China Stocks Shrug Off Covid Outbreak as Traders Bet on Stimulus

  • Benchmark index has climbed since Shanghai entered a lockdown
  • Authorities may lower interest rates, boost property sector

China’s soaring Covid infections are provoking little panic in the stock market, with investors betting that the authorities will unleash stimulus to prop up growth.

The benchmark CSI 300 gauge has gained more than 2% since the financial hub of Shanghai introduced a two-stage lockdown early last week. An index of Shanghai-listed developers and a Bloomberg gauge of Chinese real estate firms have both climbed more than 10% during that period.

Bets are mounting that China’s policy makers will deploy more stimulus to shore up growth before President Xi Jinping seeks to secure a third term before year-end. A weak services sector report on Wednesday highlighted the risks for the world’s second-largest economy, with holiday spending figures pointing to more damage ahead amid widespread Covid curbs.

“We’ve seen and quelled such outbreaks so many times before and have plenty of experience, it’s only a matter of time once the nation sets its mind on it,” said Chen Shi, a fund manager at Shanghai Jade Stone Investment Management Co. “Looking in retrospect to 2020, the largest returns in stocks came in tandem with the period of the greatest uncertainties over the virus in the first two quarters.”

Chen, who has been confined to his compound for more than 20 days, expects policy loosening to translate into better valuations even if earnings are impacted. The wider range of treatment options, more extensive testing and a lower fatality rate indicate that the outbreak can be contained, he said.

The domestic optimism contrasts with growing concerns from market participants elsewhere over China’s worsening outbreak. Analysts at Morgan Stanley slashed their target for the CSI 300 Index by 16% last week, citing risk factors such as property defaults and city-wide lockdowns, according to a research note.

In terms of stimulus, the Chinese authorities have a variety of tools at their disposal, including cutting rates and taking steps to boost the property sector. Officials will use monetary policy tools at an “appropriate time” and consider other measures to boost consumption, according to the readout from a meeting of the State Council chaired by Premier Li Keqiang on Wednesday.

Beijing loosened home-buying rules in more than 60 municipalities in the first quarter, abandoning restrictions on the number of residences households can own to stimulate demand.

Hopeful investors may be waiting for a repeat of the dramatic rebound in 2020, when the CSI 300 Index gained nearly 40% in the four months between a low in March – when Wuhan was still in lockdown – and July, when daily cases had dwindled to the single digits.

“There has to be loosening at this rate, and hopes are mostly around more relaxation for the property sector, as it’s the most important part of the economy,” said He Qi, fund manager at Huatai Pinebridge Fund Management.

“There are long-term goals for property, then there are imminent emergencies, and the task now is first to make it through this.”

Source: Bloomberg

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