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Children at The Bund, the embankment on the western bank of the Huangpu River in Shanghai on June 1, 2022. Photo: Xinhua.

Shanghai’s reopening amplifies calls to ‘buy-the-bottom’ in China’s stock market

  • A three-times leveraged China stock ETF saw a record volume surge Tuesday and Wednesday, almost six times the daily average
  • Data on Monday showed overseas investors snapped up US$2.5 billion of Shanghai and Shenzhen shares last month

Investors are trying to get ahead of any good news in China, as the lifting of a lockdown in financial centre Shanghai eases pressure on a struggling economy.

A three-times leveraged China stock ETF saw a record volume surge on Tuesday and Wednesday, almost six times the daily average. Data on Monday showed overseas investors snapped up US$2.5 billion worth of Shanghai and Shenzhen shares last month and hedge funds look to have covered their short positions after being wrong-footed by a brief rally in mid-March.

The renewed interest in Chinese equities is helping fuel a nascent rebound from a bruising start to the year, when Covid-19 lockdowns exacerbated an already slowing economy. The CSI 300 Index of mainland shares has climbed 8 per cent from its late-April low, paring losses for 2022 to about 17 per cent.

That the gains have come in the face of disappointing economic data shows the desire of investors to be first in any sustained rebound, given how far stocks have fallen. While the nation’s strict adherence to zero-Covid continues to weigh on the outlook for Chinese markets, the easing of curbs in Shanghai after a two-month lockdown should spur increased activity.

Shanghai reopening fails to impress stock traders as recovery remains bumpy

“The second quarter marks the trough: Shanghai is reopening and the 33 stimulus policy measures are starting to kick in,” said Wendy Liu, chief Asia and China equity strategist at JPMorgan Chase in Hong Kong. “The reopen may also help investor sentiment because a good number of onshore analysts, traders and portfolio managers are based in Shanghai.”

Still, the recovery in Chinese stocks is laced with volatility and unease, with markets adopting a path of two steps forward, one step back. The Hang Seng China Enterprises gauge snapped a three-day gaining streak on Wednesday, losing as much as 1.8 per cent as traders took profit.

The government is unlikely to back away from its zero-Covid strategy, which means future outbreaks will continue to be met with economically disruptive containment measures. Weak homebuyer sentiment and a liquidity crisis for developers are putting pressure on the property market. And while authorities are taking steps to bolster the economy, Chinese banks are struggling to find businesses to lend to.

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

But there are also signs the economic outlook is improving. Many of Shanghai’s residents can move freely from Wednesday and factories are resuming their operations. Data this week showed a smaller-than-expected contraction in manufacturing and services output for May and more local governments are resuming cross-province travel.

On Wednesday, Beijing ordered state-owned policy banks to set up an 800 billion yuan (US$120 billion) line of credit for infrastructure projects as it leans on construction to stimulate the economy.

“An area where I see opportunity is Chinese stocks,” said Kristina Hooper, chief global market strategist at Invesco. “Valuations are very attractive.”