China’s incremental relaxation of its gruelling zero-Covid policies could fuel a run-up that drives stocks into bull-market territory for the first time since early 2019.
Beijing’s move to halve the quarantine period for inbound travellers may be a sign that the nation will gradually scrap the zero-Covid approach after a Communist Party leadership reshuffle due to take place in the autumn, according to Morgan Stanley. Meanwhile, DBS Group said that the relaxation reduces the risk of large-scale lockdowns, which have affected more than 40 cities including Shanghai so far this year.
The quarantine change announced on Tuesday – the first such easing since the outbreak of Covid-19 in 2020 – comes as the CSI 300 Index is within about 3 per cent of bull-market status after a 17 per cent rebound from an April low. Still, traders fret about the sustainability of the bounce-back because of policy uncertainty.
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“There’s some conviction among the market that China will be back onto the track of having economic growth as the core,” said Tao Yifei, a fund manager at HFT Investment Management in Shanghai. “From the recent policy tones, we have seen the efforts by the government to revitalise the economy, and that has improved expectations.”
Chinese stocks have recently become a haven for global investors after Shanghai lifted a two-month lockdown on June 1 and top policymakers unveiled a slew of measures to spur growth, including a cut in mortgage rates and tax breaks on purchases of electric cars.
The CSI 300 slipped 1.5 per cent to 4,421.36 on Wednesday, reversing the 1 per cent it gained the previous day when Beijing announced it would slash the quarantine period to seven days and standardise testing procedures in regions that report infections.
A further 2.7 per cent gain would take the gauge into bull-market status, which is defined as a 20 per cent rise from a low by some technical traders. It would be the first time the CSI 300 entered bull-market territory since early 2019.
“Zero-Covid policy has been mentioned as the biggest hurdle facing investors,” said Laura Wang, a strategist at Morgan Stanley, in a note on Tuesday. “These latest developments will help rebuild investor confidence that economic growth is being prioritised on an ongoing basis.”
To be sure, there are sceptics. Goldman Sachs noted that the pandemic remaining under control is a prerequisite for the quarantine easing, otherwise the risk of tightening remains. In any case, no further relaxation will be made before March, when legislative delegates will elect new government leaders, the company said.
Morningstar shared a similar view, saying that the policy front will continue to be the biggest headwind for Trip.com and other travel-linked stocks until at least 2023.
Morgan Stanley expects China’s growth to accelerate to 2.7 per cent in the third quarter from 0.5 per cent in the second. China will also boost the size of its fiscal stimulus to the equivalent of 5 per cent of gross domestic product by the end of the year, up from 3 per cent currently, it said.
“While Chinese officials have commented that the [quarantine] reduction doesn’t constitute a change of the zero-Covid policy, markets could take the announcement as a marginal easing of restrictions that would slightly lower the risks of future lockdowns,” said Duncan Tan, a strategist at DBS.
With additional reporting by Cheryl Heng.
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