June’s Looking Like a Game Changer for Beleaguered China Stocks

(Bloomberg) -- From dialing back of a crackdown on tech giants to some easing of Covid curbs, the month of June so far has brought a double dose of good news for China's stock investors.

Key equity gauges in China and Hong Kong are all rallying this month, bucking a global slide, with an MSCI Inc. gauge of Chinese shares just capping its best week since July 2020. Even as a rebound in virus cases poses a fresh risk, calls are growing that this may be the start of a more sustainable rally in one of the world's worst-faring major markets this year.

Just this week, Morgan Stanley, Bank of America and Jefferies Financial Group Inc. ramped up bullish commentary on Chinese stocks, while foreign investors have been net buyers for 10 straight days, the longest run since December.

“The recovery rally is far from over in our view, and the suppressed demand and backlog in orders from the lockdown will bring about a big spike in activity in coming months,” said Hua Tong, a fund manager at Shenzhen Zhengyuan Investment Co. “Looking back at the early second quarter, the pessimism was overdone. It's likely that a revival of confidence will come just as strong.”

Morgan Stanley strategists, well-known China bears, suggested investors gradually add back growth stocks amid the “final leg of a bear market,” while noting there will be “hiccups” along the recovery.

The benchmark CSI 300 Index just capped its biggest two-week advance since February 2021 and is up 3.6% in June. The Hang Seng gauge of Chinese tech stocks listed in Hong Kong is up almost 8%.

This upturn in sentiment is a sharp reversal from the deep pessimism that had ensnared markets until March.  

Another key driver of the mood is policy tailwinds. Authorities are offering incentives and subsidies to sectors hit by lockdowns, while the People's Bank of China's looser monetary stance contrasts with aggressive tightening in most parts of the world.

Tech Revival 

For the beaten-down tech sector, a string of events this week offered tangible evidence of a shift away from heavy-handed regulation.  

The latest news that regulators are at early stage discussions on a potential revival of Ant Group Co.'s initial public offering has strengthened bets that the days of tech crackdown are behind, even as the China Securities Regulatory Commission denied the report.

That development came on the heels of a report flagging a potential end of the probe into Didi Global Inc. -- the ride hailing firm that had been caught in Beijing's crosshairs -- and a second batch of new game approvals this year.

“The risk-reward profile is a lot more favorable for China equities in the second half,” said Vivian Lin Thurston, a portfolio manager at William Blair Investment Management in Chicago, while cautioning that the bottoming out process won't be linear.

Covid Hurdle

To be sure, the recent rebound has its skeptics.  

Jitters linger that the nation's Zero Covid approach could spur fresh lockdowns at any time, derailing economic growth and business plans. Shanghai will briefly lock down most of the city this weekend for mass testing as Covid-19 cases continue to emerge.

READ: Shanghai Returns to Lockdown for Mass Testing on Covid Fears (1)

“There are bound to be sporadic cases as things reopen, and infection numbers will be persistently scrutinized by traders,” said Xiong Lin, research director at Shanghai Ruiyi Asset Management Co. “The conviction on the strength of the economy will need to be validated through macro data before stocks can rally further.”

‘Hit a Bottom'

But for now, the prospect of a strong rally is looking too good for most investors to miss.

Overseas funds have purchased a net 66 billion yuan ($9.9 billion) worth of Chinese shares over 10 straight sessions. Market activity is springing back. Turnover topped 1 trillion yuan for four days this week, the first time it has been this strong since March.

The Hang Seng Tech Index has breached its 50-day and 100-day moving averages, key technical signals that indicate more gains may be in store.

“It's not something I think you want to be underweight in at the moment,” Herald van der Linde, head of APAC equity strategy at HSBC Holdings Plc, said in a Bloomberg TV interview on Friday, referring to Chinese equities. “It seems like we've hit a bottom with lockdowns easing a little bit and things are starting to improve.”

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