Buy-the-Bottom calls for China intensify as Shanghai reopens

(Bloomberg) – Investors are trying to get ahead of any good news in China as the lifting of the lockdown on Shanghai’s financial hub eases pressure on a struggling economy.

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A three times leveraged China stock ETF saw a record increase in volume on Tuesday, nearly six times the daily average. Monday’s data showed foreign investors bought $2.5 billion worth of Shanghai and Shenzhen shares last month and hedge funds appear to have covered their short positions after being caught off guard by a brief recovery in mid-March.

Renewed interest in Chinese stocks is helping to fuel a nascent rebound after a bruising start to the year, when Covid lockdowns exacerbated an already slowing economy. The CSI 300 index of continental equities climbed 8% from its low in late April, reducing losses for 2022 to around 17%.

The fact that the gains came in the face of disappointing economic data shows investors’ desire to be first in any sustained rebound, given the depth of the equities’ slide. As the country’s strict adherence to Covid Zero continues to weigh on the outlook for Chinese markets, the easing of restrictions in Shanghai after a two-month lockdown is expected to spur increased activity.

“The second quarter marks the bottom: Shanghai is reopening and the 33 stimulus measures are starting to take effect,” said Wendy Liu, chief equity strategist for Asia and China at JPMorgan Chase & Co. in Hong Kong. “The reopening may also improve investor sentiment as a good number of onshore analysts, traders and portfolio managers are based in Shanghai.”

Still, the rally in Chinese equities is fraught with volatility and unease, with markets adopting a two-step-forward, one-step-back trajectory. The Hang Seng China Enterprises gauge posted a three-day winning streak on Wednesday, losing as much as 1.8% as traders took profits.

The government is unlikely to back down from its Covid Zero strategy, which means future outbreaks will continue to face economically disruptive containment measures. Weak buyer sentiment and a liquidity crunch for developers are putting pressure on the real estate market. And as authorities take steps to support the economy, Chinese banks are struggling to find businesses to lend to.

“We don’t think now is a good time for investors to jump straight into the market and buy the dip,” Morgan Stanley strategist Laura Wang said in an interview with Bloomberg TV on Wednesday. “There are still a number of risk factors that we are seeing right now, and we think it takes another one to two quarters of patience.”

But there are also signs that the economic outlook is improving. Many Shanghai residents can move freely from Wednesday and factories resume operations. Data this week showed a weaker-than-expected contraction in manufacturing and services output in May and more local governments are resuming inter-provincial travel.

“One area where I see opportunity is in Chinese equities,” said Kristina Hooper, chief global market strategist at Invesco. “The valuations are very attractive.

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