China stocks frenzy kicks into overdrive in hopes the worst is over

(Bloomberg) – After nearly two years of disappointment and $6 trillion in losses, speculation that the bottom in Chinese stocks has finally arrived has fueled a global rally this week.

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A flurry of market-friendly headlines — along with unverified talk that China is about to exit its strict Covid Zero policy — drove the Hang Seng China Enterprises Index to its best weekly gains since 2015. Led by tech names, the gauge soared as high as 8.8% on Friday, as Bloomberg News reported progress in efforts to prevent the delisting of hundreds of Chinese stocks from U.S. exchanges.

While similar rallies have all failed in recent months, bulls are betting some of the world’s lowest valuations have left Chinese stocks primed to pounce on any good news. The risk is that they get ahead of themselves, especially after the country’s leading health body reaffirmed its commitment to Covid Zero.

“It looks like the markets are eating away at a lot of positive news – whether big or small – as a potential catalyst for Chinese equities,” said David Chao, ex-Japan Asia-Pacific global market strategist at Invesco Ltd. on valuations and that much of the bad news has been priced into these stocks, investor sentiment is more upside than downside.

The wild rebound comes just a week after a historic rout sparked by concerns over President Xi Jinping’s takeover at the Communist Party Congress. And while those losses came after a carefully orchestrated leadership summit, the gains of the past few days — after four months of losses for major indices — have been led by a flood of reopening rumours.

“Short-term rebounds tend to be short-lived and many overseas investors are still looking to sell as they are uncertain about the outlook,” said Grace Tam, chief investment adviser for Hong Kong at BNP Paribas Wealth Management. . “For investors who don’t mind volatility, reopening and drinking games make sense, but you have to be able to tolerate the risk.”

Read: How a mysterious China screenshot spurred a $450 billion rally

Rebounding nearly 9% this week, Hong Kong’s Hang Seng index posted its best gains since 2011. The CSI 300 index, the mainland’s stock benchmark, also jumped more than 3% on Friday. The Nasdaq Golden Dragon China Index of U.S.-listed Chinese stocks also rose 7.5% in the first four days of trading.

The optimism spread to currency and commodity markets, with the offshore yuan rising more than 1% at one point, while iron ore futures rose. Dollar bonds of Chinese tech companies have also sold off in recent weeks, but their spreads tightened by around 10 basis points on Friday, according to credit traders.

Reopening-related stocks such as Li Ning Co. and Haidilao International Holding Ltd. were among the big market gainers. China is working on plans to scrap a system that penalizes airlines for bringing cases of the virus into the country, Bloomberg News also reported.

Internet giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd. were up at least 7% each at the close. Dozens of inspectors from the US Public Company Accounting Oversight Board are expected to leave Hong Kong as early as this weekend, earlier than the original schedule of mid-November, people familiar with the matter told Bloomberg News, asking not to be identified because the information is private. .

The sudden rise caught up with short sellers, who had previously bought contracts to take advantage of deeper declines in the Hang Seng China Enterprises gauge.

Yet the feeling of well-being has not stopped an exodus of foreign funds. There were 5 billion yuan ($687 million) in net sales this week through commercial ties with Hong Kong, adding to 13 billion yuan last week, according to data compiled by Bloomberg.

“With so much positive market chatter, the indices are having a relief rally, said Willer Chen, analyst at Forsyth Barr Asia Ltd. “There are so many rumors out there. Nothing is confirmed, but people are buying on these tips.

–With help from Abhishek Vishnoi, Dorothy Chan, Charlotte Yang and John Cheng.

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