Chinese stocks rally on reopening hope; Morgan Stanley upgrades rating

A pedestrian along a road in Beijing, China, on Monday, Oct. 24, 2022. Source: Bloomberg

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Chinese stocks saw sharp gains Monday after major cities in China reportedly further loosened Covid-related restrictions, a positive sign for an economy that has been grappling with strict virus measures for over two years.

The rally comes after Beijing and Shenzhen announced over the weekend they would lift measures that required commuters to show negative Covid test results before travel, despite the recent wave of Covid cases.

The Hang Seng TECH Index, which represents the 30 largest technology companies listed in Hong Kong, surged 8% in Asia’s trade.

The jump builds on the index’s performance so far this quarter, gaining about 20% to date. But it is still sitting in bear market territory with roughly 27% in losses year-to-date.

Tech heavyweights Bilibili rose more than 25%, Tencent gained 6% and Meituan rose more than 3%, while Alibaba jumped 8% and Xiaomi gained more about 11%. Electronic vehicle-maker Xpeng gained 24%, leading gains for the broader index, Li Auto jumped 12% and Nio climbed more than 15%.

The Hang Seng index rose 4% while China’s CSI 300 index, which tracks the largest largest mainland-listed stocks, rose almost 2%.

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The rally in the equities market is due to a “clear” path away from China’s zero-Covid policy, Hao Hong of Grow Investment Group said on CNBC’s “Street Signs Asia.”

“The direction is very clear, because before this, many people and markets were having lots of doubts about whether China was serious about moving forward on phasing out Covid-zero,” he said.

“Now, it seems to most people that Covid-zero is being phased out, and that’s why the market is reacting very strongly,” he said.

China’s onshore and offshore yuan strengthened further as well, pushing past 7-levels against the U.S. dollar for the first time since mid-September. Oil prices also saw a jump at the open of Asia’s session, with Brent crude futures and U.S. West Texas Intermediate futures climbing over 2% on hopes of rising China demand.

The latest shift in China’s Covid regulations also increased optimism for investors betting on further reopening in the wider region, stretching to Macao’s casino sector.

Hong Kong-listed casino operators also saw significant gains, with MGM China rising 19%, Wynn Macau climbing 16% and Sands China adding 13%. Galaxy Entertainment rose 6% and SJM Holdings gained more than 7%.

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Morgan Stanley upgrades to overweight

Following the news of China further relaxing some of its Covid restrictions, strategists at Morgan Stanley raised its recommendation rating for Chinese equities to overweight.

Strategists led by Laura Wang said in a Sunday note that the upgrade marks the end of the firm’s equal-weight stance on Chinese equities that it has held for 23 months since January 2021, or almost two years.

Morgan Stanley noted multiple factors that indicate a “meaningful positive development” for Chinese stocks since November, including what the firm views as “a confirmed path towards final post-Covid reopening.”

A “path towards reopening is finally set, likely bumpy but with no turning back,” the note said, adding that a clear direction for the nation to open up was reinforced when health officials announced detailed plans to boost elderly vaccinations.

– CNBC’s Abigail Ng, Michael Bloom contributed to this report

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