China stock rally pauses as Covid cases increase most since April

Chinese stocks halted a recent rally as a jump in Covid-19 infections and official comments defending Covid Zero dented optimism for a potential reopening.

The Hang Seng China Enterprises Index slipped 0.6% on Tuesday, following gains of about 14% over the past five days. A separate gauge on Chinese tech shares trading in Hong Kong falls 1.6%.

China’s potential exit from its Covid Zero strategy has been on top of traders’ minds since speculation over a loosening of pandemic restrictions started to swirl last week. Local assets have jumped this month even as official comments point to no imminent pivot and infections rise by the most in months.

The question is “how far the rally could continue without an official acknowledgment,” Jun Rong Yeap, a market strategist at IG Asia Pte, wrote in a note. “Chinese indices have been ignoring the push back from authorities.”

The country’s leaders are considering steps towards reopening but are proceeding slowly and have set no timeline, the Wall Street Journal reported.

On the mainland, the CSI 300 Index fell 0.7%, paring its gain for this month to under 7%. Foreign investors don’t seem too enthused about the domestic market despite the recent jump. They were net sellers again on Tuesday, offloading more than 3.7 billion yuan ($510 million) of onshore shares through trading links with Hong Kong.

There is a “significant lag in foreign equity buying flows” and “this makes the potential follow-through of foreign equity investors a main variable that determines the sustainability of the rebound,” strategists at JPMorgan Chase & Co. wrote in a note.

The speculation over reopening began with a slew of unverified online posts that circulated last week. Seeking to dispel rumours, health officials said over the weekend that they will “unswervingly” adhere to Covid restrictions. That however didn’t stop stocks from rallying.

Tuesday’s setback brings only a small dent to the recent gains, with the Hang Seng Tech Index having rallied about 20% from an October low. Meanwhile, at least three key technical indicators are pointing to a further advance for onshore shares after a solid start to the week.

“Investors are still waiting and seeing,” said Chi Lo, senior investment strategist at BNP Paribas Asset Management Asia Ltd. “Covid Zero is the biggest drag on the economy so that is investors’ number one concern. For the market to see a sustain recovery, we need a stabilising economy to support the trend.”

—Bloomberg