Chinese Stocks Soar on Hopes Covid-Zero Policy Will Be Rolled Back

China’s Shanghai Composite Stock Index ($CHSC) today soared +2.43% to a 2-1/2 week high on hopes that Chinese stocks can start to recover if China at least eases its Covid Zero policy.  Several market-positive headlines this week have boosted Chinese stocks, including unverified reports that China is poised to exit its strict Covid Zero policy.

Also, Bloomberg today reported progress in efforts to prevent the delisting of hundreds of Chinese stocks from U.S. exchanges worth some $1 trillion in total.  Bloomberg said that a group of dozens of U.S. Public Company Accounting Oversight Board inspectors left Hong Kong ahead of schedule after conducting a major audit of U.S.-listed Chinese company books.  The U.S. and China have reached a tentative agreement on auditing the books of U.S.-listed Chinese companies, but the U.S. is reserving judgment on the deal until it sees whether Chinese government officials will fully cooperate.  Current U.S. law requires U.S.-listed Chinese companies to be delisted in 2024 if sufficient access is not granted for PCAOB to inspect the books as they do for all other U.S. listed companies to try to prevent fraud.

Although similar rallies in Chinese stocks have fizzled in recent months, some analysts are betting that Chinese stocks are primed to rally on any hint of good news.  An Invesco strategist said, “it seems markets are very much chomping on any bits of positive news as a potential catalyst for Chinese shares.  Based on the valuation and that a lot of the bad news has been baked into these stocks, investor sentiment is more geared toward the upside than the downside.”

This week, Chinese stocks related to reopening rallied sharply on unverified reports that China is poised to exit its strict Covid Zero policy.  Also, Bloomberg reported today that Chin’s State Council is working on plans to scrap a system that penalizes airlines for bringing virus cases into the country. 

The sharp reversal in Chinese equity markets took place just a week after stocks plunged when Chinese President Xi Jinping stacked the leadership ranks with his allies and recommitted to China’s Covid Zero strategy at last month’s Communist Party Congress. The Hang Seng Index ($HSI) rallied more than +8% this week after slumping to a 13-year low on Monday.

The sudden surge in Chinese stocks still has yet to stop an exodus of foreign funds.  According to Bloomberg data, there were 5 billion yuan ($687 million) of net sales of Chinese stocks this week through trading links with Hong Kong.  BNP Paribas Wealth Management said, “short squeeze-driven rebounds tend to be short-lived, and a lot of foreign investors are still looking to sell because they are not certain of the outlook.”

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