China's Reopening Rally Loses Momentum as Covid Cases Surge

The recent stock upgrades that were fueled by China's reopening may already be over. The dust has barely settled on the situation, but it looks like the rally may be done.

China's stock market failed to rise on Friday, even as officials reportedly plan to ease coronavirus restrictions even further next month. The Shanghai Composite Index has fallen back to around the level it was at just before authorities started relaxing restrictions on November 11.

Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management, believes that the market has already priced in much of the initial news surrounding the reopening of the economy. However, he notes that global funds are still cautious about investing in China due to weak consumption levels. De Mello believes that the market will see further gains when the current wave of infections subsides and people feel more comfortable spending time outside.

The recent decline in Chinese equities highlights the challenges that lie ahead for the market. With the initial excitement around the reopening of the economy fading, a sustained drop in stock prices could catch some investors off guard. This could increase pressure on the government to provide more support for the market.

After China announced it was reopening its economy, there was a surge in buying of Chinese shares. The MSCI China Index rose more than 30% from its October low. However, since then the Index has been trading in a narrow range as a spike in new infections has created uncertainty about 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. Top officials are said to be debating a growth target of around 5%.

China's streets are more deserted than they were during the lockdowns, according to data. This is likely due to the fact that many people are still working from home and are not commuting as much.

Steven Leung, executive director at UOB Kay Hian, believes that China's economic recovery next year has not been fully priced in by investors. This is because the path of the recovery is uncertain, and investors are waiting for various data points to see if consumption will return to normal levels.

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

Jonathan Garner, Morgan Stanley's chief Asia and emerging market equity strategist, believes that a meaningful recovery may not take place before the Lunar New Year.

According to Garner, economic activity will rebound significantly in February and March, after the Chinese New Year.