Around May of this year, it looked like the tide had finally turned for a recovery in Chinese stocks. The PBoC was cutting rates, the government was falling over itself to announce stimulus packages, and Western nations were emerging from Covid with hopes the rest of the world would follow suit. See here for a piece written in May. However, at the time a key risk was flagged, namely that of China exiting its Covid Zero policy. Would it? The policy has been very successful for China and we outlined the reasons for China to hold onto the policy here. Recently, the intense focus has been on China over its socialist meeting and the fact that China is sticking to its Covid Zero policy.
This Covid Zero plan, plus a struggling property sector, US-China trade tensions, and slowing global demand all led to sharp falls in China’s stocks that began to look overdone as the Hang Seng fell the most last Monday since 2008. For some brave investors with a long-term view, there may be some value here.
Covid Zero has a limited life
The recent bounce in China’s stocks has been accompanied with the news that China may be on the verge of making plans to withdraw from its Covid Zero plan. Whether these rumours are true or not remains to be seen; however, it does confirm that eventually China will abandon its Covid Zero plan. The reaction in China’s stocks is an affirmation that China is still worth backing. This could be seen as confirmation that a lot of the bad news for China is priced in. It also needs to be emphasised that China will eventually abandon the Covid Zero plan, if not now then at some point in the future. So long-term traders could see this dip as a potential area to buy into, especially as China’s A50 index is now down to key support since March 2020.