Grand Reopening?

“COVID zero” in China is over. Not officially, and maybe not for good. But de facto, and at least for the time being.

It’s obvious China has decided to take a real shot at reopening after three years of rolling lockdowns and draconian virus curbs blamed for kneecapping the world’s second-largest economy. The question is whether Xi will ultimately countenance the inevitable explosion in cases and, likely, wave of deaths.

As the new week dawned, the Party was still using buzzwords like “optimization” and “adjustments” to describe the unfolding strategic pivot, but doing away with testing requirements for access to public places and transportation across major cities isn’t a minor tweak. For China, it’s a great leap forward. Wait, let me try again. It’s a “new phase.” “Great leap forward” is a bit inauspicious in the Chinese context.

Vice Premier Sun Chunlan last week described a “new situation” in the country’s virus control efforts, referencing the pathogenicity of Omicron. It was a watershed moment, and it came amid a national outcry which plainly suggested the public’s patience with lockdowns had reached a limit.

At 29,171 on Sunday, new cases were the lowest in almost two weeks, but still very elevated for a country which, just six weeks ago, was still inclined to sealing off theme parks over a single case. Despite the elevated (and likely understated) case load, testing requirements were relaxed en masse across Shanghai, Hangzhou, Shenzhen, Dalian, Shandong, Wuhan and other cities.

According to Reuters, China is likely to unveil a handful of new measures to “compliment” the 20-point modification plan released last month. “Management of the disease may be downgraded as soon as January, to the less strict Category B from the current top-level Category A of infectious disease,” sources said, speaking on condition of anonymity (because speaking on the record about internal Party deliberations around sensitive matters is a good way to lose your tongue).

Reuters tried to reach China’s National Health Commission for comment, but the agency didn’t respond to a fax. That international media outlets are still compelled to use fax machines to reach out to the Party is a source of continual amusement for me. Bloomberg articles about the PBoC infallibly include references to failed fax attempts.

From the onset of the pandemic, China classified COVID as a Category B infectious disease, the same as SARS, but management was conducted based on Category A protocol, which afforded local officials latitude to quarantine the infected and institute lockdowns. Given that the vast majority of cases in China are “asymptomatic and mild,” Category A protocol is scientifically inconsistent, one state media outlet said Sunday, citing an “unidentified expert,” as Reuters put it. (Chinese state media often cites experts in various fields without saying who they are.)

For credulous markets, this is all great news. Hong Kong-listed Chinese shares surged Monday, rising more than 5%. The Hang Seng China Enterprise index is coming off one of its best months ever. The gauge rose 30% in November. Mega-cap Chinese tech shares rose almost 10% to start the week, capping a five-day run of gains that summed to 23% (purple dashed line in the figure, below).

Don’t forget: The gauge peaked at nearly 11,000 in early 2021. Despite a 50% rally from the October lows, the index still sits 61% below the highs.

Morgan Stanley is bullish. The bank cited “multiple positive developments” and a “clear path” to reopening while upgrading Chinese shares over the weekend. If you ask Laura Wang, “We are at the beginning of a multi-quarter recovery in earnings revisions and valuations.” Mainland Chinese shares had their best month since summer 2020 in November, although at 10%, the gain on the CSI 300 wasn’t the raucous barnburner seen in Hong Kong.

“Investors view current levels as a once-in-a-generation entry point for China stocks,” SPI Asset Management’s Stephen Innes said Monday.

Notably, the offshore yuan rallied back through 7 (figure below), a remarkable reversal of fortune on the heels of an inexorable slide which saw the currency hit record low after record low against the dollar around the Party congress.

It helps that long-end US yields are down sharply from the highs amid Fed “step down” optimism. The dollar is, of course, coming off its worst month in a dozen years.

Whether any (let alone all) of this is sustainable is up for debate. To speak bluntly, it all depends on how many people die from the virus as the curbs are relaxed, and also how the healthcare system holds up. It does seem as though Xi would rather not have to crack down violently on protesters, so the cost-benefit analysis in Beijing might’ve changed following recent unrest.

For what it’s worth, Goldman used historical sensitivities across assets to map an upward shift in Chinese growth expectations into estimated shifts in major assets associated with both a reopening and a reversal (table below).

“The key results are intuitive,” the bank noted. “Chinese and EM equities and commodities (particularly copper, but oil too) are amongst the largest beneficiaries.”

For my part, I doubt China’s reopening will go smoothly. It’ll probably be a fits and starts affair, replete with false dawns, mixed signals, lockdown scares and conflicting Party rhetoric.

If you prefer a sterilized version of the same general assessment, Goldman wrote that, “Uncertainties over the timing and extent of re-opening and the balance between increased near-term risks from rising infection rates and subsequent recovery may lead to ongoing volatility.”

At the end of the day, investors should remember this: Xi is Marxist dictator presiding over a totalitarian state.

It’s not that you can’t make money investing in China. It’s just that it isn’t clear why you’d risk it with so many other opportunities on the board.


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3 thoughts on “Grand Reopening?

  1. Amen. I decided a long time ago to never invest or trade Chinese securities. Market is rigged, data fudged, etc., etc. At least lottery tickets often benefit identifiable charities rather than despots.

    1. I’m right behind you. I’ve got a holding in a fin-tech that supports the banking and finance area of the Chinese economy. It swims in money and applies tech in a unique way that helps it save cost on the front end and multiply returns on the back end. I’ve been selling it off, though it’s holding its own in a dubious market. But in the long term, I grown to dislike the politics in China. It’s only a matter of time as they slowly and steadily isolate themselves further from the international community. Right now, I would not want to be Apple, working with Foxconn. That’s just one example of the significant problem China creates for itself in running the business of the country by the thoughts and directions of the Fearless Leader at the top.

      What gets me even more is how the west is so comingled in their system. That creates another question in my mind: How do we, in fact, separate? Aside from being a general topic in the news, I’m not hearing a lot of specific stories about US companies changing the locale for their production work. I hear only general declarations from politicians and the media that US companies are leaving China. But actual evidence is scant.

      I also hear a lot about the “end of globalization.” Even if US companies leave China completely, it seems to me that globalization could carry on to a degree, but in a less robust form.

  2. There’s definitely been a sea change in Chinese covid policy, and it has definitely come from the top. My reasoning is that a lot of bureaucratic inertia had to be overcome to make the headline-making policy changes we’ve seen. You cited the dropped requirements for a negative test before using public transportation. The other one is Beijing allowing people to quarantine at home rather than in dedicated quarantine facilities. Beijing had already built out temporary quarantine facilities capable of housing tens of thousands of people. To do all that, then reverse the policy, required a huge shift in bureaucratic inertia. That only happens when people at the top of the pyramid give explicit orders. Even in the most liberal of democracies, bureaucracies are slow to change direction. In China, it takes a lever big enough to impress even Archimedes.

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