(Bloomberg) — After nearly two years of disappointment and $6 trillion of losses, speculation that the bottom in Chinese stocks has finally arrived stoked a world-beating rally this week.
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A flurry of market-friendly headlines — along with unverified talk that China is poised to exit its strict Covid Zero policy — drove the Hang Seng China Enterprises Index to its best weekly gains since 2015. Led by tech names, the gauge soared as much as 8.8% on Friday, as Bloomberg News reported progress in efforts to prevent the delisting of hundreds of Chinese stocks from US bourses.
While similar rallies have all fizzled in recent months, bulls are betting that some of the world’s lowest valuations have left Chinese shares primed to surge on any hint of good news. The risk is that they could be getting ahead of themselves, especially after the nation’s top health body reaffirmed its commitment to Covid Zero.
“It seems markets are very much chomping on any bits of positive news — whether big or small — as a potential catalyst for Chinese shares,” said David Chao, global market strategist for Asia Pacific ex-Japan at Invesco Ltd. “Based on the valuations 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.”
The wild rebound takes place just one week after a historic rout sparked by concerns about President Xi Jinping’s power grab at the Communist Party congress. And while those losses came after a carefully orchestrated leadership summit, the gains in the past days — after four months of losses for major indexes — were led by a drip feed of reopening rumors.
“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,” said Grace Tam, chief investment adviser for Hong Kong at BNP Paribas Wealth Management. “For investors who don’t mind volatility, the reopening and consumption plays make sense but you need to be able to tolerate risk.”
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Rebounding almost 9% this week, Hong Kong’s Hang Seng Index posted its best gains since 2011. The CSI 300 Index, the benchmark for mainland stocks, also jumped more than 3% on Friday. The Nasdaq Golden Dragon China Index of US-listed Chinese stocks has also advanced 7.5% in the first four days of trading.
The optimism spread to currency and commodity markets, with the offshore yuan rising more than 1% at one stage, while iron ore futures rose. Dollar bonds of Chinese tech firms had also sold off in recent weeks, but their spreads tightened about 10 basis points Friday, according to credit traders.
Stocks related to reopening, such as Li Ning Co. and Haidilao International Holding Ltd., were among the big gainers in the market. China is working on plans to scrap a system that penalizes airlines for bringing virus cases into the country, Bloomberg News also reported.
Internet giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd. soared at least 7% each at the close. Dozens of US Public Company Accounting Oversight Board inspectors are set to leave Hong Kong as soon as this weekend, earlier than the original schedule of mid-November, people familiar with the matter told Bloomberg News, asking not to be identified because the information is private.
The sudden surge has caught out short sellers, who earlier had bought contracts to profit from deeper declines in the Hang Seng China Enterprises gauge.
Still, the feel-good sentiment hasn’t stopped an exodus of foreign funds. There was 5 billion yuan ($687 million) of net sales this week through trading links with Hong Kong, adding to the 13 billion yuan last week, according to Bloomberg-compiled data.
“With so many positive chatters in the market, the indexes are having a relief rally, said Willer Chen, an analyst at Forsyth Barr Asia Ltd. “There are so many rumors. Nothing is confirmed but people are buying on those tips.”
–With assistance from Abhishek Vishnoi, Dorothy Chan, Charlotte Yang and John Cheng.
©2022 Bloomberg L.P.
