China markets rally after unconfirmed social posts on reopening

CHINESE stocks roared back from a rout and the yuan strengthened as speculation mounted that policymakers are making preparations to gradually exit the stringent Covid-zero policy that’s been the biggest bugbear for investors.

A gauge of Chinese stocks listed in Hong Kong surged almost 7% intraday, rebounding from its lowest close since late 2005, as unverified social media posts circulated online that a committee was being formed to assess scenarios on how to exit Covid-zero. Shares pared gains after Chinese Foreign Ministry spokesman Zhao Lijian said he’s “not aware” of such a committee.

The market had seen a heavy bout of selling following last month’s Communist Party congress, where President Xi Jinping’s power grab led to expectations that strict lockdowns and other market-unfriendly policies will likely persist. Previous rebounds on reopening speculation have all failed to last as authorities continued to pursue Covid-zero.

“I’m not surprised by the rumor circulating online about a conditional reopening,” said Liu Xiaodong, a fund manager at Shanghai Power Asset Management Co. “The state council could be waiting for the deliberation by the team of experts to determine the next step. The market is also willing to buy that an inflection point is near for Covid-zero.”

The impact of the speculation was felt beyond China markets. US stock index futures extended gains while a broader gauge of Asian equities climbed more than 2%. Iron ore futures in Singapore posted the biggest gain in more than a week. Copper rebounded after three days of consecutive declines, leading the gains of other metals including aluminum and zinc. Oil also gained with broader market rally.

The Hang Seng China Enterprises Index ended up 5.5%, while the Hang Seng Tech Index rallied 7.8% in its best day since April. On the mainland, the CSI 300 Index closed 3.6% higher, the most since March.

Chinese authorities have ramped up lockdowns quietly since the recently concluded party congress, as the highly transmissible omicron strain continues to breach virus defenses. Economic powerhouses including Shanghai, Zhengzhou and Guangzhou all have varying levels of restrictions in place, which have upended production and disrupted daily lives.

However, there are debates on how to fine-tune the zero-tolerance approach as social and economic costs rise and the public and investors grow weary. Chinese officials are mulling a cut to travel quarantine to two days in a hotel and five days at home, down from seven days in a hotel and three days at home, Bloomberg News has reported.

Dip buyers though have suffered repeated setbacks in the face of the relentless equities rout.

“Investors are sensitive as they are waiting for a cue to buy back China-related assets on reopening progress,” said Ken Cheung, chief Asia foreign exchange strategist at Mizuho Bank. “Rumor impact will not hold if there’s no follow-up and it’s not easy to speculate on timing of China policy change.”

The onshore yuan rose as much as 0.7% before paring gains to 0.4%. It fell to a 15-year low earlier in the session. The yield on 10-year government bonds rose two basis points to 2.66%, ending four straight days of declines.

The latest rally comes as global financial industry heavyweights gather in Hong Kong for a summit where China’s Covid policies are bound to be a topic of discussion.

“Efforts to resuscitate consumption and attract foreign investments cannot be done without some form of reopening,” said Fiona Lim, senior foreign exchange strategist at Malayan Banking Bhd in Singapore. “Any confirmation by authorities to ease up on Covid-zero would probably strengthen yuan significantly.” – BLOOMBERG