Chinese stocks and currency rally on reopening hopes

Chinese stocks shot higher and the renminbi rose to a 12-week high against the dollar on Monday on further signs that Beijing was easing its harsh zero-Covid restrictions and as Morgan Stanley upgraded the country’s equities to overweight.

Hong Kong’s Hang Seng China Enterprises index jumped 4.1 per cent, while the CSI 300 index of Shanghai- and Shenzhen-listed stocks rose 1.7 per cent.

China’s currency also rallied, with the renminbi rising almost 1 per cent against the greenback to Rmb6.955 per dollar, the highest level since September.

The gains for Chinese assets come on the heels of further easing of Covid-19 restrictions over the weekend, stoking expectations that authorities may drop the country’s longstanding economically disruptive zero-Covid policy more quickly than expected.

Shenzhen and Shanghai said commuters would no longer need to present PCR test results to use public transport, while some apartment complexes in Beijing told residents they could quarantine at home if they tested positive.

The latest easing of restrictions came amid a broad wave of optimism in markets about the prospects for reopening. Analysts at Morgan Stanley upgraded their position on equities in the benchmark MSCI China index to overweight from equal-weight. “Multiple positive developments alongside a clear path set towards reopening warrant an upgrade,” they wrote in a research report on Monday.

The strategists pointed to the recent acceleration in easing of Covid restrictions, the stabilisation of China’s property market following a series of support measures from Beijing meant to ensure stalled projects resume construction and signs that a crackdown on tech groups launched in 2021 may be wrapping up.

However, they added that “the path will be bumpy” as markets continue to face uncertainty from long-term structural concerns about China’s economy, along with the possibility of renewed tensions with Washington as political campaigning starts for the 2024 US presidential election.

In commodities markets, oil prices gained on the prospect of increased demand from China, with Brent crude, the international benchmark, up 0.8 per cent at $86.28 a barrel.

However, Hui Shan, chief China economist at Goldman Sachs, warned that after three years of embracing zero-Covid, China’s path to reopening “will probably not be straightforward”.

“Our base case remains [that the zero-Covid policy] stays in the near term, followed by an April reopening,” she said. “This scenario allows time for medical preparations, which help improve health outcomes significantly with only moderate incremental economic costs next year.”