China’s Big Pledges Set to Test Covid-Weary Markets in Reopening

(Bloomberg) -- Chinese markets return from a three-day break Thursday, testing whether Beijing's vow to boost growth can keep investors positive in the face of strict Covid lockdowns and gloomy economic data.

The Hang Seng China Enterprises Index of big Chinese stocks listed in Hong Kong slid 2.2% during the period mainland trading was closed, while its tech counterpart slumped 4.6%. Yet the overnight rally on Wall Street in response to Fed Chair Jerome Powell's less hawkish tone may take some pressure off Chinese shares.

Powell's remarks that countered fears of super-sized rate hikes are also expected to offer some relief to China's government bonds and currency, given the policy divergence between the two nations.

On the home front, mainland traders will get a chance to price in a slew of negative headlines that came out over the Labor Day holiday, including the weakest factory activity in more than two years, a plunge in domestic travel spending, as well as a delay in Shanghai's exit from a five-week lockdown and stricter movement controls in Beijing.

All that is adding to the stubbornly downbeat mood among investors after a yearlong crackdown on tech firms, despite policymakers' latest efforts to ease fears of a harsh stance toward private enterprise. The absence of more concrete stimulus measures has also aggravated concerns about China's costly battle against Covid.

Dismal Stocks

The benchmark CSI 300 index last traded up 2.4% Friday, after the Communist Party's top decision-making body issued pledges to meet growth targets and support the troubled housing market. The gauge is down 4.9% in April after capping its worst quarter since 2015.

The euphoria on Friday proved short lived, as key Chinese stocks listed in Hong Kong resumed losses on Tuesday after returning from a public holiday.

“This time around, we worry that the rebound in domestic consumption-related sectors will be slower and softer than 2020” given the bleak consumer outlook and lingering lockdown fears, said Winnie Wu, China equity strategist at BofA Securities, in a Bloomberg TV interview.

Weak Yuan

The yuan lost more than 4% both onshore and offshore in April, recording their worst months in history. Beijing has so far refrained from heavy-handed intervention, instead relying on stronger reference exchange rates and cutting foreign-exchange reserve requirements to curb rapid declines.

The Fed's latest half-point rate hike and signaling of more to come this year may prompt a further retreat by global investors from the world's No. 2 bond market amid China's dwindling yield advantage over the U.S. But Powell's apparent effort to quell concerns about an even bigger future rate increase may help slow their pace.

The prospects for China's onshore corporate debt are brighter, given Beijing's commitment to looser credit conditions and early steps to ease stress in the debt-laden property sector. Despite continued weakness in junk dollar bonds from the nation's developers following a wave of defaults, the domestic credit market remains much calmer, with spreads on three-year AA-rated notes recently at their narrowest since 2016, according to Bloomberg-compiled data.