Covid shows "weakened pathogenicity," contradicting earlier statements made to justify the zero-Covid policy. This admission that Covid is weaker than it once was could be the first step in providing the basis for a move away from zero-Covid to living with the virus.

Having hit a high of 43,026 on December 1, new Covid infections across China have dipped slightly again, to 36,196 as of Sunday. Health authorities will take encouragement that what had been a precipitous rise appears to have turned around. Should we see a sudden leap again, though, all bets will be off on opening up.

The infection numbers are tiny considering China's 1.4 billion population. But the fear is that the healthcare system would be overrun by a large-scale nationwide outbreak, creating similar conditions to those experienced in Western Europe in the early stages of the outbreak in 2020. What's more, Chinese vaccines showed a weaker performance against early strains of Covid than their overseas counterparts, and it's unknown in terms of peer-reviewed research how much protection they offer against the latest strains.

The Chinese Communist Party has been shaken by the demonstrations two weekends back against the zero-Covid policy. There were no signs over this weekend of a resurgence, as Chinese authorities surveil potential protest sites and attempt to track down those who participated, to stamp out dissent. The CCP rules largely on the premise that it will ensure stability and solid economic growth so long as the public give up on pursuing politics and democracy.

The dire state of China's economy, forecast to slow to 3.2% growth for 2022 and miss the official target of around 5.5%, and the party's intrusion into daily life has united Chinese citizens from many walks of life in a shared grievance against the zero-Covid stance.

The Chinese yuan also strengthened on Monday, breaking through the C¥7.00 barrier to the U.S. dollar, and now stands at C¥6.96 to the greenback. In the last month, it has firmed to the tune of 4.7%, from peak weakness of C¥7.31 to the U.S. dollar.

There's also been positive noise on the China market from Goldman Sachs (GS) , which says Chinese equities should outperform in 2023. Ajay Kapur, the chief Asia Pacific equity strategist at Bank of America Securities, said last month he has turned "tactically positive" on China after two years of caution.

Investors buying into the China stocks rally now are certainly buying into hints of opening up across China, rather than a full relaxation of zero-Covid. It'll take time to see if those easier Covid rules still stand should Covid infections escalate.

At the time of publication, Alex Frew McMillan had no position in the securities mentioned.