China reopening playbook
Comment of the Day

November 07 2022

Commentary by Eoin Treacy

China reopening playbook

Thanks to a subscriber for the report from Goldman Sachs which may be of interest. Here is a section:

The light at the end of the tunnel?
China’s Zero-Covid Policy (ZCP) has kept Covid cases at low absolute levels but at rising economic costs as the virus becomes more transmissible. Reported cases are rising but more signs of Covid policy relaxation have been made available post the Party Congress, and our economists expect China could start to reopen in 2Q23 on political and public health considerations.

China could rally 20% on (and before) reopening
Cross-country empirical analysis shows that equity markets tend to pre-trade reopening (as defined by the peak of activity disruptions) about a month in advance and the positive momentum typically lasts for 2-3 months. We estimate that a full reopening could drive 20% upside for Chinese stocks based on empirical, top-down, and historical sensitivity analyses. Importantly, equity markets usually react more positively to local policy relaxation than to international reopening, with Domestic Cyclicals and Consumer sectors outperforming.

Eoin Treacy's view

The prospect of China opening up has enlivened risk appetites among traders who are tempted by the low absolute valuations on Chinese stocks listed in Hong Kong. The Beijing marathon went ahead as planned over the weekend and is being taken as evidence of some easing of COVID restrictions. It will be interesting to see if the Shanghai and Chengdu marathons pass off as planned later this month.  

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