Global traders are increasingly bullish on China as they bet the country will gradually lift Covid restrictions following widespread protests.
Several cities across China eased Covid-19 restrictions over the weekend. From Monday, Shanghai residents will no longer require a negative Covid test result to enter outdoor venues, including parks and attractions.
Investment bank Morgan Stanley (AANXX) has revised its view on the future direction of Chinese equities for the first time in almost two years.
“Several positive developments alongside a clear path to reopening warrant an upgrade and index target increases for China,” its analysts said in a research note on Monday. They upgraded Chinese stocks to overweight from equal weight, a position they had held since January 2021.
“We are at the beginning of a multi-month recovery in earnings revisions and valuations,” they said.
The Bank recommended investors increase their investment allocations to offshore Chinese stocks. The MSCI China, an index tracking major Chinese stocks available to global investors, will hit the 70 mark by the end of 2023, according to Morgan Stanley. That would be a 14% increase from current levels.
It also raised its target for Hong Kong’s benchmark Hang Seng index to 21,200 by the end of next year. That’s a 10% increase from current levels.
The offshore yuan, a key indicator of how international investors feel about China, appreciated sharply against the US dollar on Monday. It rose more than 1% to 6.947 per dollar, breaking through the key 7 per dollar mark for the first time in more than two months.
On the domestic market, the yuan, also known as the renminbi, rose even more, last trading 1.4% higher at 6.957 per dollar.
The Hang Seng rose more than 4% on Monday after posting a 27% gain in November, its best monthly performance since 1998. Mainland China benchmark Shanghai Composite rose 1.7% after rising 9 % had increased.
Along with Shanghai, the nearby city of Hangzhou also no longer requires scanning QR codes or providing Covid test results when riding public transportation and entering public places, except in some locations classified as high-risk, such as retirement homes and kindergartens.
The major cities of Beijing, Tianjin, Shenzhen, Wuhan and Zhengzhou have also eliminated the need for a negative test to travel on public transport. In the southwestern city of Chongqing, the government has asked citizens not to test for Covid “unless it is necessary”.
However, many limitations remain. In Beijing, public facilities like malls and office buildings still require Covid test results, even as the abrupt removal of testing kiosks in the capital and other cities has led to long lines at remaining testing sites.
Goldman Sachs, which had a baseline scenario for China reopening in April, said Monday the likelihood of an earlier exit had increased.
China’s consumer stocks also rose on Monday. Big pot stew restaurants Haidilao and Xiabuxiabu were up 6% and 7%, respectively. Bubble tea chain Nayuki Holdings rose 8%.
In commodity markets, oil prices continued to rise after posting their first weekly gain in four weeks last week. US crude and Brent crude each rose 0.7% in Asian trading.
Copper and iron ore prices had settled higher last week. The gains were fueled by hopes that the easing of restrictions and recently announced property support measures will boost demand from the world’s top commodity buyer, according to ANZ analysts.
However, analysts also warned that China may still be a long way from fully ending its zero-Covid policy.
“We caution that the road to reopening may be gradual, painful and bumpy,” Nomura analysts said. “A massive wave of Covid infections in the coming months can partially disrupt production and supply chains.”
On Monday, a private business survey showed that China’s service sector contracted for the third straight month. The Caixin/S&P Global Services PMI, a closely watched business survey, slipped to 46.7 in November from 48.4 in October, marking its lowest level in six months.
On the same day, Jefferies analysts said the Chinese economy had done so continued to lose momentum, some indicators deteriorated.
“As we said before, the economy is so poor that ‘now they have to dump everything on the economy,'” they said.
But the prospect of a reopening should be enough to spark hopes for growth, according to economists.