China markets set for more volatility as Covid-zero policy stays ‘unwaveringly’

Assets from equities to oil rallied last week on convictions that China is taking concrete steps toward reopening. The Hang Seng China Enterprises Index had its best weekly gain since 2015, Brent crude closed at the highest in two months, iron ore futures jumped and the offshore yuan strengthened more than 1% at one stage.

But authorities tempered those hopes in a briefing Saturday. 

“Previous practices have proved that our prevention and control plans and a series of strategic measures are completely correct,” said Hu Xiang, an official at the National Health Commission’s disease prevention and control bureau.  

The comment is the latest from government officials to back a strict adherence to China’s reliance on lockdowns and mass testing to stamp out infections. The approach has weighed on the economy, which in turn has dragged on financial markets.

The Australian dollar, seen as a China-risk proxy, led major currencies lower at the start of the week’s trading, while the greenback advanced on haven demand. The Aussie fell as much as 0.9% to 64.09 US cents.

Goldman Sachs Group Inc. said China has given some signs of a potential exit from Covid Zero, such as trying to alleviate public fears of the coronavirus and other medical preparations. However, “the government still needs to keep its zero-Covid policy until all preparations are done,” economists including Hui Shan wrote in a note.

That may take months, according to Goldman, which expects a reopening in the second quarter of next year.

Still, the repeated signs of a reopening followed by government denials of any changes have kept investors on the edge and added to market volatility. Investors have been looking for reasons to scoop up Chinese stocks, which are among the worst performers in the world this year as the economy grows near the slowest pace in four decades.

Markets were boosted last week by unverified online posts about China’s reopening, as well as headlines supporting the easing scenario: Bloomberg reported that officials are working on plans to end Covid flight suspensions, while German Chancellor Olaf Scholz said China would make BioNTech’s Covid shots available to foreigners in the country, a potential first step toward wider offerings. 

The rebound took place just one week after a historic rout in equities sparked by concerns about President Xi Jinping’s power grab at the Communist Party congress. 

While Chinese equities are likely to fall on Monday, expectations for further stimulus from the government after weak economic data and gains in Covid-19 cases in October could help limit the decline, according to Cui Xuehua, China equity analyst at Meritz Securities Co. in Seoul.

“I expect there would be a reversal of the last week’s gains, but I believe the stock markets are not likely to break the previous lows,” she said. “The fact that rumors have spread is a positive signal that the Chinese government is internally discussing easing virus restrictions.”

However, some analysts warned of continued market turmoil even before the health officials’ comments over the weekend.

“We expect confusion could go on for a while,” said KB Securities strategists including Park Su-Hyun in a note dated Friday. 

This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.