(Bloomberg) – After nearly two years of disappointment and $6 trillion in losses, speculation that Chinese stocks have finally bottomed out has fueled a world-best rally this week.
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A flurry of market-friendly headlines — along with unconfirmed rumors that China was ready to abandon its strict Covid-zero policy — propelled the Hang Seng China Enterprises Index to its best weekly gains since 2015. Led by tech names, the index soared to 8.8% on Friday, as Bloomberg News reported progress in efforts to prevent hundreds of Chinese stocks from being delisted from US stock exchanges.
While similar rallies have all fizzled out in recent months, bulls are betting that some of the world’s lowest valuations have caused Chinese stocks to soar at every hint of good news. The risk is that they could overtake themselves, especially after the country’s top health authority reiterated its commitment to Covid Zero.
“It seems that the markets are eating up any positive news – big or small – very heavily as a potential catalyst for Chinese equities,” said David Chao, global market strategist for Asia-Pacific ex-Japan at Invesco Ltd. “Based on valuations and the fact that there is a lot of bad news baked into these stocks, investor sentiment is bullish rather than bearish.”
The wild backlash comes just a week after a historic defeat sparked by concerns over President Xi Jinping’s seizure of power at the Communist Party convention. And while those losses came after a carefully orchestrated leadership peak, gains in recent days – after four months of losses for major indices – have been led by a drip of reopening rumors.
“Short-squeeze-driven rallies tend to be short-lived and many overseas investors are still looking to sell, unsure of the prospects,” said Grace Tam, chief investment adviser for Hong Kong at BNP Paribas Wealth Management . “For investors who don’t mind volatility, the reopening and consumption games make sense, but you have to be able to tolerate risk.”
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Hong Kong’s Hang Seng Index rallied nearly 9% this week, posting its best gains since 2011. The CSI 300 Index, the benchmark for mainland stocks, was also up more than 3% on Friday. The Nasdaq Golden Dragon China Index of US-listed Chinese stocks also rose 7.5% in the first four trading days.
Optimism spilled over into FX and commodities markets, with the offshore yuan at times rising more than 1% while iron ore futures rose. Dollar-denominated bonds issued by Chinese tech companies have also sold off in recent weeks, but their spreads tightened about 10 basis points on Friday, according to credit traders.
Stocks related to the reopening, such as Li Ning Co. and Haidilao International Holding Ltd. were among the big winners in the market. China is working on plans to scrap a system that penalizes airlines for bringing virus cases into the country, Bloomberg News also reported.
Internet giant Alibaba Group Holding Ltd. and Tencent Holdings Ltd. up at least 7% at the close of trading. Dozens of inspectors from the US Public Company Accounting Oversight Board will leave Hong Kong as early as this weekend, earlier than originally planned in mid-November, people familiar with the matter told Bloomberg News, asking not to be identified because the information is private.
The sudden surge caught short sellers who had previously bought contracts to take advantage of deeper falls in Hang Seng China Enterprises.
Still, the feel-good mood hasn’t stopped the exodus of foreign funds. According to data compiled by Bloomberg, trade links with Hong Kong generated net sales of 5 billion yuan ($687 million) this week, adding to last week’s 13 billion yuan.
“With so much positive rumor in the market, the indices are on a recovery rally,” said Willer Chen, analyst at Forsyth Barr Asia Ltd. “There are so many rumours. Nothing is confirmed, but people are buying based on these tips.”
–Assisted by Abhishek Vishnoi, Dorothy Chan, Charlotte Yang and John Cheng.
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