Bull In A China Shop

“This sends the signal that the economy comes first,” a Guangzhou-based investor said Tuesday.

“This” was a decision by Chinese authorities to cut mandatory COVID quarantine times for inbound travelers to 10 days, seven in a quarantine facility and another three at home. Before the change, the hotel quarantine period was two weeks. It’s been as long as three weeks previously.

Needless to say, China’s approach to the virus remains anomalous. While the reduced quarantine times were variously described Tuesday as a big step, it’s a stretch to say “the economy comes first.” The economy clearly doesn’t come first, or if it does to Li Keqiang, it doesn’t to Xi Jinping, whose steadfast adherence to his own containment strategy put the Party’s 2022 growth target out of reach months ago, even if Beijing won’t admit it.

An official at the NHC said the traveler quarantine change represented an effort to “optimize and adjust COVID protocol” during a “window” of stabilization. “It’s absolutely not loosening up,” he said.

No, “absolutely” not. But market participants will “absolutely” never learn, which is why it took the better part of 18 months for despondency to set in after Xi embarked on a sweeping societal overhaul that eviscerated entire industries (e.g., education technology) and crippled the country’s tech giants. It wasn’t until this year that it finally dawned on analysts that Chinese equities may be uninvestable.

More recently, Chinese shares have outperformed, though, in part due to the monetary policy divergence between the PBoC and its Western counterparts (figure below).

In aggregate, monetary policy will remain accommodative in order to support the economy amid “some downward pressure,” PBoC governor Yi Gang told CGTN on Monday. He mentioned assistance for small firms, price stability and called employment maximization a “high priority.” Rates, he said, are “pretty low” right now.

China has only eased in dribs and drabs this year. While the risk of capital flight is diminished compared to the 2015/2016 episode, it’s still potentially perilous to ease aggressively in the face of a determined Fed tightening campaign. Last month, banks reduced the five-year loan prime rate (a reference for home mortgages) by the most on record after the PBoC lowered the floor on mortgage rates. In April, Yi delivered what some characterized as a weak-willed RRR cut. CPI in China is just 2.1%, and factory gate inflation has ebbed meaningfully since peaking in October, ostensibly freeing the PBoC to ease if necessary.

The problem with being bullish on Chinese stocks is always the same: You’re at Xi’s mercy. At any given time, he could rekindle the tech crackdown, institute additional anti-capital measures in the name of “common prosperity” or, in the event of simultaneous, significant COVID flareups in major cities, order a nationwide lockdown.

But, for now, investors are starry-eyed again. And news of the shorter quarantine times is likely to embolden bullish bets. The CSI 300 is on the precipice of a bull market (figure below) in a world of bears.

“This improves sentiment and is yet another positive for Chinese equities,” Manish Bhargava, CEO of Straits Investment Holdings, remarked, adding that “reassuring messages from regulators plus beaten down valuations make Chinese equities very attractive.”

Someone at Zhuhai Greenbamboo Private Fund Management delivered what sounded like an obsequious assessment: “The move demonstrates that China’s policy toward managing the virus is indeed dynamic and all based on science.”

Shuang Ding, Standard Chartered’s chief Greater China economist, offered a more measured take. “This seems to be a cautious first step, compared with other countries, and is likely to be followed by more relaxations if it does not cause an out-of-control rebound in COVID cases.”

And therein lies the problem. You can’t control COVID if “control” means keeping cases at zero. It isn’t possible. The Party’s contention that authorities are (basically) succeeding in doing so is a lie. Consider this: China claims that over the past three days, there were only 59 total cases in a country of 1.4 billion people. I’m sorry, but that’s laughable. According to the Party, there were just 14 new cases in all of China on Saturday.

Xi will visit Hong Kong later this week to celebrate the 25th anniversary of the city’s return to Chinese rule. He won’t be staying overnight, and he’ll be surrounded by “thousands” of police officers, in what SCMP described as “an unprecedented security blanket.” Lest someone with a fever should cough in his general direction.