China reopening rally fades as Covid wave empties street

The dust has barely settled on the stock upgrades fueled by China’s reopening, but the rally may already be over.

China’s benchmark share gauges failed to climb on Friday even as officials were said to be planning to roll back Covid restrictions further next month. The Shanghai Composite Index has fallen back near the level it was at just before authorities started relaxing curbs on Nov. 11, Bloomberg reports.

“A good part of the initial reopening news has been priced in by the market, and global funds are still a little wary of going back into China given weak consumption,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management. “The next move higher will be when this wave of infections subsides and people feel comfortable to come out and spend while living with the virus.” 

The latest moves underscore the hard reality awaiting Chinese equities as the euphoria surrounding the long-awaited reopening trade fades. A sustained drop in share prices risks wrong-footing bulls like JPMorgan Chase & Co. and may increase pressure on the government to provide more support for the market.

Initial headlines on China’s reopening triggered a burst of buying in the nation’s shares, with the MSCI China Index surging more than 30% from an October low. But the gauge has since been trading in a narrow range as a spike in infections clouds the outlook for the world’s second-largest economy.

The latest high-frequency data show that soaring Covid infections are keeping people home and causing a slump in travel and economic activity. This may hamper efforts by authorities to revive growth in 2023, with top officials said to be debating a growth target of around 5 per cent.

“What’s not been fully priced in is China’s economic recovery next year after reopening, because the path is not certain,” said Steven Leung, executive director at UOB Kay Hian. “Investors are waiting for various data to see whether the consumption can come back.”

China’s retail sales may remain muted in the initial reopening phase, with the recovery trajectory likely to be “bumpy and slow,” Fitch Ratings said in a note on Thursday. Sales dropped more than expected in November, when the Covid Zero policy was still largely in place.

A meaningful recovery may not take place before the Lunar New Year, according to Jonathan Garner, Morgan Stanley’s chief Asia and emerging market equity strategist. 

“Once you get through Chinese New Year at the end of January and you head through February and March, you will see a very significant recovery in economic activity from exceptionally depressed levels right now,” Garner said in a Bloomberg TV interview on Tuesday.